Leaders of Congress’s main tax committees unveiled a discussion draft of legislation aimed at reducing double taxation for employees and businesses involved in U.S. and Taiwan cross-border investment.
The bill aims to significantly reduce withholding taxes on dividends, interest and royalties paid on cross-border investments, lower barriers for smaller businesses to make such investments, reduce complexity for dual residents, and unlock deeper economic cooperation with Taiwan.
Introduction of the draft legislation comes amid rising tensions between the U.S. and China, which has long objected to U.S. support for the island, which China considers part of its territory. Treasury Secretary Janet Yellen traveled to Beijing over the weekend and met with officials in an effort to cool the tensions, but acknowledged areas of disagreement between the two countries.
I-Hwa Cheng/Bloomberg
Senate Finance Committee chairman Ron Wyden, D-Ore., ranking member Mike Crapo, R-Idaho, House Ways and Means Committee chairman Jason Smith, R-Missouri, and ranking member Richard Neal, D-Massachusetts, released the draft legislation Wednesday. “Today’s draft is an important step toward providing relief for American and Taiwanese workers and businesses that face burdens when operating across our borders,” the lawmakers said in a statement. “Given Taiwan’s very unique status precluding it from remedying double taxation through an income tax treaty, we remain committed to solutions that will unlock investment, create more jobs, and lead to greater shared prosperity. This legislation will provide much needed certainty for U.S. businesses investing in Taiwan, and vice-versa, while strengthening our economic partnership for decades to come.”
The bill would create a new Section 894A of the Tax Code providing
substantial benefits to Taiwan residents similar to
those that are provided in the 2016 United States Model Income Tax Convention. The provisions would fall into four primary categories:
- Reduction of withholding taxes
- Application of permanent establishment rules
- Treatment of income from employment
- Determination of qualified residents of Taiwan, including rules for dual residents.
Since the legislation requires full reciprocal benefits, it would not come into full effect until Taiwan provides the same set of benefits to U.S. individuals with income subject to tax in Taiwan, similar to the reciprocal operation of a tax treaty.
A reduced rate on withholding taxes would apply to certain income from U.S. sources
received by qualified residents of Taiwan, such as interest, dividends, royalties and some other comparable payments, such as dividend equivalent amounts.
Instead of the 30% withholding tax presently imposed on U.S. source income received by nonresident aliens and foreign corporations, interest and royalties would be subject to a 10 % withholding tax rate. Generally, dividends would be subject to a
15% withholding tax rate. Dividends would be subject to a lower 10 percent rate if paid to a recipient that owns at least 10% of the shares of stock in the corporation, subject to limitations.
Lower withholding tax rates would not apply to certain amounts, such as those subject to Foreign Investment in Real Property Tax Act, received from real estate investment trusts, received from inverted companies and others.
The threshold of whether a qualified resident of Taiwan’s income from a U.S. trade or business is subject to U.S. income tax would be raised to the permanent establishment standard in treaties, rather than the U.S. trade or business standard applied in the Internal Revenue Code.
The bill says the income that’s subject to U.S. income tax is only taxable income effectively connected to a U.S. permanent establishment of a qualified resident of Taiwan.
No U.S. would be imposed on certain wages of qualified residents of Taiwan in connection with personal services performed in the U.S. The wages could not be paid by a U.S. person or borne by a U.S. permanent establishment of a foreign person. But that wouldn’t apply to certain types of wages, such as directors’ fees, pensions and other wages that are generally taxable under the U.S. Model Tax Treaty.
A “qualified resident of Taiwan” would generally be any person who is liable for tax to Taiwan because of their domicile, residence, place of management, place of incorporation or any similar criterion, and is not a U.S. person. For corporations, a qualified resident of Taiwan would also need to meet the limitation on benefits requirements to be a beneficiary of the provision.
The provision contains rules to determine whether certain dual resident individuals (who are technically subject to residence-based tax by both Taiwan and the U.S.) are to be treated as qualified residents of Taiwan. The tie-breaker rules would look at factors such as where a permanent home exists, where personal and economic relations are closer, along with other factors.
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