WASHINGTON – The Senate Finance Committee on Thursday passed a bill that would deepen economic ties between the United States and Taiwan and effectively create a tax treaty that is expected to pave the way for more Taiwanese investment in the American semiconductor industry.
The effort by Congress could inflame tensions between the US and China at a time when the Biden administration has been working to stabilise the relationship. President Joe Biden dispatched three Cabinet officials to Beijing this summer to improve dialogue between the world’s two largest economies.
In a rare demonstration of bipartisanship, the tax-writing committee passed the bill unanimously. Although Republicans and Democrats have vastly different views on most areas of tax policy, the two parties are united in their support for Taiwan and antipathy for China – which denies the island’s independence.
The legislation would end the double taxation between the US and Taiwan that has strained business ties for years. Currently, Taiwanese companies and individuals doing business in the US are taxed in both places, and vice versa for US companies, making it expensive for the businesses to invest in one another.
The US has tax treaties with many countries that eliminate double taxation, but it has been unable to form such a treaty with Taiwan because the two governments do not have official diplomatic ties. The US established diplomatic ties with China in 1979 and broke off formal relations with Taiwan. Since then, every US administration has tried to maintain an ambiguous position on Taiwan based on the “One China” policy.
Usually, US administrations strike tax treaty agreements with other countries that are ratified by the Senate. To circumvent the normal tax treaty process, Congress has been working on legislation that would change the tax code directly as long as Taiwan enacts similar benefits for Americans who want to do business there.
The bill was drafted with input from House lawmakers, and it could become law later this year, if the full Senate and House approve it, and President Biden signs it. The Biden administration has expressed support for ending double taxation with Taiwan.
Lawmakers view the legislation as a way to bolster US manufacturing and accelerate investment in the US semiconductor industry. Congress approved more than US$50 billion in support for the sector as part of the Chips Act legislation that was enacted last year, and Taiwan, which is a global leader in the production of microchips, has been planning to build manufacturing facilities in the US.
Democratic Senator Ron Wyden, who chairs the Senate Finance Committee, said that the legislation would help make those plans possible.
“To ensure that our country continues to grow these investments in America, relief of double taxation between the US and Taiwan is an important next step,” he said. “We do not want these investments to fall through or go to other countries because we are not providing double-tax relief.”
Taiwan Semiconductor Manufacturing Co. has been planning a new chip production facility in Arizona, but the project has been delayed amid concerns about labour shortages. The company said last year that the lack of a bilateral tax treaty had increased the cost of investing in the US.
Closer business ties are only part of the appeal of the tax legislation for lawmakers.
Mr Wyden said it would also reinforce US support for Taiwan at a moment when Beijing is showing increased aggression toward the island, which it considers part of China.
“Not only is Taiwan a critical trading partner; it is a democracy that shares our values and faces a growing threat,” he said.
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