MOF upbeat on cross-strait tax pact

Taiwan and China might sign an agreement on the avoidance of double taxation later this year, the Ministry of Finance said yesterday.

“Technical issues” led to a breakdown in negotiations in 2009 on such a pact, which could significantly lighten the tax burdens on companies and Taiwanese doing business across the Taiwan Strait.

The ministry has gained more concessions from China this time around, Minister of Finance Chang Sheng-ford (張盛和) told a news conference in Taipei after a hearing with trade groups, taxation academics and accountants on the proposed pact.

“All attending parties welcome the agreement, which needs formal approval from policymakers on cross-strait affairs on both sides and the ratification by the Legislative Yuan,” Chang said.

The technical negotiations on the pact were completed during cross-strait talk in Shanghai in the middle of November last year.

While the two sides have yet to agree on the timing and venue for the next round of cross-strait trade talks, Chang said that the tax pact would likely signed and ratified this year.

The tax pact would ensure that companies and individuals with business on both sides of the Strait pay income taxes on gains from share transfers to their respective governments of origin, the ministry said in a report.

That was the sticking point in the 2009 talks because at the time there were many Taiwanese firms with operations in China, but very few Chinese firms with a presence in Taiwan, international fiscal affairs director Sung Hsiu-ling (宋秀玲) said.

The Chinese side agreed to the arrangement in principle, but said it needed more time to resolve objections, Sung said.

China has also agreed to extend the definition of Taiwanese firms and individuals to foreign-registered companies as long as their place of effective management is in Taiwan, Sung said.

Many Taiwanese firms with operations in China are registered in the Cayman Islands, Hong Kong and other locations to bypass Taiwan’s rules governing cross-strait investments.

The loose reading would allow up to 75 percent of Taiwanese firms based in China to meet the qualification and enjoy tax benefits under the proposed tax agreement, Sung said.

Taiwan has a flat income tax of 17 percent for companies, while China’s rate is 25 percent. Individuals in Taiwan pay income taxes ranging from 5 percent to 45 percent, while China has a more complicated system.

At present, companies and individuals are subjected to double taxations on their earnings.

While companies say they are in favor of lower tax burdens, some have voiced concern about the security of their tax information, fearing that it could be leaked, as well as falling afoul of inspections by taxation and law enforcement authorities on both sides of the Strait.

However, the proposed tax agreement would not be retroactive and tax-related documents could not be used for criminal prosecution or other purposes, the ministry had previously said. It also said there would be no provision of information about specific tax cases.

China has signed double taxation pacts with more than 100 countries, placing Taiwanese firms at a cost disadvantage, the ministry said.

Additional reporting by staff writer