Senate Finance Committee Approves Tax Bill to Deepen US–Taiwan Economic Relations

Sen. Ron Wyden (D-Ore.) participates in a Senate Finance Committee hearing in Washington on March 22, 2023. Kevin Dietsch/Getty Images

The Senate Finance Committee has voted unanimously on a bill to provide relief for American and Taiwanese workers and businesses from double taxation.

Sen. Ron Wyden (D-Ore.), who serves as committee chair, said ahead of the vote that the legislation, known as the U.S.-Taiwan Expedited Double Tax Relief Act, would strengthen the partnership between the two sides.

“Taiwan is a critical trading partner,” Mr. Wyden said. “Over the last five years, $45 billion was invested in the United States from Taiwan in the semiconductor sector. We anticipate billions of dollars more, translating into good-paying jobs across the country.”

Taiwan is the United States’ ninth largest trading partner. According to economic data from Taiwan’s economic affairs ministry, bilateral trade between the two sides totaled over $120 billion in 2022, of which $45.46 billion was made up of American exports to the island.

The island is home to the world’s biggest contract chipmaker, Taiwan Semiconductor Manufacturing Corporation (TSMC), which accounts for the production of about 90 percent of the world’s most advanced semiconductors. TSMC is building a chipmaking plant in Arizona, with production scheduled to begin in 2025.

“To ensure that our country continues to grow these investments in America, relief of double taxation between the U.S. and Taiwan is a crucial next step,” Mr. Wyden said. “We do not want these investments to fall through or go to other countries because we are not providing double-tax relief.

“We cannot allow double-tax issues to hamper any growth in our domestic semiconductor industry,” Mr. Wyden added.

Currently, the United States has tax treaties with over 60 countries to eliminate double taxation. The United States and Taiwan do not have such a treaty because the two sides are not formal diplomatic allies, ever since Washington changed its diplomatic recognition in favor of the Chinese Communist Party’s (CCP’s) rule in Beijing in 1979.

Legislation

Sen. Mike Crapo (R-Idaho) questions U.S. Trade Representative Katherine Tai during a Senate Finance Committee hearing on Capitol Hill in Washington on March 31, 2022. Drew Angerer/Getty Images

The draft of the bill was announced in July in a joint collaboration between Mr. Wyden, Finance Committee ranking member Mike Crapo (R-Idaho), and House Ways and Means Committee leaders Chair Jason Smith (R-Mo.) and Ranking Member Richard Neal (D-Mass.).

The legislation would significantly reduce withholding taxes on dividends, interest, and royalties paid on these cross-border investments. For instance, instead of the 30 percent withholding tax currently imposed on U.S. source income received by nonresident aliens and foreign companies, interest and royalties would be subjected to a 10 percent withholding tax rate, according to the bill (pdf).

“According to a 2020 survey by the American Institute in Taiwan, almost four out of five Taiwanese companies with a U.S. presence consider the current 30 percent dividend withholding tax to be a considerable factor preventing additional U.S. investment,” Mr. Crapo said.

Mr. Crapo added, “The second part of this bill—applying permanent establishment rules to create a higher threshold for taxation in the source country—would reduce barriers for smaller and mid-sized Taiwanese companies to conduct certain activities in the U.S., fortifying our domestic supply chains.”

The bill has a reciprocity cause, meaning that Taiwan would need to provide the same benefits to U.S.-based businesses and individuals, similar to the reciprocal operation of a tax treaty, according to the bill.

If enacted, the legislation would create a new section of the Internal Revenue Code.

“This bill will help workers and businesses of all sizes get ahead in both the U.S. and Taiwan,” Mr. Crapo said.

The 27-0 vote (pdf) on Sept. 14 included support from Sen. Bob Menendez (D-N.J.), chairman of the Senate Foreign Relations Committee. In May, Mr. Menendez and other senators introduced the Taiwan Tax Agreement Act of 2023, which passed the Senate Foreign Relations Committee in July. A companion version of the legislation has been introduced in the House.

The Taiwan Tax Agreement Act of 2023 (pdf) would authorize the president to “negotiate and enter into a tax agreement” with Taiwan, allowing businesses in the United States and Taiwan to avoid double taxation.

China

A greater economic cooperation with Taiwan is also needed given Beijing’s aggression against the island and the surrounding region, according to Mr. Wyden.

“The Chinese Communist Party continues its efforts to intimidate and isolate Taiwan through diplomatic and economic coercion and the use of force,” he said. “China has been ratcheting up its military capabilities along Taiwan’s coastline, from updating its military bases near the Taiwan Strait to sending warships and warplanes near the island on a daily basis.”

Taiwan’s defense ministry reported one of China’s biggest incursions in recent weeks on Sept. 14, when it reported that within 24 hours, 68 Chinese warplanes and 10 Chinese navy vessels were near its territory.

Military coercion is just one of several tactics the CCP deploys against Taiwan, in order to sway public opinion as it continues its attempts to persuade the island’s population to accept its rule. Other tactics include disinformation campaigns and economic coercion.

Currently, Beijing views the self-ruled island as a renegade province that must be reunited with the mainland, with force if necessary. However, Taiwan is a full-fledged democracy with its own government, military, constitution, and currency.

“Taiwan plays a key role in the security of democratic nations,” Mr. Wyden said. “Beijing’s activities in the region could lead to global disruptions in trade, investment, and finance. As cross-strait tensions increase, the United States Congress must work to help stabilize the region.”

Hsiao Bi-khim, Taiwan’s de facto ambassador to the United States, took to X to thank senators from both parties for their commitment to finding a resolution to the double taxation problem.

“An important milestone moving towards relief in double taxation, with the reciprocal goal of incentivizing more two-way investments and deeper Taiwan-US economic ties,” Ms. Hsiao added.