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U.S.-Taiwan Tax Deal

Aug 28, 2023

The United States government is exploring ways to enter into a tax agreement with Taiwan to strengthen ties between the two countries, as Taiwan is an increasingly important trade partner for the United States. As the United States and Taiwan do not have official diplomatic relations, a formal treaty is unavailable as a route for double taxation relief. Instead, different avenues are being explored to create a treaty-like agreement between the two countries, including legislation. 

On July 12, the Senate Finance Committee released a discussion draft of legislation that would use the Internal Revenue Code to grant treaty-like treatment to Taiwan residents. Subsequently, on July 25, the Senate Foreign Relations Committee advanced a resolution that would authorize President Biden to negotiate a tax agreement with Taiwan. 

Provisions in the Bill

The proposed bill would create IRC Sec. 894A, “Special Rules for Qualified Residents of Taiwan.” The legislation:

  • Reduces the rate of withholding taxes on certain U.S.-sourced income of residents of Taiwan, including interest and dividends,
  • States that no income tax will be imposed on wages paid to a “qualified resident of Taiwan” for services performed in the U.S., provided the wages are not paid by a U.S. person,
  • Applies permanent establishment rules to Taiwanese companies in the U.S., and
  • Defines a “qualified resident of Taiwan” as a person who is not a U.S. person and has a tax liability in Taiwan due to their domicile, residence, or other criteria and sets out tie-breaker rules for dual residents.

The provisions in the bill are drafted to track the articles found in the U.S. Model Tax Treaty. The legislation, like a treaty, would not be in full effect until Taiwan grants the same tax benefits to U.S. residents with income subject to tax in Taiwan. 

Future of the Treaty

Legislation strengthening economic ties with Taiwan has strong bipartisan support. Congress also recently authorized approval and implementation of a trade agreement with Taiwan, which was signed into law on August 7, 2023 – less than two months after it was introduced. It is rare for Congress to release a discussion draft of a bill to the public, and the announcement via a joint press release shows the united front of the tax leaders of both parties. 

With this much bipartisan support, there is a strong likelihood a tax agreement with Taiwan is on the horizon. Taxpayers who believe they could be impacted by this legislation should reach out to a trusted tax advisor to stay informed of changes and opportunities. 

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