Calls Grow for a US-Taiwan Agreement to Avoid Double Taxation as Chip War Intensifies – Global Taiwan Institute
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Washington is engaged in a concerted effort to re-shore production capacity of advanced semiconductors to the United States, and to reduce its over-reliance on China for critical materials through legislative efforts such as the CHIPS and Science Act and Inflation Reductions Act (IRA). Amidst these efforts, Taiwan—a world leader in the fabrication of advanced microchips—has renewed its longstanding push to begin negotiations on an Avoidance of Double Taxation Agreement (ADTA) with the United States, which now enjoys stronger support in Congress than ever before, as well as seemingly greater support within the Biden Administration.
At first blush, the two issues—tax and foreign policy—may appear to have very little in common. Taiwan has been trying to negotiate an ADTA with the United States for decades. However, the issue has been the focus area of only a handful of tax specialists and international lawyers, and was relatively low on the list of other priorities amid a bilateral relationship dominated by other concerns—and was therefore widely perceived in Washington as an issue not worth irritating Beijing over.
Don Shapiro, a senior advisor to the American Chamber of Commerce in Taiwan, which is an international business association that advocates on behalf of the US and international business community in Taiwan, described early discussions about a potential ADAT as follows:
A decade or more ago when the double taxation issue was first being broached, the idea got shot down on the grounds that in the absence of formal diplomatic relations, it wouldn’t [sic] be a treaty approved only by the Senate but would also have to go to the House. The argument was that Treasury would never stand for opening the door to House involvement in international tax matters. At the time, we at AmCham wondered how much that argument reflected a real problem and to what extent it was an excuse not to pursue a policy that Beijing would vigorously object to. The fact that no one now is raising the ‘bicameral’ issue would indicate that it was the latter—and something that could be ignored if the [US government] considered a tax agreement with Taiwan to be in its best interest. [1]
The attitude in Washington has changed in fundamental ways in the intervening years in large part due to China’s belligerence, the increased awareness about the critical importance of semiconductors, and the growing recognition of the need for a reliable global high-tech supply chain. A mundane issue such as a tax agreement is now becoming a foreign policy focus area that is receiving the attention of senior lawmakers in both chambers.
Increasing US Political Support for a US-Taiwan ADAT
Asserting the significance of an ADTA with Taiwan in terms of an increasingly necessary measure to counter Chinese economic coercion, a bipartisan group of senators led by Senator Bob Menendez (D-NJ), Senator Jim Risch (R-ID), Senator Chris Van Hollen (D-MD), and Senator Mitt Romney (R-UT) introduced the Taiwan Tax Agreement Act of 2023 in early May. If enacted, the Bill would authorize the Biden administration to negotiate and conclude a tax agreement with Taiwan. In the statement unveiling the bill, the Senators noted: “Similar to a tax treaty, this agreement would play a key role in facilitating investment between the United States and Taiwan, including in key strategic industries such as semiconductors, by making it easier for businesses in the United States and Taiwan to avoid double taxation while protecting against tax evasion.”
However, not every member of Congress is on board. Senator Rand Paul (R-KY) purposely delayed the landmark Taiwan Tax Agreement Act of 2023. Still, Senator Paul’s objection to the agreement is not specific to Taiwan; instead, his concerns are purportedly over protecting the privacy of American taxpayers with the legislation. “We’ve had problems with the bulk exchange of data without individualizing,” he told The Hill. As a libertarian, Senator Paul is critical of provisions in tax treaties that often provide a low bar for the US government to obtain the financial records of Americans living abroad.
Notwithstanding Senator Paul’s objection, the ADTA also has the clear and strong support of the US business community. In a letter dated June 8 sent by the US Chamber of Commerce—the largest lobbying group representing US business interests in the United States and abroad—to members of Congress in reference to the Taiwan Tax Agreement Act of 2023:
Taiwan is the 10th largest US trading partner, and US direct investment in Taiwan topped $16 billion in 2021. In the same year, Taiwanese investment in the United States reached $17 billion. These commercial ties support growth, jobs, and innovation in both the United States and Taiwan. A US-Taiwan tax agreement would help reduce unnecessary double taxation, prevent tax evasion, and remove barriers to trade between our two economies. The Chamber urges the Committee to expeditiously report this bill.
Even more importantly, the Executive Branch—once a hurdle for an ADTA—has signaled a willingness to consider the matter. In March, the Biden Administration’s secretary of the treasury, Janet Yellen, in a Congressional hearing organized by the House Committee on Appropriations Subcommittee on State, Foreign Operations, and Related Programs, was asked the following question by Representative Diaz-Balart (R-FL): “[T]here is strong bipartisan support in Congress for our Democratic friend and partner Taiwan. Many of us support efforts to strengthen that partnership, including through expanded trade and investment frameworks … Madame Secretary, do you think it’s [sic] time to address this gap in our trade policy by potentially beginning negotiations towards that end with Taiwan?”
The treasury secretary responded in the affirmative: “I do recognize that this is a very significant problem, that we really need to explore ways to deal with what the private sector has repeatedly pointed out is an issue, and we will do that work with the State Department to see if we can find a way to address it.”
ADAT: Reduces Investment Barriers, Supply Costs, and Shipping Delays
Taiwan-based companies like Taiwan Semiconductor Manufacturing Company Limited (TSMC, 台灣積體電路製造股份有限公司)—which accounts for the fabrication of around 90 percent of the most advanced chips—and GlobalWafers (環球晶圓股份有限公司) have already committed historic-size investments in the United States: such as building plants to manufacture 5 and 3-nanometer chips, silicon wafer plants, and an electronic-grade isopropyl alcohol plant, and have contributed to the significant increase in two-way investments from USD $1.52 billion over four years (from 2012-16 to USD $8.11 billion from 2017-21). Additionally, the United States is Taiwan’s top destination for foreign direct investment (FDI), accounting for USD $4.19 billion of Taiwan’s outward FDI. [2]
As US policymakers look for ways to re-shore capacity in chip fabrication back to the United States, it also requires the technical experience and know-how of a myriad of suppliers in a complex ecosystem to make investments in the United States and build and produce their products at costs that are still profitable. Yet, given that Taiwan and the United States do not have an income tax agreement in place, corporations in countries like South Korea, Australia, and even China have significantly lower withholding tax rates on dividends, interest, and royalties when compared to their Taiwanese counterparts. In the absence of a tax agreement, Taiwan’s corporations currently have a 30 percent withholding tax on dividends, interest, and royalties—and this is in comparison to a range of 5 percent to 15 percent for the other three countries that have a tax agreement with the United States.
As a result, Taiwanese companies have two to three times more tax burden when remitting dividends, interests, or royalties from the United States when compared to their Chinese, Australian, or South Korean counterparts. [3] While all foreign companies have to pay the same level of federal and state taxes, the real income that Taiwanese companies earn is effectively garnished relative to the other companies by the higher remittance taxes placed on them. As such, the absence of an ADTA creates an unequal playing field and reduces the bottom line for Taiwanese companies relative to their market competitors.
It is therefore no surprise that a Wall Street Journal article in April reported:
A ‘double tax’ conundrum involving Taiwanese businesses operating on American soil is straining business ties between the US and Taiwan, a technology manufacturing powerhouse and central player in Washington’s plan to counter the rise of China and strengthen US supply chains.
The same article also quoted an executive of a company that supplied TSMC who noted that the lack of an ADTA is “a big impediment to Taiwanese investments.” Additionally, a 2020 survey commissioned by the American Institute in Taiwan’s Taipei office reportedly noted that “79 percent of respondent Taiwanese companies with a presence in the United States consider the current 30 percent dividend withholding tax to be a considerable factor preventing investment in the United States.” [4]
These findings were echoed by AmCham’s Shapiro: “[s]ome of the semiconductor companies have complained that they are disadvantaged by the lack of a tax treaty because it deters them from doing drop shipments direct to their customers from the fabs like TSMC that are doing the actual production. To avoid being taxed in two jurisdictions, they have the chips shipped to their US head office and then reship them to the customer—adding to costs and delivery time.” [5] Accordingly, the lack of an ADTA is not only a barrier to investments, but also adds unnecessary delays and costs to the global supply chain.
Conclusion
In the final analysis, pushing Taiwan to move production capacity to the United States while keeping the doors closed on an ADTA would be a twofold blow to Taipei. On the one hand, it will put Taiwan’s companies at a relative disadvantage to their market competitors; and, on the other hand, it will impose an unfair share of the necessary burden that comes with realigning the high-tech supply chain away from China. Moreover, it will discourage reciprocal investments that would help to reduce China’s economic leverage. According to AmCham’s Shapiro: “[I]t has also been clear that for many prospective investors, the tax implications are a serious concern and in some cases a definite impediment.” [6]
The main point: In addition to levying a comparatively high tax burden upon Taiwanese companies, the absence of an ADTA is also a deterrent to US-Taiwan investments that adds unnecessary delays and costs to production. Taking advantage of current political and economic momentum, US policymakers should aim to push through negotiations on an ADTA to encourage economic cooperation between Taiwan and the United States, as well as to bolster a shared defense against the PRC’s continued threats of economic coercion.
The author would like to Ya-Hui Chiu Summer Fellow Jonah Landsman for his research assistance.
[1] Author’s email, dated July 9, 2023.
[2] Taipei Economic and Cultural Representative Office, “Need for a Taiwan-U.S. Avoidance of Double Taxation Agreement (ADTA) to create more attractive environments for two-way investments” (fact sheet), January 2023.
[3] Ibid.
[4] Ibid.
[5] Author’s email, dated July 9, 2023.
[6] Author’s email, dated July 9, 2023.
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