AmCham arrow Publications arrow Topics Archive arrow Topics Archive 2003 arrow Vol.33- No.8 arrow Law: Evaluating the New Free Trade Zone Law
Law: Evaluating the New Free Trade Zone Law PDF Print E-mail

The recently passed statute appears to offer some promising opportunities for companies of various kinds, but...

The recently passed statute appears to offer some promising opportunities for companies of various kinds, but much depends on how the law is implemented.

By Michael S. Wong and Jeffrey N. Watkins

T aiwan's recent special Legislative Yuan session was billed as yet another "Great Leap" towards improving Taiwan's economic position. A key piece of the resulting legislation was the "Statute for Establishment and Administration of Free Trade Harbor Zones" (the "Law"), which took effect as of July 23, 2003). The Law generally allows establishment of free trade zones near existing air or sea ports, which will be exempt from many import/export regulations, customs, and many taxes for certain value-added and transportation activities taking place in and around such zones.

The Law's touted benefits for Taiwan and the business community are many, including enhancing and capitalizing on Taiwan's strategic geographic location as a viable regional transportation and value-added processing hub; significantly reducing transportation, assembly, manufacturing, and time-delay costs for businesses; attracting foreign investment, and generally giving Taiwan a more regionally competitive economic environment.

Is this new Law a great new opportunity for domestic and multinational companies that must be incorporated into any successful Taiwan or regional business plan? Or is the new Law more hype than substance, with the all-too-common inclusion of impractical conditions or provisions spawned by political or bureaucratic interests?

In at least these authors' views, it is crucial for businesses to be aware of this Law if they are engaged in transportation, logistics, import and export, manufacturing, value-added processing, packaging, financial services, and hotels/restaurants. Let us take a closer look at the Law.

What it is and What it Does


Many types of businesses can utilize the benefits of free trade zones or even set up companies in the free trade zones to provide services. Interested companies should carefully review the below-mentioned types of zones and the types of activities encouraged by the zones in order to assess the advantages and feasibility of using or setting up operations in the free trade zones.

A Free Trade Harbor Zone is defined as an approved area within an international airport or harbor, a designated industrial zone, economic (export) processing zone, scientific industrial park, or other enjoined demarcated and controlled area. Ministry of Transportation and Communications (MOTC) officials and press reports indicate that Kaohsiung Harbor will receive first priority for development of zones, possibly followed by Chiang Kai-Shek International Airport's Air Cargo Park in Taoyuan and other major ports and airports around Taiwan. The Kaohsiung zones reportedly could be in place as early as the end of this year.

A Free Trade Zone Enterprise is defined as an approved enterprise within the zone that engages in trade, warehousing, distribution, container (cargo) handling, transshipment, forwarding and customs brokerage services, assembling, packaging, repackaging, repair, assembly, processing, manufacturing, exhibitions, and technical services.

Other Enterprises allowed to operate in the zones are defined as including financial services, loading/unloading businesses, restaurants, hotels, business conference centers, local transportation services, and other businesses as may be approved. Aside from the obvious opportunities for transportation, logistics, and processing, perhaps the not-so-obvious but significant opportunities for new business under the Law are for auxiliary services, particularly financial services, but also hotel/restaurant and exhibition services.

Financial Services


It is especially noteworthy that the Law allows for the establishment of foreign-owned holding companies, financial institutions, banks, and overseas banking units in the zones in order to serve some of the expected day-to-day financial needs of the businesses and their transactions within the zone. For example:

* Foreign-owned Investment Holding Companies: The Law exempts foreign-owned investment holding companies specializing in offshore investment from the Statute for Investment by Foreign Nationals and its required application process through the Ministry of Economic Affairs and other cumbersome restrictions. Offshore-banking units may provide foreign exchange and trading services to the investment holding company in accordance with certain provisions of the Offshore Banking Act. However, the foreign exchange transactions may not involve domestic (inside Taiwan but outside of the zone) financial or economic transactions in New Taiwan Dollars.

* Financial Institution Branches for Foreign Exchange: A financial institution may apply to set up a branch in the zone to operate a foreign-exchange business in accordance with certain financial services laws.

* Offshore Banking Units for International Banking Business: Through its head office, a bank may apply, in accordance with the Offshore Banking Act, to establish an offshore-banking unit in the free trade zone to conduct international banking business with independent accounting books and records. However, the offshore banking unit in the zone is restricted to providing only specified international banking services such as letters of credit in a foreign currency, advice, negotiation, import and export collection, and foreign-currency conversion and exchange according to certain provisions of the Offshore Banking Act. In addition, the above services and transactions shall not include banking, economic, and trading transactions within Taiwan (inside Taiwan but outside of the zone), nor any transactions in New Taiwan Dollars.

If the proposed zones are to be successful in attracting businesses and economic activity, financial-services companies will want to be there to serve the businesses in the zone and further facilitate their success. In particular, the presence of investment holding companies specializing in offshore investments within the zones should allow further flexibility for multinationals operating in the zone to take advantage of global or regional tax planning strategies.

Import-Export Regulatory and Tax Exemptions


The Law exempts many activities in the zone -- or in some cases activities within the zone to/from a levied area -- from major laws and taxes. These exemptions are designed to significantly reduce trading costs for businesses using the free trade zones. To get a sense of the amount of savings, the Council for Economic Planning and Development (CEPD) cites a forecast of over NT$200 billion (US$5.8 billion) in trading cost savings by 2008.

As an example of regulatory exemptions, imports and exports between the zone and areas outside of Taiwan are exempt from import/export laws and regulations (except for commonly prohibited, restricted, or dangerous items as well as the expected continued prohibition on direct shipments to/from the PRC).

In addition, many activities are exempt from major duties and taxes. Some examples of the major exemptions include:

* Imported Goods: Goods imported by a free-trade-zone enterprise from overseas to a free trade zone for operational purposes are exempt from customs duty, goods tax, sales tax, tobacco and alcohol tax, tobacco health tax, and trade promotion and harbor service fees.

* Imported Machinery and Equipment: Machinery and equipment imported by a free-trade-zone enterprise from overseas to a free trade zone are exempt from customs duty, goods tax, sales tax, and trade promotion and harbor services fees. However, all relevant taxes shall be applied if the machinery and equipment are exported to a levied area within five years after importation.

* Exported Goods: Goods exported from a free trade zone to a levied area are essentially treated as imports and are subject to customs duty, goods tax, sales tax, tobacco and alcohol tax, tobacco health tax, and trade promotion and harbor service fees according to relevant import or other regulations. However, the added value of products processed and manufactured in a free trade zone will be deducted from the customs duty to be levied on such products.

* Goods Sold to Free Trade Zone: Goods sold from a levied or bonded area to a free-trade-zone enterprise for operational purposes are not subject to sales tax.

* Goods and Labor Services sold within Free Trade Zone: Goods or labor services are not subject to sales tax if the goods or labor services are sold in a free trade zone by a free-trade-zone enterprise or foreign business entity, institution, or organization to enterprises in the same free trade zone, enterprises in another free trade zone, overseas clients, or other business entities of a bonded area, or to export companies for direct export or storage in a bonded warehouse or distribution center pending exportation, without being transported to a levied area.

While the regulatory and tax exemptions outlined above are broad and impressive, they are only a partial listing and businesses should consult a legal or other professional to carefully review their current or proposed operations to determine if they may benefit from a free trade zone.

Foreign and PRC Business Visitors


The Law provides for simplified procedures for foreign nationals applying for and obtaining landing visas upon arrival for visits to the free trade zone. Significantly, the Taiwan government is also moving to allow simplified procedures for business visitors from the People's Republic of China.

Labor Restrictions


While most of the Law seems business friendly and reasonably designed to achieve its lofty economic and policy objectives, there are some controversial and cumbersome labor provisions which may frustrate business use of the free trade zones. The labor provisions include:

* Free-trade-zone enterprises must hire at least 60% Taiwan nationals.

* Salaries paid to foreign nationals by free-trade-zone enterprises must meet the minimums provided in Taiwan's Labor Standards Law.

* Free-trade-zone enterprises must hire at least 5% aboriginal workers. If the free-trade-zone enterprise falls short of this requirement, the enterprise must pay to a special fund the basic monthly salary multiplied by the shortfall.

The 5% requirement for aboriginal employees has generated the most political and practical controversy, with critics claiming that the requirement, while well-intentioned, will be impossible to meet. Some legislators have indicated intentions to relax or revise the aboriginal section in the upcoming legislative sessions. Other observers have noted that the 60% employment requirement for Taiwan nationals and the minimum wage for foreign nationals will result in higher operational costs in the zones compared to a version of the Law without such requirements.

Conclusion


Overall, the new Law seems to be fairly well suited to better position Taiwan as a regional hub, provide new opportunities and benefits to businesses in Taiwan and the region, and improve Taiwan's overall competitiveness.

While the Law looks promising, will it really deliver on all of its promises? "The CEPD together with the MOTC and other government agencies did a terrific job of putting this all together and making it happen," says Jimmy Chen, managing director of Federal Express Taiwan and co-chair of the AmCham Transportation Committee. "Certainly, there are going to be some opportunities for transportation and logistics companies. As for the overall impact or opportunities for other types of businesses, we'll just have to wait and see."

However, interested companies should not just sit back and passively wait for the chips to fall where they may. Interested companies should consult legal counsel or other advisors on opportunities under this new Law and assist AmCham in being very proactive in monitoring implementation and providing input and advice to the government on how to make this Law a success.

--- Michael S. Wong, an Executive Consultant, and Jeffrey N. Watkins, an Associate Consultant, are with the law firm of Baker & McKenzie, Taipei Office. They can be reached at (886-2) 2712-6151, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it and This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
 
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