Free Economic Pilot Zones

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

2. 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

3. Introduction • Taiwan’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

4. 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

5. Ideas and Goals

6. Key Ideas • Liberalization: Deregulation, market opening • Internationalization: Institutional reform, international alignment • Forward looking: Industries with new business models

7. What Will We Do? • Removing Investment and trade barriers • Refining business conditions • Improving government efficiency • Establishing better regulatory environment • Developing new business models

8. 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

9. Strategies and Targeted Industries

10. Physical or Virtual • 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 Physical (shop on site ) Virtual • Any location outside the zone • Process outsourcing (factory off site)

11. Strategies • Promoting the free movement of people, goods, and money • Market opening and international alignment • Tax incentives • Convenient acquisition of land • A supportive and friendly operating environment

12. 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

13. Targeted Industries (2/3) • 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

14. Targeted Industries (3/3) • 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

15. Implementationand Incentives

16. Time Line FEPZ’s Framework approved on Apr. 29, 2013 12 regulations amended in Sept. 2013 Special Act reviewed by Legislative Yuan(timing uncertain) 2013 Action Plan approved on Aug. 16, 2013 Special Actsubmitted to Executive Yuanfor approval in Sept. 2013 Special Actenacted (timing uncertain) PLANNING PHASE1 PHASE 2

17. Physical Locations Taipei Port FTZ • Phase I • 7 FTZs & 1 agri-biotech park • Extending FTZs by “on-site shop, off-site factory” (shop in front, factory behind) operation Keelung Port FTZ Taoyuan Airport FTZ Su’ao Port FTZ Taichung Port FTZ AnpingPortFTZ Pingtung Agricultural Biotechnology Park Kaohsiung Port FTZ * Proposal for inclusion submitted to the EY for approval.

18. Single Window • Project managers will assist FEPZ businesses in administrative and regulatory matters • Business registration Land acquisition and use • Comprehensive single window services Labor administration, safety and hygiene Construction Environment protection

19. Potential Benefits • Private investment to increase by NT$20 billion in 2014 • GDP to increase by NT$30 billion in 2014 • Creating 13,000 new jobs in 2014 • FTZs to see trade value multiplying and surpassing NT$1 trillion in 2015 • New business models • Preparing us for joining TPP and RCEP talks

20. A Summary 0Restriction 1Service window 2Phases 3Ideas 4Targets (4+N) 5Strategies 6Benefits

21. Facilitating Overseas Professionals Movement Short-term Long-term Foreign professionals Foreign and Mainland Chinese professionals Visa free Exempt from filing overseas income for tax Mainland Chinese professionals FEPZs Only half of income taxable for the first 3 years Exempt from review on business stay 3-year multiple-entry visa

22. Tax Incentives for Business 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) FEPZs Foreign enterprise Regional HQs Income form overseas affiliates tax at 10% for the first 3 yrs

23. 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 firmis exempted

24. 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

25. 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

26. 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

27. 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

28. Comparison of Taiwan’s FEPZs and the Shanghai Free Trade Zone

29. 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.

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

31. Comparison of Taiwan’s FEPZs and the Shanghai Free Trade Zone (3/3) • 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.Ifother countries or regions are willing to cooperate and have the right conditions for doing so, we can formulate supporting policy measures for it.

32. 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.

33. Cross-Strait Services Trade Agreement

34. Mainland China’s Opening • 80 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

35. 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

37. 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

38. Target industries • Primary target industries: • Smart logistics • International medical services • Value-added agricultural processing • Industrial cooperation • 4 + N e.g. Financial services • Financial services: • Will developed in virtual mode with differentiated administration based on grading Taiwan FEPZs • 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 Shanghai Pilot FTZs

39. 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