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The US and Taiwan are preparing to negotiate an agreement that would remove the obligation for each other’s companies to pay tax in both jurisdictions.
The US Treasury said Washington and Taipei would start talks in the coming days on a deal to tackle “double taxation”, which has been a drag on bilateral investment flows between the two countries.
Taiwan has long pushed for an agreement on the issue which, along with a free trade deal, has topped its wish list for better economic ties with the US.
But fixing double taxation is complicated because the US and Taiwan have not had official relations since 1979, when Washington switched its diplomatic recognition of China away from Taipei to Beijing.
Interest in resolving the issue has risen in recent years, with US lawmakers and officials looking for ways to help Taipei economically as it comes under growing pressure from Beijing, which claims sovereignty over the country. The US is also hoping to reduce Taiwan’s economic dependence on China.
There has been additional impetus since 2022, when Congress passed the Chips and Science Act that provided more than $50bn in subsidies, including to foreign companies, to bolster the US semiconductor industry.
The Treasury said a deal would reduce double taxation barriers to further Taiwanese investment into the US “particularly for the small and medium-sized enterprises that are crucial to a complete semiconductor ecosystem”.
Since taking office in May, Taiwan’s President Lai Ching-te has mentioned the importance of resolving double taxation at least six times in meetings with visiting delegations of American lawmakers and think-tank experts.
Taiwanese officials and industry executives said a tax deal had become crucial as the push to reduce western democracies’ dependence on China was redirecting Taiwanese manufacturing investment away from the country.
“A US-Taiwan agreement on avoiding double taxation has been discussed for years and is long overdue,” said Bonnie Glaser, a China expert at the German Marshall Fund think-tank. “Once in place, such an agreement will remove a barrier to investments and strengthen business ties between the United States and Taiwan.”
The US was the top destination for Taiwanese outbound foreign direct investment last year, with $9.7bn in approved flows — ahead of Germany and Singapore, according to Taiwan’s economy ministry. This was a stark reversal from a decade ago, when the majority of the island’s direct investment went to China.
New Taiwanese investment in the US is mainly driven by projects supported with subsidies from the 2022 Chips act.
Taiwan Semiconductor Manufacturing Co, the world’s largest chipmaker, is building two fabrication plants in Arizona and planning a third. It is also urging its suppliers to follow suit, but the double taxation issue has held many back.
Vincent Liu, president of LCY, a supplier of cleaning chemicals to TSMC, said the issue was a “very big headache”. His company has an operation in the US, but he said the group could only expand if the double taxation problem was removed.
Liu added a tax deal would “encourage a lot of Taiwanese companies to invest in America — will trigger a wave — because a lot of Taiwanese companies need to find new overseas markets” other than China.
The Chinese embassy in Washington said China opposed “any country negotiating economic and trade agreements of sovereign implication or official nature with China’s Taiwan region” and urged the Biden administration to “stop all forms of official interaction with Taiwan”.
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