Senate committee backs Bill to deepen the US’ economic ties with Taiwan

WASHINGTON – The United States Senate Finance Committee on Thursday passed a Bill that would deepen economic ties between the US 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 in the summer of 2023 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 towards 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 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 in 2023, 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 (S$68.1 billion) in support for the sector as part of the Chips Act legislation that was enacted in 2022.

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 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 (TSMC) has been planning a new chip production facility in Arizona.

But the project has been delayed amid concerns about labour shortages.

The company said in 2022 that the lack of a bilateral tax treaty had increased the cost of investing in the US.

Closer business ties are only one 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 towards 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.

Republicans on the Senate Finance Committee also voiced support for closer economic ties with Taiwan.

Iowa Senator Chuck Grassley, a Republican, noted that Taiwan was a major importer of corn and soya beans from his state and said that the tax agreement would send a strong message to China.

“I look forward to the expanded opportunities for economic cooperation with Taiwan that this Bill affords Iowa businesses,” he said.

“More importantly, strengthening our ties with our democratic allies in Asia, as this Bill does, is exactly the type of step this committee should take to counter the global ambitions of an increasingly hostile China.”

Beijing criticised the legislation on Thursday, and suggested that it was a breach of the “one-China” principle.

“China is always against any country negotiating economic and trade agreements of sovereign implication or official nature with China’s Taiwan region,” said Mr Liu Pengyu, a spokesman for the Chinese embassy in Washington.

“The US must not negotiate agreements with sovereign implication or official nature with China’s Taiwan region or send any wrong signal to the ‘Taiwan independence’ separatist forces in the name of trade and economic interactions.”

The Senate Foreign Relations Committee passed a separate Bill in the summer of 2023 to address double taxation with Taiwan, and a compromise may need to be reached between the committees.

Lawmakers on Thursday expressed optimism that the legislation could be passed and sent to Mr Biden in the coming months.

“We very much share your goal to make sure that firms that are engaged between the US and Taiwan are not subject to double taxation,” Mr Jay Shambaugh, the Treasury Undersecretary for International Affairs, told the Senate Foreign Relations Committee in July.

He added: “It’s an incredibly important supply chain, it’s an incredibly important trading relationship, and it’s important that we don’t have double taxation issues.” NYTIMES