Progress on Double Taxation

U.S. Congress shows strong support for necessary legislation. 

The idea of creating a mechanism to resolve double-taxation issues between the United States and Taiwan was first broached more than 15 years ago. The Taiwan authorities had long supported such a proposal as a sign of closer relations with Washington, but only in the past two years has the initiative appeared to gain traction on the U.S. side.  

Whereas the American authorities previously tended to dismiss the prospect of negotiating a bilateral tax agreement as too challenging due to the lack of formal diplomatic ties with Taiwan, recently two U.S. Senate committees were actually competing for the privilege of having jurisdiction over the necessary legislation.  

For insight on the status of that legislation, AmCham Taiwan turned to tax-policy expert Catherine Schultz, vice president for Tax and Fiscal Policy at the Washington, D.C.-based Business Roundtable. Prospects are excellent for enactment of a bill prepared by the Senate Finance Committee and an identical bill approved unanimously by the House Ways and Means Committee, possibly by the end of this year but more likely early in 2024, she told AmCham members who signed up for her briefing as the latest session of the Chamber’s “DC Dialogue” series of online discussions with prominent U.S. contacts.  

“The good news is that there is no opposition,” says Schultz. At a time when Republicans and Democrats are at loggerheads over most issues, the proposal for double-taxation relief has enjoyed broad bipartisan backing. But tempering that good news is the fact that the path to moving the bills forward in the legislative process still remains murky. For complicated reasons of Congressional procedure and politics, the package will almost certainly need to be attached to another piece of legislation rather than being voted on as a standalone bill.  

Tax policy expert Catherine Schultz says more movement on double-taxation avoidance is expected soon.

“Finding a suitable vehicle and getting it on the Congressional calendar won’t be easy,” Schultz says, especially considering the recent turmoil in the House of Representatives. “But I’ve been assured that because this is such high priority, the legislators will do everything they can to move it as early as possible.” 

The main thrust of the legislation will be to lessen the withholding tax obligations for Taiwanese companies – as well as partnerships, real estate investment trusts, and individuals – on U.S.-sourced dividend, interest, and royalty payments. Implementation will be contingent on Taiwan passing reciprocal conditions for Americans, which is not expected to be an obstacle. Schultz says her understanding is that the tax authorities from the two sides have already engaged in extensive discussions of the matter. 

In almost all respects, the result will be equivalent to the stipulations normally covered in a tax treaty concluded between two countries. Because the United States does not maintain diplomatic relations with Taiwan, however, one element that will be missing is a provision for a Mutual Agreement Procedure or MAP, enabling companies to raise issues concerning double-taxation avoidance with their home country’s tax authority for resolution with the counterpart tax authority. Although not provided for in the current legislation, Schultz suggests that informal arrangements for dispute settlement would likely be adopted between the United States and Taiwan.     

After languishing for so many years, why has the double-taxation issue recently attracted so much attention and support? The biggest factor, says Schultz, is the huge semiconductor-fabricating complex being built in Arizona by Taiwan Semiconductor Manufacturing Co. (TSMC) and the Taiwanese-invested satellite plants needed to supply it. “Given the number of facilities now being built and the number of Taiwanese companies involved in that, it became clear that we needed some way to relieve the double-taxation problems.” 

An open question is the future of the other Senate bill, which is under the jurisdiction of the Foreign Relations Committee and calls for the Biden administration to conduct negotiations with Taiwan to conclude a bilateral tax agreement. If the legislative solution being pursued by the Senate Finance and House Ways and Means Committees succeeds, it is unclear what might be left to be dealt with in a bilateral agreement.