The Senate Finance Committee voted 27-0 on Sept. 14 to approve legislation that would confer treaty-like tax benefits to Taiwan to reduce withholding and double taxation. The bill also has bipartisan support among House tax writers, but its prospects are complicated by process concerns.
The effort to confer treaty-like tax benefits to Taiwan without a tax treaty stems from Taiwan’s unique political status, which generally prevents the U.S. from entering into formal treaty negotiations. The Senate Finance Committee legislation would instead create a new code Section 894A that would provide treaty-like benefits to Taiwan based on 2016 U.S. Model Tax Treaty, including:
- Reducing the 30% withholding rate on U.S. source interest and royalties to 10% for nonresident Taiwanese aliens and Taiwanese corporations
- Reducing the dividend withholding rate to 15% with a 10% rate under certain conditions
- Applying permanent establishment rules to determine effectively connected income
- Exempting certain U.S. wages of Taiwanese residents from U.S. tax
The provisions would not take effect until Treasury determines that Taiwan has enacted reciprocal benefits to U.S. persons.
While there is broad support for the underlying result that would be achieved by the bill, Senate Foreign Relations Committee members have concerns that the mechanism circumvents the formal treaty process and their role in it. Senate Foreign Relations Committee Chair Robert Menendez, D-N.J., voted for the bill in the Finance Committee, but said he still had deep concerns with advancing it without other measures from his committee.
Grant Thornton Insight:
If lawmakers can agree on a compromise path forward, there is a reasonable chance of enactment this year. If enacted, the legislation would provide significant benefits to U.S. multinationals with investments and operations in Taiwan.
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