Taiwan tax reciprocity gains steam

 

The House Ways and Means Committee voted 40-0 on Nov. 30 to clear a bill that would potentially confer tax treaty benefits to Taiwan, moving the legislative effort closer to potential enactment as early as this year.

 

The legislation is designed to provide benefits equivalent to a tax treaty, which is unavailable due to Taiwan’s unusual political status. The bill has widespread bipartisan support. The Senate Finance Committee advanced a similar version of the treaty-like legislation on Sept. 14.

 

The version passed by the House represents a new compromise meant to appease concerns from the Senate Foreign Relations Committee about bypassing important aspects of the treaty process and the Senate’s role in it. Like the Senate version that advanced in September, the House bill would create a new section of the internal revenue code, Section 894A, that would provide treaty-like benefits to Taiwan based on the 2016 U.S. Model Tax Treaty contingent on Treasury certifying that Taiwan has granted reciprocal benefits to U.S. persons. The House bill would add an additional step, requiring the president to enter into a treaty-like agreement with Taiwan, which would require consultation with Congress. Acting Senate Foreign Relations Chair Ben Cardin, D-Md., and Senate Finance Committee Chair Ron Wyden, D-Ore., endorsed the compromise version, raising the possibility that Congress moves the legislation.

 

The treaty-like benefits that would be conferred to Taiwan under the legislation include:

  • Reducing the 30% withholding rate on U.S. source interest and royalties to 10% for nonresident Taiwanese aliens and Taiwanese corporations
  • Reducing the dividend withholding rate to 15%, with a 10% rate under certain conditions
  • Applying permanent establishment rules to determine effectively connected income
  • Exempting certain U.S. wages of Taiwanese residents from U.S. tax
Grant Thornton insight:

The legislation looks likely to become law this year due to broad bipartisan support. In addition to incentivizing additional Taiwanese direct investment in the U.S., the reciprocity requirement within the bill will likely lead to benefits for U.S. companies and individuals seeking to further operate or invest in Taiwan. 

 

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