Importing Own-use Machinery & Equipment Duty-Free
Written By: Tony Lin
"A community is like a boat; everyone must be prepared to lead!" Henrik Ibsen
The last several years have been a time of rapid transformation in the global economy, and Taiwan’s economy has had to face some tough challenges as a result. The government, for its part, has provided many tax preferences to raise the level of automation and quality in industry. Among them is one that offers companies in specific lines of business duty-free or installment payment options for importing machinery and equipment for their own use. The specific types of business include:
| 1. | Export processing zone businesses: Exempt from customs duty. |
| 2. | Manufacturers and technical services companies that comply with factory management regulations. The companies must engage in one of the following: new product development, product quality improvement, productivity enhancement, promotion of resource conservation, recycling or improved production methods, importation of items specified in chapters 84, 85 and 90 of the "General Rules of the Customs Import Tariff", and instruments and equipment that are not manufactured in Taiwan, and are used especially for research experiments or quality testing (including tools used in nuclear reactors, boilers, machines and instruments, plus related components and accessories. For a detailed list, see the MOF's official website.) These are also exempt form customs duty. |
| 3. | Firms in science-based industries, where the imported items are not yet manufactured in Taiwan: exempt. |
| 4. | Private enterprises participating in major public construction works, where items are for use in construction and are not manufactured locally. When items are provided for use in construction and are not manufactured locally, and those for use in operations, duties may be paid in installments. Beginning one year after the commencement of operations, monthly payments may be stretched for as long as 60 months, but the monthly payments may not be less than NT$1,000,000. |
| 5. | Businesses in free trade ports are exempt from customs duties. |
In the case of machinery and instruments that with comply with the terms of number 2 above, the additional notes of tariff (which convey tariff exemption privileges based on tax principles), had originally been annulled on 1 January 2002 in the course of Taiwan’s WTO accession negotiations because the European Union suspected subsidization. However, with minor changes, they were put back into effect on 13 June 2003 in order to encourage more vibrant traditional industries, and to eliminate the discrepancy in tax incidence between firms inside and outside science-based parks and export processing zones.
In addition, the “technical services” alluded to in number 2 above means manufacturing-related technical services. So, those filing applications need to pay heed to whether their businesses are in industries that meet the definitions set out in the additional notes of tariff. An investigation by the Industrial Development Bureau (Ministry of Economic Affairs) is based on whether a company’s line of business falls within the scope of its jurisdiction, and the actual investigation is conducted by verifying that the firm is engaged in manufacturing and related technical services as provided in the Law Governing Factory Administration and Assistance. On the whole, applicants’ industrial classifications can be categorized according to the 7th revision edition of "Standard Industrial Classification of the Republic of China” (issued by the Directorate-General of Budget, Accounting and Statistics, Executive Yuan). So, when applicants are making their applications, they are advised to first seek the opinion of the various responsible units having jurisdiction within the Industrial Development Bureau to determine what classification they are qualified to apply for. This way, they can avoid having their applications rejected for failure to qualify.
Another issue has to do with factory registration. After the Law Governing Factory Administration and Assistance was issued in 2001, relatively simple methods were adopted for factory registration. It is only necessary to apply for registration after setting up a factory, unless another law has stipulated to the contrary, or where factory establishment requires permission from the Industrial Development Bureau (neither of which has occurred in practice), or where the central authority issues a proclamation requiring its approval. The simpler approach contrasts with the three-stage procedure - approval, factory establishment, and registration - under the old law, “Regulations on Registration of Factory Establishment”.
On the Industrial Development Bureau’s standard application form for showing eligibility to waive tariffs on imported machinery and equipment not yet manufactured domestically, “factory registration approval” is sufficient to establish the applicant’s qualifications. So far, however, if no special application has been made for an extension, factory registration approvals obtained while the old law was in effect expire once their time limits are reached. As for the current Law Governing Factory Administration and Assistance, when an approval document is yet to be issued, most businesses investing in factories will first, before establishing a factory, import machinery and equipment, install it, and finally obtain a factory registration. Under these circumstances, only a business registration can be used to establish an applicant’s qualifications. If the business registration application is still being processed and machinery and equipment is imported, the Industrial Development Bureau will be unable to issue a certificate of approval for importing non-domestically produced equipment because it cannot verify the applicant’s line of business. Firms should therefore take care to avoid this outcome.
Concerning preferences for science-based industries, their main purpose is to remove the difference in tax incidence between firms inside and outside science-based parks and export processing zones, to increase the willingness of high tech firms outside such areas to invest, and thereby heighten the competitive strength of science-based industries. However, the regulations set the threshold for science-based industries relatively high. Applicants must make an overall comparison of other tax relief regulations and choose an approach amenable to simplified application procedures.
In the case of tariff exemption for businesses in so-called free trade ports, if a private land management organization, owner or user outside the area governed by a free trade zone applies to set up inside the zone (in accordance with Article 7 of the Statute Governing the Establishment and Management of Free Ports) and, before obtaining a free port operating permit, imports machinery and equipment in order to build basic facilities inside the zone, then a dispute will arise when it uses such items because it is not yet considered a free trade port business. To deal with this problem, the competent authority or the coordination unit of the port zone should be urged to undertake the relevant regulatory changes and pronouncements.
To sum up, when businesses actually apply for duty-free customs clearance, they must coordinate their business establishment and factory establishment schedules, while at the same time giving careful consideration to the timing of machinery and equipment imports and the associated tariff preferences. Only then can they receive the real benefits of the pertinent tariff preferences.