Taxation agreement stalled at Taiwan-China talks

On December 22nd, Taiwan and China signed another three agreements covering fishing crew cooperation, agricultural quarantine inspections and regulations covering industrial products. What generated more news, however, was not the three agreements that were signed, but the fourth one that was shelved, pertaining to double taxation. Never in the previous three rounds of the carefully scripted Chiang-Chen talks have the two sides put a planned agreement on hold just days before the two negotiators met formally to seal the deal.

This phase of the Chiang-Chen talks, between Chiang Pin-kung of Taiwan's Straits Exchange Foundation (SEF) and his Chinese counterpart Chen Yunlin with the Association for Relations Across the Taiwan Strait (ARATS), took place in Taichung, Taiwan.

Local media cited a number of factors contributing to the last minute change. Some reports mentioned a possible sovereignty-related dispute. Others suggested mounting pressure from Taiwanese-invested companies in China worried that a new agreement might lead to higher taxes.

Taiwan has signed 17 taxation agreements with other countries, the main purpose of which are to avoid double taxation and to determine the taxation jurisdictions so that businesses and individuals can evaluate their tax costs, reduce their tax burdens, and promote mutual investment and business development. It is important for Taiwan to maintain an attractive taxation policy in order to lure more multi-national companies.

According to the Economic Daily News, the proposed tax agreement is based on the Organization for Economic Cooperation and Development (OECD) standard, which uses a "state to state" framework. The two sides were reportedly unable to agree on the language, given how the sovereignty issue affects the taxation jurisdiction of each government.

Meanwhile the United Daily News reported that Taiwan’s Premier Wu Den-yih said the delay in signing the tax agreement does not involve the sovereignty issue, but rather, China changing its mind. China now wants taxation to be based on the place which generates the income. Premier Wu explained the two sides had originally agreed that the taxation would be based on the place of residence. For Taiwanese who do business in China, Taiwan is their residence. But China later proposed a different view where taxation should be based on the original place where the income is generated. So both sides agreed to put off the signing of the agreement until consensus could be reached.

A United Daily News report attributed the delay to mounting pressure from Taiwanese doing business on both sides of the Taiwan Strait who do not want their tax information “exposed.” Taiwanese business people are worried that the Taiwan government would share their detailed tax information with the Chinese authority, which might be “misused.”

In an editorial, the Taipei-based China Times said taxation is an obligation for businessmen no matter whether they are in Taiwan or China. The paper urged the government to be clear about why the taxation issue was not raised during the recent meeting.

Lai Shin-Yuan, Minister of the Mainland Affairs Council (MAC), noted in an interview with the United Daily News that the key issue in not signing the agreement lies in “tax benefits” or in plain language, money. She said delaying signing an agreement is a natural, normal and mature form of expression in an institutionalized negotiation between Taiwan and China. It is not just signing for the sake of signing. The two sides have reached consensus on key contents, but still need more time to iron out some technical issues.

On the three agreements that were signed, the fishing crew cooperation addresses issues that have long been in contention between fishermen on both sides. The agricultural quarantine inspection and industrial products inspection are measures necessary with increasing trade volumes of agricultural and industrial products. During the talks, the opposition Democratic Progressive Party observed the agreements and implementation carefully to ensure that the government did not lessened Taiwan’s interest in these talks.

Despite the advances of the Chiang-Chen talks, a greater problem on the horizon might be the lack of a FTA-like economic cooperative framework agreement (ECFA) with China. The recent free trade agreement between the Association of Southeast Asian Nations (ASEAN) and China that took effect at the start of the 2010 could cost Taiwan dearly. According to Taiwan’s Chung-Hua Institution for Economic Research, Taiwan bears the uncertainty that its industrial production value may drop by US$2.46 billion. Once ASEAN is expanded to include Japan and South Korea, Taiwan’s overall industrial production may fall by as much as US$9.99 billion.

Taiwan hopes to enter formal talks with China in mid-January with the aim of hammering out an ECFA May or June 2010.