Time for a U.S.-Taiwan Tax Agreement

When six prominent U.S. Senators – three Democrats and three Republicans – introduced a resolution early last month urging the Biden administration to begin negotiations with Taiwan on a double-taxation avoidance agreement, the text of the resolution made a point of calling attention to AmCham Taiwan’s support for such an agreement as expressed in its 2022 White Paper.

In fact, AmCham has advocated the conclusion of a U.S.-Taiwan bilateral tax agreement ever since then American Institute in Taiwan Director Stephen Young first proposed the idea some 15 years ago in a speech at the Chamber’s Hsieh Nien Fan banquet. Young presented the initiative as a natural component of needed efforts to further bolster the bilateral economic relationship.

But the proposal got little traction at the time. A major obstacle cited was the lack of formal diplomatic relations between Taiwan and the U.S., which meant the agreement could not be regarded as a treaty as would normally be the case. There seemed to be little appetite in Washington for the challenge of charting a new course to get around that Constitutional impediment. As a result, the issue was long relegated to AmCham’s back burner.

Thankfully, the overall environment surrounding a potential bilateral tax agreement has changed significantly over the past few years. One difference is the growing interest of Taiwanese companies to invest in the U.S. and the increased encouragement of such incoming foreign investment by the U.S. government through the Commerce Department’s SelectUSA program as a means of boosting domestic manufacturing and job creation. Although the program has achieved some important successes in attracting Taiwanese investment, for many would-be investors a prime consideration has continued to be tax implications. A bilateral tax agreement would eliminate most of those concerns.

At the same time, American companies operating in Taiwan – particularly those in the crucial tech sector – have suffered from double taxation of some of their earnings, including those from dividends and royalties. In addition, for the last two years the Semiconductor and Taxation sections of the AmCham White Paper have noted that the potential impact of double taxation leads U.S. companies to avoid the use of drop shipments from contract Taiwanese manufacturers direct to final U.S. customers, inconveniently lengthening the supply chain.

Undeniably, geopolitical factors have also prompted U.S. authorities – especially Taiwan’s supporters in Congress – to seek new ways to draw the two economies closer together without touching on sensitive areas that might spark China’s ire. A tax agreement would seem to be suitably non-controversial, and solid arguments can be marshaled in its favor. As the proposed Senate resolution explains, the U.S. already maintains tax treaties with 66 other countries and Taiwan has similar agreements with 34. Yet Taiwan, which consistently ranks among the top 10 American trading partners, is the only country in that category without a double-taxation avoidance mechanism with the U.S.

In response to a question at a House Appropriations subcommittee hearing, Treasury Secretary Janet Yellen has now stated her recognition that the lack of a tax agreement with Taiwan is a “very significant problem” that the Biden administration will be looking to address. Fifteen years after the idea was first broached, AmCham urges the U.S. government to move forward expeditiously to bring that goal to fruition.