HR-5988-118
Placed on the Union Calendar, Calendar No. 249.
Sponsored by Jason Smith (R-MO)
What it does
This bill would establish special U.S. tax rules that apply specifically to residents of Taiwan who earn income from U.S. sources. It would reduce the rate at which taxes are withheld from that income, apply "permanent establishment" rules (which determine when a foreign business is taxable in the U.S.), set rules for how employment income is taxed, and clarify how Taiwan residents' tax residency status is determined.
Who benefits
Taiwanese individuals and businesses earning income from U.S. sources, who would face lower withholding tax rates. U.S. companies and investors with operations or partnerships in Taiwan, who would benefit from clearer, more predictable tax rules. Cross-border workers employed by U.S. or Taiwanese firms operating in both countries. Financial and legal professionals who facilitate U.S.-Taiwan business transactions.
Who is hurt
U.S. Treasury, which would collect less withholding tax revenue from Taiwanese-source income under the reduced rates. Other foreign nationals and countries that do not have similar bilateral tax agreements with the U.S., who may view this as preferential treatment for Taiwan. U.S. workers who compete with Taiwanese businesses or workers that may gain a cost advantage from reduced tax burdens.
Supporters argue
Supporters argue that Taiwan is one of the United States' most important economic and trade partners, yet the two sides lack a formal tax treaty — a gap that results in Taiwanese residents and businesses being taxed twice on the same income. This double taxation, they contend, discourages cross-border investment and puts U.S.-Taiwan economic ties at a disadvantage compared to countries that do have full tax treaties with the U.S. By reducing withholding rates and clarifying residency and employment income rules, the bill would level the playing field, attract more Taiwanese capital into the U.S. economy, and strengthen a critical strategic partnership — all without requiring a formal treaty that could complicate sensitive diplomatic considerations around Taiwan's unique international status.
Opponents argue
Opponents argue that the bill sets a problematic precedent by granting treaty-like tax benefits to Taiwan through ordinary legislation, bypassing the Senate's constitutional treaty-ratification process and potentially undermining the framework that governs how the U.S. manages tax relationships with other nations. They contend that reducing withholding tax rates would result in lost federal revenue at a time of fiscal pressure, and that other trading partners may demand similar legislative arrangements, creating a patchwork of country-specific tax rules outside the normal treaty process. Critics also raise concerns that the bill's permanent establishment and residency rules could be exploited for tax avoidance by entities using Taiwan as a conduit, and that Congress should address the broader diplomatic status of Taiwan before extending such significant economic benefits.
Constitutional context
Tax bills must originate in the House of Representatives under the Origination Clause (Art. I, Sec. 7). Congress's taxing power is grounded in Art. I, Sec. 8 and the Sixteenth Amendment, which authorizes income taxes without apportionment. The bill's withholding rate reductions implicate the uniformity requirement for indirect taxes (Art. I, Sec. 8). Formal tax treaties are typically negotiated by the Executive and ratified by the Senate under the Treaty Clause (Art. II, Sec. 2); this bill achieves similar outcomes through statute, raising separation-of-powers questions. Moore v. U.S. (2024) is relevant to how unrealized or withheld income is characterized for tax purposes.
Checks and balances
Congress (the Legislative Branch) would gain authority by establishing bilateral tax rules through statute rather than through the Executive-led treaty process, which normally requires a two-thirds Senate vote for ratification. This shifts some power over international tax policy from the Executive Branch (which negotiates treaties) to Congress. The Executive Branch retains implementation authority through the IRS and Treasury Department.
Historical precedent
The Taiwan Tax Agreement Act of 2023 (S. 3084) is a companion Senate effort. More broadly, the U.S. has used statutory mechanisms to extend tax-treaty-like benefits in limited prior instances, though formal bilateral income tax treaties (e.g., with Japan, Germany, and the UK) are the standard model. The Taiwan Relations Act of 1979 similarly used legislation to manage U.S.-Taiwan relations outside a formal diplomatic framework.