Senate Finance Committee Chair Ron Wyden, Democrat of Oregon, has announced plans to convene a business meeting on September 14, to favorably report the U.S.-Taiwan Expedited Double Tax Relief Act.
The bill would require an agreement to relieve American and Taiwanese tax residents from double taxation and implement measures to limit the risk of tax evasion or avoidance. Implementing such an agreement would require a future concurrent resolution of approval from the Congress.
The legislation creates a new section of the Internal Revenue Code, providing substantial benefits to Taiwan residents, like those that are provided in the 2016 United States Model Income Tax Convention. The provisions fall into four primary categories:
1) Reduction of withholding taxes
2) Application of permanent establishment rules
3) Treatment of income from employment
4) Determination of qualified residents of Taiwan, including rules for dual residents.
Since the legislation requires full reciprocal benefits, it does not come into full effect until Taiwan provides the same set of benefits to U.S. persons 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 certain 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% rate if paid to a recipient that owns at least ten percent of the shares of stock in the corporation, subject to limitations.
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 will be raised to the permanent establishment standard in treaties, rather than the U.S. trade or business standard applied in the IRC.
The bill provides that the income which is subject to U.S. income tax is only taxable income effectively connected to a United States permanent establishment of a qualified resident of Taiwan.
Under the treaty, no U.S. tax may be imposed on certain wages of qualified residents of Taiwan in connection with personal services performed in the U.S. Such wages cannot be paid by a U.S. person or borne by a U.S. permanent establishment of a foreign person. This does not 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” generally is any person who is liable for tax to Taiwan because of such person’s domicile, residence, place of management, place of incorporation, or any similar criterion, and is not a U.S. person. The provision contains rules to determine whether certain dual resident individuals are treated as qualified residents of Taiwan. For corporations, a qualified resident of Taiwan must also meet one of the limitation on benefits tests to be a beneficiary of the provision.
The benefits for qualified residents of Taiwan only apply once the U.S. has determined that Taiwan has granted reciprocal benefits to U.S. persons. Specific regulatory authority is provided for a number of policies, and any regulations or other guidance should be consistent with the provisions of the U.S. Model Tax Treaty.
The legislation was co-sponsored by Finance Committee ranking member Mike Crapo, Republican of Idaho, and was jointly developed with the House Ways and Means Committee leaders, Chairman Jason Smith, Republican of Missouri, and Ranking member Richard Neal, Democrat of Massachusetts.
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