Tax writers propose treaty benefits for Taiwan

The top congressional tax writers from both parties and both chambers last week released draft legislative language that would confer treaty-like tax benefits to Taiwan to reduce withholding and double taxation.

The rare bipartisan and bicameral agreement lends the effort significant momentum, but the outlook is complicated by competing legislation. The discussion draft was released by the chairs and ranking members of both the Senate Finance Committee and the House Ways and Means committee, who are asserting jurisdiction over the issue because it is tax legislation. This has rankled some members of the Senate Foreign Relations Committee, who see the effort as equivalent to securing a treaty, which would be the purview of their committee. The Senate Foreign Relations Committee has passed a competing bill that would authorize the Biden administration to negotiate a tax agreement with Taiwan.

The underlying difficulty stems from Taiwan’s unique status, which is preventing the U.S. from entering into a formal tax treaty. Lawmakers are looking to provide equivalent benefits, but disagree over how. The discussion draft from tax writers would create new code Section 894A provide treaty-like benefits to Taiwan based on 2016 U.S. Model Tax Treaty, including:

• 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

The provisions would not take effect until Treasury determines that Taiwan has enacted reciprocal benefits to U.S. persons. If enacted, the legislation would provide significant benefits to U.S. multinationals with investments and operations in Taiwan.

There is widespread bipartisan support to provide relief for Taiwan, but lawmakers must reconcile the different approaches taken by tax writers and the Senate Foreign Relations Committee. Committee Chair Robert Menendez, D-N.J., has indicated he is open to an “amalgam” of the efforts.