(Bloomberg) -- President Joe Biden wants to bring the world’s most sophisticated chipmakers to the US. Taiwan says he should offer them a better tax deal –- one that could infuriate China. 

Taiwanese officials are pushing hard for an agreement to eliminate the burden of double taxation, like the US has with dozens of countries. In Congress on Wednesday, Treasury Secretary Janet Yellen acknowledged that the absence of such arrangements is a “very significant problem” and said the Treasury and State Department will “see if we can find a way” to address it. 

Without a deal, Taiwan argues, would-be investors will be put off by the prospect of whopping tax bills – and the administration’s flagship industrial policy will fall short of its potential. The case will likely be pushed further by Taiwanese President Tsai Ing-wen, who’ll be in the US during the coming week. Her visit is already raising tensions: China warned on Wednesday that a mooted meeting with House Speaker Kevin McCarthy would be seen as a “provocation.” 

Read More: China Warns Taiwan Leader to Avoid McCarthy as She Visits US

There’s plenty of sympathy for Taiwan’s tax pleas in Washington. Biden would like to tout his Chips and Science Act in the runup to a re-election bid next year. Investment pledges by the world-leading Taiwan Semiconductor Manufacturing Co. – including a plant in Arizona where ground has already been broken – count as one of its signal achievements, a step toward revitalizing American manufacturing in a cutting-edge field. Many lawmakers would like to see that kind of action in their own patch.

But there’s a big obstacle. The US doesn’t recognize Taiwan as a sovereign nation, so it can’t sign a treaty — which is how deals to avoid double-taxation are typically enshrined. And any effort to achieve the same goal via some kind of halfway measure, short of a formal treaty, risks being seen by Beijing as a step toward recognition of an island it considers part of its own territory. 

Creative Ways

After the furor over former Speaker Nancy Pelosi’s visit to the island last year, as well as the friction last month when the US shot down an alleged Chinese spy balloon, any move to deepen ties with Taipei could set off a new downward spiral in ties between the world’s two biggest economies. 

The administration is exploring creative ways to pursue a tax agreement with Taiwan, people familiar with the matter said. But some officials are hesitant about a move that could be seen as escalatory by Beijing, with China-US relations already at their lowest point in decades.

Taiwan’s government has been calling for a fix to the double-taxation problem since Donald Trump was president. This year, its representatives in Washington have been circulating a fact sheet for administration officials and congressional staff. It estimates that Taiwanese companies pay an effective tax rate of 51% on profits earned in the US — at least 10 percentage points higher than Korean or Australian firms — after factoring in withholding charges on dividends that are sent back home.

Commerce Secretary Gina Raimondo said in an interview last month that TSMC executives raised the double-taxation issue with her. 

Companies like the chipmaker, “in order to be successful, need a certain set of suppliers near them,” and the US should offer incentives for those suppliers to move here too, Raimondo said. On the tax agreement, she said: “As we get into this, we may need more help from Congress.” 

‘I Would Hope...’

There are some willing helpers on Capitol Hill. 

Republican Senator Todd Young of Indiana, a key architect of the Chips Act, visited Taipei in January and discussed taxation while he was there. This month, he co-sponsored a resolution that encourages the administration to pursue a tax agreement.

Ideally, Young said, it would cover both individual and corporate income taxes. That way, the smaller privately-held businesses that might follow companies like TSMC to the US – like Raimondo hopes they will — would be covered too. 

“We’re really trying to reconstitute an ecosystem,” Young said. Without double taxation, “you’d see more development in Taiwan and in the US. I, of course, would hope that much of that development would occur in the industrial Midwest.”

The resolution notes that Taiwan has income-tax agreements with 34 countries — including those in the same boat as the US in not having diplomatic relations with Taiwan. The Taiwanese fact sheet highlighted close US allies like Japan, the UK and Canada.

While the precedents carry some weight, there are two reasons why they might not defuse the potential fallout if the Biden administration followed suit. First, those arrangements were mostly reached at a time when China didn’t carry the geopolitical clout it does now – and when few worried about a new Cold War. And second, while those countries are members of the same broad coalition, they don’t play the kind of leadership role that the US does. 

‘Difficult Path’

It might take some legal maneuvering, but there are precedents in the US for a tax deal with Taiwan.

Since the late 1980s, they’ve had an agreement that covers income from operating ships or aircraft across borders. More recently, representatives from the US and Taiwan signed an accord in 2016 requiring Taipei to report American taxpayers who have accounts at Taiwanese banks, as part of a broader effort to crack down on evasion.

Rupert Hammond-Chambers, president of the US-Taiwan Business Council, says that prior to the Trump administration the reason a deal on double-taxation didn’t happen was down to the “accommodationist China policy pursued by successive Republican and Democratic governments.” But even now, when the mood in Washington has changed, he sees “difficulty in constructing a legislative path” to a comprehensive fix.

Economic agreements between the US and Taiwan are typically cut between intermediaries that are a half-step away from government, to differentiate them from regular diplomatic relations. 

They’re often conducted by the American Institute in Taiwan, a de facto US embassy on the island, and the Taipei Economic and Cultural Representative Office in the US — rather than through finance ministers. Taiwan hopes to start negotiations “at the earliest possible juncture,” the TECRO office in Washington said this week, adding that a deal would benefit both sides by increasing business opportunities for Taiwanese firms in the US.

In January, the US sent a formal trade delegation to the American Institute in Taiwan to kick off bilateral trade negotiations, in defiance of China. Lawmakers want the administration to include a tax agreement as part of those talks, according to a GOP aide. That means that, like other US-Taiwan agreements, it wouldn’t require ratification by the Senate. 

Still, the Taiwanese are seeking support from Congress. And even though the legislature is bitterly divided along partisan lines on many issues, Young reckons they might get it.

“I think that people are going to be surprised what can pass this Congress, if the policy has a strong nexus with the US-China competition,” he said. “As this one clearly does.”

--With assistance from Debby Wu.

©2023 Bloomberg L.P.