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CEPD Minister introduces Free Economic Pilot Zones

Taipei, 23 August – Taiwan is experimenting with new ways to boost economic growth and competitiveness and attract investment. The Executive Yuan's approval of a plan to set up Free Economic Pilot Zones (FEPZ) is one example. According to Dr Kuan Chung-ming, Minister of the Council for Economic Planning and Development, the plan has the strong support of President Ma Ying-jeou, the premier and vice premier. Kuan also said that the government is committed to fair treatment for foreign companies doing business in the FEPZs. Minister Kuan was speaking at a Premium Event lunch on 23 August to introduce FEPZs arranged by the European Chamber of Commerce Taiwan (ECCT). The event also featured short presentations and a panel discussion by industry experts Chee Yaw-chek, General Manager of DHL Express Taiwan; Winston Yu, Chief Executive Officer of KPMG Taiwan; Godwin Wang, Senior Manager of the Farglory Group and Tsai Ting-yi, CEO of the Port of Taipei, Taiwan International Ports Company.

The FEPZs will be test beds of economic liberalisation where restrictions will be greatly loosened on the flow of goods, people, money and information to create a more favourable environment for doing business. The government's objective in setting up the FEPZs is to demonstrate the benefits of free trade and open markets. They will do this by removing investment and trade barriers, refining business conditions and improving government efficiency in the zones. Should the FEPZs be successful in bringing economic benefits, they will be expanded beyond the initial zones in the future.

While the government started introducing economic processing zones back in the 1960s, FEPZs are different from conventional processing zones or science parks in that they will concentrate on high end and high value-added services. Initially, the zones will focus on four main areas: intelligent (or smart) logistics, international medical care, value-added agriculture and business cooperation. The government is also exploring the idea of introducing wealth and asset management services that would allow certain financial institutions to sell a wider variety of products in the FEPZs.

In the FEPZs it will be much easier to acquire land and hire people, including foreign professionals. For example, foreign professionals will be able to provide services needed on a commission or contract basis. Meanwhile, the tax environment in FEPZs will be much friendlier than in Taiwan proper and incentives will be offered. In addition, agricultural and raw materials imported into the zones will be exempt from customs tariffs, commodity taxes, trade promotion services charges and harbour service fees. Moreover, exported goods will be exempted from enterprize income tax and will be allowed to enter and leave the zones without examination or escourt.

Through the FEPZs, the government aims to attract an increase in private investment of NT$20 billion in 2014, increase GDP by NT$30 billion, create 13,000 new jobs in 2014 and boost trade in FTZs to over NT$1 trillion.

During his brief presentation at the lunch, Winston Yu explained some of the tax incentives planned for the FEPZs. The storage and processing of goods would be tax exempt. Taiwanese companies that make real investments in FEPZs (not including land or stock) using offshore dividends or repatriated profits will be exempt from income tax.
Qualified multinational corporations which set up regional operational headquarters and increase their investments or create a certain number of jobs can enjoy a 10% income tax rate on real investments. There are also tax exemptions for the income of foreign companies which provide enterprizes within the zones with patents and technology licences. In addition, Mainland Chinese professionals will be exempt from reporting foreign sourced income and only 50% of the first three years of salary income is included in taxable income. For FEPZ companies that invest in R&D, up to 15% of their expenses may be credited against their corporate income tax payable every year for three years.
Companies may consider restructuring or reorganizing their operations to take advantage of FEPZs. For example, it may offer tax savings to locate R&D operations in the FEPZs but companies should first consider the transfer pricing implications, according to Yu.