Taxing Relations: The Stalled US-Taiwan Tax Treaty in Congress

The United States and Taiwan share a strong economic partnership, with Taiwan ranking as the United States’ seventh largest trading partner and the United States ranking as Taiwan’s third largest trading partner. This close economic relationship is powered by extensive two-way trade, with the United States exporting agricultural products, machinery and mechanical appliances, and mineral products to Taiwan, while relying on Taiwan for imports of both basic and advanced semiconductors, electronics, and other manufactured goods. In recent years, Taiwan’s significance in the global supply chain has been thrust into the spotlight, due to its dominant position in the production of semiconductors–which also fuels the US consumer economy. 

Since Congress passed and President Biden signed into law the Chips and Science Act in 2022 to bring advanced semiconductor manufacturing to the United States, Taiwanese market leader Taiwan Semiconductor Manufacturing Company (TSMC,台灣積體電路製造股份有限公司) has announced the largest foreign direct investment (FDI) greenfield project in US history—investing a total of over USD $65 billion—to build three semiconductor fabrication plants in the state of Arizona. In addition to Taiwanese FDI into the United States, American companies are active in the Taiwanese market—investing in sectors such as cybersecurity, defense, medical devices, and machinery and machine tools. However, Taiwan is the only country among the United States’ top 10 largest trading partners with whom the United States does not have a formal double taxation agreement. This has not only impacted large Taiwanese multinationals such as TSMC but also other and smaller Taiwanese companies that supply TSMC.

American companies investing in Taiwan have also stated that the lack of a formal double taxation agreement creates uncertainty in their investments. Having this problem solved would help support more cross-border trade and investment by providing a clearer and more stable regulatory framework for economic activities between the two countries. The US House of Representatives recently, on a strongly bipartisan basis, passed The Tax Relief for American Families and Workers Act of 2024 (hereafter referred to as the “Act”), within which is a provision that includes a “treaty-like” tax relief framework for Taiwan residents, effectively serving as a US-Taiwan tax treaty. As the Biden administration aims to “friendshore” and strengthen economic partnerships with key allies, establishing a double tax agreement with Taiwan emerges as a crucial step to achieve this goal, facilitating enhanced trade and investment flows between the two nations.

The Current Tax System between the United States and Taiwan

In the absence of a formal double taxation agreement between the United States and Taiwan, businesses and individuals have had to navigate the complex tax regimes of both countries, rather than just the tax regime of one. For example, Taiwanese businesses and individuals operating in the United States, in addition to paying US federal and potentially state and local taxes, are also subject to the normal tax rates in Taiwan. Below is a breakdown of how individual and corporate income is taxed in each country:

2024 Taiwan Income Tax Brackets: 

Taiwan Corporate Income Tax Brackets:

2024 US Income Tax Brackets (Single):

The United States has a flat 21 percent federal corporate tax, and 44 states also impose a corporate income tax (which ranges from 2.5 percent to 9.8 percent). In addition to the normal corporate tax, both countries also have an alternative minimum tax (AMT) on corporate income. In the United States, the Inflation Reduction Act of 2021 introduced a Corporate Alternative Minimum Tax (CAMT), which is effective for tax years beginning after 2022. This 15 percent minimum tax applies to the adjusted financial statement income (AFSI) of C corporations [1], with an average annual AFSI exceeding USD $1 billion over a three-year period. The CAMT ensures that corporations pay at least a minimum tax when the tentative minimum tax exceeds regular tax plus the base erosion and anti-abuse tax. In Taiwan, the Income Basic Tax (IBT) functions as an alternative minimum tax for resident companies and non-resident companies with a fixed place of business or business agent in Taiwan. The IBT, set at 12 percent, is calculated on certain tax-exempt income with a NTD $600,000 deduction. If the IBT amount is higher than the regular corporate income tax (CIT) amount, companies must pay the regular CIT plus the difference. If the regular CIT amount is greater, no additional payment is required.

There is a way to get relief from the current double taxation through the foreign tax credit. In both Taiwan and the United States, the foreign tax credit provides relief from double taxation by allowing individuals and businesses to claim a credit for taxes paid to foreign governments. In Taiwan, the tax credit is limited to the amount of foreign tax paid, ensuring that the credit cannot exceed the actual tax liability incurred abroad. This tax credit applies equally to both individuals and businesses, providing a straightforward method to mitigate double taxation. Similarly, in the United States, the foreign tax credit is also restricted to the amount of foreign taxes paid. Thus, both countries adopt a comparable system that aims to prevent double taxation while limiting the credit to the foreign tax amount paid. However, the main issue with the current system is that these tax credits are only paid out after an individual or business files their taxes with their respective governments, which can create cash flow challenges and uncertainty throughout the fiscal year. 

The Double Taxation Section of the Bill: the US-Taiwan Tax Treaty

A significant portion of the bill addresses tax issues related to Taiwan. Due to the lack of formal diplomatic relations with Taiwan, the bill provides “treaty-like” relief for Taiwan residents [2], including: reduced withholding rates to prevent double taxation; clear guidelines on the treatment of employment, interest, and dividend income for individuals; and criteria for determining qualified residents of Taiwan. Additionally, the bill sets a framework for the US president to negotiate a formal tax agreement with Taiwan, enhancing economic ties and reducing tax-related barriers for individuals and businesses. Tax relief for Taiwan residents in the United States is dependent on US residents obtaining similar treatment under Taiwanese law. 

The Status of the Bill

The Act is currently facing significant hurdles in the Senate. As mentioned above, despite passing the House with strong bipartisan support, Senate Republicans have focused on the inclusion of the expanded child tax credit (CTC) as a reason to oppose the bill. Key Republican senators—including Senator Mike Crapo (R-ID), who is the Ranking Member of the Senate Finance Committee, and Senator Mitt Romney (R-UT)—have been vocal in their opposition to the bill, with both emphasizing the need for fiscal responsibility and the potential for fraud in the expanded CTC. In addition, Senate Republicans are taking their cues for supporting or not supporting the legislation through Senator Crapo. In Senator Crapo’s view, because the child tax credit for the current tax year relies on the previous tax year’s income, he is strongly opposed to this provision because “allowing individuals to receive a refundable credit when they have zero annual earnings—as the prior year’s earnings provision allows—is a departure from longstanding policy tying the CTC to work.” 

Three Senate Democrats have called on Senate Majority Leader Chuck Schumer (D-NY) to put the legislation up for a vote before the election in November. Because Senate rules require a 60-vote threshold to overcome a filibuster and bring the bill to a direct vote, at least 9 Republican Senators would have to vote in the affirmative (assuming all 47 Democrats and the 4 Independents who caucus with the Democrats vote in the affirmative). Once a bill overcomes the 60-vote filibuster threshold, it needs a simple majority vote of least 51 to pass the Senate. However, the Senate recently rejected the bill on a 48-44 vote, with most Democrats voting in favor and most Republicans rejecting the bill. 

Potential for Passage after the Election?

As the United States gears up for the coming election in November, the chances of this bipartisan bill passing becomes lower and lower as each day passes. Due to key provisions in the 2017 Tax Cuts and Jobs Act expiring in 2025—such as tax cuts for businesses and individuals, certain business tax credits, pass-through business tax changes, widening of the estate tax exemption, and many others—Senate Republicans are hesitant to support this legislation and give a victory to President Joe Biden, a Democrat.

However, there is a scenario in which Congress passes a stand-alone bill “treaty-like” relief for Taiwan residents after the November election in a lame-duck session (i.e., the period between the election and the inauguration of the new Congress). Because political considerations wouldn’t be as much of a factor anymore, Congress could either pass the current Act as is—or else pass a stand alone bill that would provide “treaty-like” relief to Taiwan residents, and that would allow the president to enter into negotiations with the Taiwanese government on a double-taxation agreement. 

Conclusion

The robust economic partnership between the United States and Taiwan underscores the importance of mutual investments and trade. With Taiwan’s pivotal role in the global supply chain, particularly in semiconductor manufacturing, the United States’ efforts to bring advanced semiconductor manufacturing to its soil through legislation such as the Chips and Science Act highlight a strategic move to strengthen this bilateral relationship further. The historic investment by TSMC in Arizona marks a significant milestone, reflecting the deep economic ties between the US and Taiwan, and a shared commitment to innovation and growth. However, the absence of a formal double taxation agreement poses challenges, adding a layer of uncertainty for businesses on both sides. The recent passage of the Act by the US House of Representatives, with its provisions for a “treaty-like” tax relief framework for Taiwan, represents a crucial step towards addressing these issues and fostering a more favorable business environment.

Looking ahead, the bill’s journey through the Senate remains stalled, with political dynamics and differing priorities influencing its fate. The expanded child tax credit provision has been a point of contention, drawing criticism from key Senate Republicans who emphasize fiscal responsibility. Despite this, the potential for passing a standalone bill offering tax relief to Taiwan residents post-election presents a viable path forward. Such a development could significantly enhance US-Taiwan economic ties, providing much-needed clarity and stability for investors. As both nations navigate these legislative hurdles in the US Senate, ongoing dialogue and cooperation will be essential in shaping a resilient and mutually beneficial economic partnership for the future.

The main point: Strong economic ties between the United States and Taiwan necessitate a formal double taxation agreement. However, due to both political considerations and how legislation moves through the US Congress, it remains to be seen whether the proposed double taxation framework within the Act will overcome the current legislative hurdles and be enacted into law. 

[1] A C corporation is an independent legal business entity owned by its shareholders.

[2] The term “Taiwan resident” in this context means any person who is liable to tax under the laws of Taiwan, is not a United States person, or is an entity taxed as a corporation in Taiwan.