Free Economic Pilot Zones November, 2013 Chung-Ming Kuan Council for Economic Planning and...

Free Economic Pilot Zones

November , 2013

Chung-Ming KuanCouncil for Economic Planning and Development

2 / 37 CEPDFree Economic Pilot Zones

Outline Introduction Ideas and Goals Strategies and Targeted Industries Implementation and Incentives Comparison of Taiwan’s FEPZs and the

Shanghai Free Trade Zone Concluding Remarks Digression: Cross-Strait Services Trade

Agreement


IntroductionTaiwan’s economy in recent years

Slower economic growth Weaker domestic demand: Consumption,

investment More export competition, worse terms of trade Declining real wage

What has gone wrong? Investment and trade barriers Business conditions Government efficiency


Introduction

While there is no room for a large-scale fiscal stimulus plan, how can we restore Taiwan’s economic momentum?

Free Economic Pilot Zones (FEPZs) for furthering Taiwan’s economic liberalization Why does Taiwan still need special zones? FEPZs are different from the conventional

“Export Processing Zones” or “Science Parks” FEPZs may be physical or virtual


Ideas and Goals


Key Ideas

Liberalization: Deregulation, market opening

Internationalization: Institutional reform, international alignment

Forward looking: Industries with new business models


What Will We Do?

Removing Investment and trade barriers

Refining business conditionsImproving government efficiencyEstablishing better regulatory

environmentDeveloping new business models


Ultimate Goal

FEPZs as “trial” and “pioneer” areas To demonstrate the usefulness/benefits of

economic liberalization and internationalization

From partial to general From small-scale to large-scale

Ultimate goal: Toward a free trade island


Strategies and Targeted Industries


Physical

(shop on

site )

Virtual

(factory off site)

Location can be defined geographically

Differentiated administration based on grading

Not feasible for implementation in physical areas

Pilot models to be defined by corresponding ministries

Differentiated administration based on grading

Any location outside the zone

Process outsourcing

Physical or Virtual


Strategies

Promoting the free movement of people, goods, and money

Market opening and international alignment

Tax incentivesConvenient acquisition of landA supportive and friendly operating

environment


Targeted Industries (1/3)

Smart Logistics To promote faster and freer goods flows and

increase the value-added of goods with top logistics services, enabled by innovative customs administration and information clouds

International Medical Services To provide foreign patients with health checks,

cosmetic medicine and serious illness treatment, and to promote alliances with other industries, such as tourism



Value-Added Agriculture Processing To develop agriculture by utilizing Taiwan’s

agricultural technology to innovate for higher value, to extend the whole value chain, and to market the MIT brand

Industrial Cooperation Taking advantage of FEPZs to promote cross-

country cooperation through acquisition of key technologies, intellectual property (IP) or funds



4 + N: More service industries to come Financial services: Wealth and asset

management (to be included) Under a grading (grade-based approval)

system, only qualified financial institutions are allowed to develop and sell products which are not currently approved and to provide different services. This is what we mean by a “virtual” zone


Implementationand Incentives


Time Line

PHASE 1 PHASE 2PLANNING

FEPZ’s Framework approved on Apr. 29, 2013

Action Plan approved onAug. 16, 2013

2013

12 regulations amended in Sept. 2013

Special Act submitted to Executive Yuan for approval in Sept. 2013

Special Act reviewed by Legislative Yuan (timing uncertain)

Special Act enacted (timing uncertain)


Physical Locations

Phase I 7 FTZs & 1 agri-

biotech park Extending FTZs by

“on-site shop, off-site factory” (shop in front, factory behind) operation

* Proposal for inclusion submitted to the EY for approval.

Taipei Port FTZ

Pingtung Agricultural Biotechnology Park

Anping PortFTZ

Kaohsiung Port FTZ

Keelung Port FTZ

Taoyuan Airport FTZ

Su’ao Port FTZTaichung Port

FTZ


Single Window Project managers will assist FEPZ businesses in

administrative and regulatory matters

TaxLand

acquisition and use

Business registration

Comprehensive single window

servicesConstruction

Labor administration,

safety and hygiene

Environment protection


Private investment to increase by NT$20 billion in 2014

GDP to increase by NT$30 billion in 2014Creating 13,000 new jobs in 2014FTZs to see trade value multiplying and

surpassing NT$1 trillion in 2015New business modelsPreparing us for joining TPP and RCEP talks

Potential Benefits


A Summary

0 Restriction1 Service window2 Phases3 Ideas4 Targets (4+N)5 Strategies6 Benefits


Facilitating Overseas Professionals Movement

FEPZs

Foreign professionals

Exempt from filing overseas income for tax

Only half of income taxable for the first 3 years

Visa free

Short-term

Mainland Chinese professionals

Exempt from review on business stay

3-year multiple-entry visa

Foreign and Mainland Chinese professionals

Long-term


Tax Incentives for Business

Foreign enterprise

FEPZs

Exemption for repatriated dividends used for real investment

Exemptions for patent and technology transfer

Tax credits for R&D over 3 yrs (from current year)

Regional HQs Income form overseas affiliates tax at 10% for the first 3 yrs


A Case (1/5)

Imagine a multinational enterprise setting up an automation company in an FEPZ: The company repatriates US$100 M of its

overseas profits to buy capital equipment. The amount will be exempt from business income tax

The company then buys US$50 M worth of a key technology from a foreign consulting firm. Business income tax on the foreign firm is exempted


A Case (2/5)

The company then need to hire a foreign engineer. The company will not have to worry about its size and

sales, nor about the engineer’s work experience The engineer may get a visa upon arrival and come to

work for the company Half of the engineer’s income will not be taxed during

the first 3 years of his business stay in Taiwan The engineer will not have to include his income

earned in other countries when filing income report


A Case (3/5)

If the company wishes to recruit a Chinese engineer The company can invite as many as it wishes and

need not to apply to the competent agencies for business stay within one month

If the Chinese is to work longer, he or she can get a 3-year multiple-entry visa


A Case (4/5)

At the same time, the zone company spends another US$50 M in R&D for innovation The R&D spending of that year can be used as tax

credit for a period of 3 years, instead of 1 year in general. The deductible amount is up to 15% of the spending, and not surpassing 30% of total income tax payable each year


A Case (5/5)

The zone company is then upgraded to be a regional headquarters (HQs) by its parent company If the HQs meet specified criteria for size, investment

and job creation, it can enjoy a preferential income tax rate of 10%, from the normal 17%, on management service, royalty and investment profit income received from overseas affiliates,for the first 3 years


Comparison of Taiwan’s FEPZs and the Shanghai

Free Trade Zone


Purpose and Implementation P

Taiwan is initially prioritizing the promotion of intelligent logistics, international medicine, agricultural value added and industrial cooperation in its FEPZs.

Shanghai FTZ will mainly host trade industries, the international shipping industry, and the financial services industry.

Financial services Taiwan’s financial services industry is being included in the

zones on a virtual basis, under a grade-based and differentiated management system.

Shanghai FTZ will test run interest rate marketization, convertibility of renminbi capital items, etc.


Development focuses Taiwan is initially prioritizing the promotion of intelligent

logistics, international medicine, agricultural value added and industrial cooperation in its FEPZs.

Shanghai FTZ will mainly host trade industries, the international shipping industry, and the financial services industry.

Financial services Taiwan’s financial services industry is being included in the

zones on a virtual basis, under a grade-based and differentiated management system.

Shanghai FTZ will test run interest rate marketization, convertibility of renminbi capital items, etc.

Comparison of Taiwan’s FEPZs and the Shanghai Free Trade Zone (2/3)


Zone-to-zone industrial cooperation Industrial cooperation in Taiwan’s FEPZs is mainly aimed at

zone-to-zone cooperation, and is not limited to cross-strait cooperation.If other countries or regions are willing to cooperate and have the right conditions for doing so, we can formulate supporting policy measures for it.

Comparison of Taiwan’s FEPZs and the Shanghai Free Trade Zone (3/3)


Concluding Remarks

FEPZs to prepare us for further economic liberalization and internationalization

FEPZs include but are not limited to 7 FTZs; more service industries will be included in “virtual” FEPZs in the future.

Foreign and domestic businesses will be treated equally in FEPZs.

We welcome new ideas and proposals that can be applied to FEPZs.

In face of competition from Shanghai FTZ and other countries, Taiwan has all the more need for speeding up advancement of liberalization.


Cross-Strait Services Trade Agreement


Mainland China’s Opening80 items of WTO+ commitment

Less restrictions on Taiwanese investment: Sole ownership and higher shareholding are possible

Greater business scope for Taiwanese service providers, including increased activities and enlarged geographic coverage of services

More relaxed administration for easier business operation: Minimum stay requirement is abolished and the time for content examination is shortened


Foreign Companies in Taiwan

Foreign businesses with a substantive presence in Taiwan, after operating and paying taxes for 3 or 5 consecutive years (the latter for the financial and construction industries), will be able to enter the mainland as Taiwanese companies

Taiwan’s opening: only 64 items of commitment; more than 2/3 are greater than or equal to Taiwan’s WTO commitments. None of these surpass what foreign businesses already enjoyed in Taiwan

Purpose and Implementation•Purpose

– Both are trial and pioneer zones where institutional reform are carried out

– Service industry as target industry for development– From small scale to large scale, progressing toward whole

country

•Implementation– Beginning with framework, followed by

Phase I Action Plan and Special Act.– Broad communication with local industrial

communities

– Developing in full speed– A “Negative List” approach for foreign

investment – Other policies to be adopted in an

explorative mode

Taiwan FEPZs

Shanghai Pilot FTZ

Target industries

Taiwan FEPZs

Primary target industries: Smart logistics International medical services Value-added agricultural processing Industrial cooperation4 + N e.g. Financial services

Financial services: Will developed in virtual mode with differentiated

administration based on grading

Shanghai Pilot FTZs

Focusing on trade related industries, e.g. outsourcing, e-

commerce International shipping industry Financial services: Test run

Interest rate marketization Convertibility of RMB on the capital account Foreign-invested or Chinese & foreign co-invested

banks

Zone-to-zone Industrial Cooperation

• Zone-to-zone industrial cooperation– Not limited to cross-strait cooperation– Competent FTZs of other countries or regions are

also most welcome• Taiwan should accelerate liberalization when

facing competition from either Shanghai Pilot FTZ or other countries’ FTZs

Free Economic Pilot Zones November, 2013 Chung-Ming Kuan Council for Economic Planning and...

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