The Ministry of Transportation and Communications has proposed changes to regulations governing a tax-free scheme in free-trade zones (FTZs) to avoid being listed as a noncooperative jurisdiction for tax purposes by the EU.
Key changes to the Regulations Governing Business Income Tax Exemption for Foreign Countries, Mainland China, Hong Kong or Macau Profit-Seeking Enterprises Conducting Goods Storage and/or Simple Processing Operations in Free Trade Zones (外國大陸地區香港或澳門營利事業於自由貿易港區從事貨物儲存或簡易加工免徵營利事業所得稅辦法) would state that the benefits would apply to “profit-seeking enterprises engaging in purely preparatory or auxiliary activities,” rather than “foreign profit-seeking enterprises,” the ministry said.
Meanwhile, tax-free activities in FTZs would include procurement, import and storage or transport of goods, rather than only storage of goods and simple processing operations, it said.
Currently, goods produced or processed in the FTZs are completely tax-free if they are exported to foreign countries, but for those sold domestically, only 10 percent would qualify for tax exemption, it said.
Following the amendment, the tax exemption would apply to goods sold globally and domestically without any limitation, it said.
Deputy Minister of Transportation and Communications Chi Wen-chung (祁文中) said the amendments were proposed in response to an EU request calling for fair treatment in terms of tax benefits in FTZs.
The ministry has consulted the model convention with respect to taxes on income and on capital stipulated by the Organisation for Economic Co-operation and Development for its proposed amendments, Chi said.
Taiwan has free trade zones in six seaports and one airport, which generated about NT$13.91 million (US$451,594) in tax revenue in 2016, Deputy Minister of Finance Wu Tzu-hsin (吳自心) said.
The amendments would cause a tax revenue loss of about NT$268,200, but the nation would incur more financial losses if it was listed as a noncooperative jurisdiction, Wu said.
The amendment is scheduled to be implemented next year, Department of Aviation and Navigation Director-General Chen Chin-sheng (陳進生) said, adding that investment cases approved before the end of this year can still enjoy the tax benefits until 2021.
Tax exemptions for simple processing goods would be eliminated through the amendment, but labeling, packaging and categorization of goods in FTZs would still be tax-free, Chen said.
While most lawmakers agreed that the changes are necessary, People First Party (PFP) Lee Hung-chun (李鴻鈞) questioned their effectiveness.
With Vietnam and Japan having signed free-trade agreements with the EU, what good would it bring Taiwan to initiate the changes at the request of the EU, he asked.
Although Taiwan cannot afford to deny a request from a big economic entity like the EU, changes should be made with a view to ensuring that the nation can use its advantages to stay competitive in the Asia-Pacific region, Lee said.
The US-China trade dispute has caused some Taiwanese businesspeople to move their bases back to Taiwan, Lee said, adding that the ministry should draft policies to accommodate them in FTZs.
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