(Tribune News Service) — Lawmakers could use the tax code in unprecedented fashion to extend friendly tax treatment to Taiwanese firms operating in the U.S. and American companies doing business in Taiwan, a reflection of the island’s unique position and backing in Washington.

A draft bill that all four of Congress’ top tax writers endorsed would add a new section to the tax code and could mark the first time that this level of tax treaty-like treatment would be extended by domestic law.

Experts say it’s a novel approach that comes as the U.S. looks to unlock investment in microchip factories at home and support Taiwan while operating within the confines of U.S. policy.

“This is really a very unique situation that I have not seen before, but it is also one that I think everybody is supportive of just simply because of the unique situation,” said Catherine Schultz, vice president for tax and fiscal policy at the Business Roundtable. The group represents CEOs of the largest U.S. companies.

The U.S. only has unofficial relations with Taiwan so it can’t execute a formal tax treaty, and its close partnership with Taiwan has been a flashpoint in U.S.-China relations. China claims the self-governing island as its territory.

PwC’s Pat Brown, who previously worked on tax treaties at the Treasury Department, said the unique situation with Taiwan means establishing a tax agreement is more of a congressional project than usual. Typically, the Treasury Department negotiates tax treaties that the Senate must approve by a supermajority vote.

A discussion draft released by the top Democrats and Republicans on the Senate Finance and House Ways and Means panels would create a new section of the tax code replicating some key provisions of the model tax treaty the U.S. uses to negotiate formal pacts. The benefits, which prevent the same income from being taxed by each jurisdiction, would only kick in if Taiwan offers the same treatment to U.S. businesses.

There’s no precedent for extending reciprocal benefits to another jurisdiction at this scale in the tax code. But aides looked to some examples.

A provision of the tax code allows foreign companies to avoid tax on international shipping income if their home countries offer the same benefit to U.S.-based firms, a guide for allowing benefits that only go into effect if they’re mutual. A 1983 law extending tax and trade benefits to Caribbean countries provided an example of provisions targeted to a specific region.

The tax committees set Monday as their deadline for collecting comments on their discussion draft, and are primarily seeking feedback on how well they tracked with the benefits of a typical tax treaty. They’re not interested in considering significantly different benefits because their goal is to replicate the traditional pact, according to an aide to Senate Finance Chair Ron Wyden, D-Ore.

But there’s a snag with the effort. The Senate Foreign Relations Committee that typically processes tax treaties has its own bipartisan bill that takes a different approach.

Foreign Relations’ bill would authorize the executive branch to negotiate and enter into a tax agreement with Taiwan that would have the force of a treaty and require final approval from Congress. The panel approved it by voice vote this month.

Brown said the bill provides the highest-level directive to Treasury, and that department-led negotiations could take years to produce an agreement.

The tax committees are opposed to the Foreign Relations approach. They believe allowing a less formal agreement to override the tax code — rather than using legislation or a treaty — would create a new, problematic precedent for making tax law, according to the Wyden aide.

Senators are attempting to work out the hangup. Foreign Relations Chairman and Finance panel member Bob Menendez, D-N.J., said he’s discussing the issue with Wyden.

“I think they are not mutually exclusive,” Menendez said. “They’re different approaches — ours is broader — but I think we’ll get to a good place.”

While it’s unclear exactly if or how the two committees could meld their approaches, they likely have months before tax legislation could move through the House and Senate to negotiate and make any tweaks.

Race for semiconductor plants

Getting something done this year would still be remarkably fast compared to the typical tax treaty process, a boost for chipmakers eyeing new U.S. subsidies. Treasury negotiations, with limited staff, typically take years, and once signed by the president, the pacts tend to sit in the Senate for years more.

The tax committees’ Taiwan proposal doesn’t need special treaty consideration and could instead be tacked onto a larger legislative package taken up in the House and Senate.

The tax committees believe they could attach their measure to the next possible legislative vehicle for tax provisions and have benefits in place as soon as next year, according to the Wyden aide.

Tax writers view speed as important to strengthen the country’s economic partnership with Taiwan generally and, in particular, to bolster investments that Congress has made in growing the domestic microchip industry.

Ways and Means’ top Democrat, Richard E. Neal of Massachusetts, said reducing double taxation of business earnings between the U.S. and Taiwan would help unlock the full competitive benefits of a 2022 law that provided grants and tax credits to attract new semiconductor factories to the U.S.

Taiwan is a leader in semiconductor manufacturing, and global competition is heating up as European countries offer their own incentives. Making sure that Taiwanese companies aren’t taxed twice on their earnings from U.S. plants would make those investments more attractive.

“I think we all see Taiwan as a very important pivot point in strategic relationships as well as trade is a big part of it, economics,” Neal said. Asked whether that means legislation could pass this year, he said, “Why not?”

The Business Roundtable’s Schultz said that companies have sought a tax agreement with Taiwan for years but the driving force for Congress acting now is likely the global competition to attract semiconductor manufacturing. The microchips are critical for computers, cars, smartphones and other technology.

It would also benefit U.S. companies, particularly in the tech industry, that sell their goods and services in Taiwan or source products from Taiwanese factories or suppliers.

Companies that reported lobbying specifically on a U.S.-Taiwan tax agreement this year include multiple major chipmakers based in Taiwan that operate U.S. facilities and have announced plans to build more, including MediaTek Inc., Taiwan Semiconductor Manufacturing Co., and an Arizona division of TSMC.

TSMC recently delayed the opening of its first plant in Arizona citing a shortage of local workers specialized in the field. That project is a $40 billion investment expected to create 4,500 jobs, according to the company’s announcement.

MediaTek announced plans for an Indiana chip design center last year.

©2023 CQ-Roll Call, Inc., All Rights Reserved.

Visit cqrollcall.com

Distributed by Tribune Content Agency, LLC.