TAIWAN'S 2008 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 37 TAIPEI 000073



SIPDIS



SIPDIS



STATE PLEASE PASS USTR

STATE FOR EB/IFD/OIA/HATCHER, KAMBARA, and TRACTON, EAP/RSP/TC,

EAP/EP

USTR FOR KATZ, STRATFORD and BEHAR

USDOC FOR 3132/USFCS/OIO/EAP/WZARIT

TREASURY FOR OASIA/TTYANG AND HAARSAGER

TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF

GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB

MARI BOLIS



E.O. 12958: N/A

TAGS: EINV, EFIN, ECON, PINR, OPIC, KTDB, USTR, KIPR, TW

SUBJECT: Taiwan's 2008 Investment Climate Statement



REF: State 158802



TAIPEI 00000073 001.2 OF 037





/////////////// ZFR /////////////////////

CANCEL ALL SECTIONS OF TAIPEI 73.

TO BE TRANSMITTED UNDER NEW MRN.

/////////////// ZFR /////////////////////







TAIPEI 00000073 002 OF 037





the SIFN and the SIOC specify that foreign-invested enterprises must

receive the same regulatory treatment accorded local firms. Foreign

companies may invest in state-owned firms undergoing privatization

and are eligible to participate in publicly-financed research and

development programs.



5. The Investment Commission (IC) of the Ministry of Economic

Affairs screens applications for investment, acquisitions, and

mergers. According to the IC, approximately 98% of projects with an

investment value less than NT$500 million (US$15.4 million at an

exchange rate of NT$32.5 per US$) are excluded from the negative

list; the IC estimates that approval for these projects is generally

granted within two working days at the IC division chief level. For

investments in the range of NT$500 million (US$15.4 million) to

NT$1,500 million (US$46.2 million) excluded from the negative

list, approval authority rests with the IC Executive Secretary and

normally is granted within three working days. Approval of

investments in industries above NT$1,500 million or on the negative

list requires two weeks because those investments must be referred

to the relevant supervisory ministries and require approval of the

IC Chairman or IC Executive Secretary. Investments involving

complications such as mergers and acquisitions require screening at

the monthly meeting of an inter-ministerial commission.



6. Taiwan offers incentives to encourage investment, including

accelerated depreciation and tax credits for investments in emerging

or strategic industries, pollution-control systems, production

automation, and energy conservation. Equipment for R&D purposes can

be brought into Taiwan duty-free. Other incentives include

low-interest loans for developing new and/or cutting edge products,

upgrading traditional industries, and importing automation or

pollution-control equipment. A broad five-year tax holiday for new

investments was re-instituted in January 1995. Incentives for

manufacturing firms to locate factories in designated industrial

parks to include free rent the first two years, 40% discount on rent

the next two years, and 20% discount on rent in the fifth and sixth

years has been extended to December 2008. Under another incentive

program, state-owned land is available for investors rent-free for

the first four years and 50% off for the next six years. As part of

its financial reform plan, Taiwan encourages and provides incentives

for banks, insurance companies, securities firms, and financial

holding companies to merge.



7. In 2005 and 2006, Taiwan authorities slashed some investment tax

incentives as a part of a tax reform designed to reduce the fiscal

deficit. A new law to levy a ten-percent alternative minimum tax on

business firms became effective in January 2006. Since early 2005,

Taiwan authorities have cut the number of industries entitled to tax

incentives by one-third and doubled the thresholds in annual R&D

expenses for tax offsets from NT$15-20 million (US$462 thousand to

US$615 thousand) to NT$30-40 million (US$923 thousand to US$1.23

million). The tax credit for procurement of automation equipment

has been lowered from 11% to 7% and that for procurement of

technologies reduced from 10% to 5%. The tax credit for projects in

remote poor areas has been cut from 20% to 15%.



--------------

A.2 Conversion and Transfer Policies

--------------



8. There are relatively few restrictions on converting or

transferring direct investment funds. Foreign investors with

approved investments can readily obtain foreign exchange from a

large number of designated banks. The remittance of capital

invested in Taiwan must be reported in advance to the IC, but IC



TAIPEI 00000073 003 OF 037





approval is not requited. Declared earnings, capital gains,

dividends, royalties, management fees, and other returns on

investments can be repatriated at any time. For large transactions

requiring the exchange of NT$ into foreign currency which could

potentially disrupt Taiwan's shallow foreign exchange market, the

central bank may require the transaction to be scheduled over

several days. There is no written guideline on the size of such

transactions, but amounts in excess of US$100 million may be

affected. Capital movements arising from trade in merchandise and

services, as well as from debt servicing, are not restricted. No

prior approval is required for movement of foreign currency funds

not requiring exchange between the NT dollar and the foreign

currency. No prior approval is required if the cumulative amount of

inward or outward remittances does not exceed the annual limit of

US$5 million for an individual or US$50 million for a corporate

entity.



9. Total outbound investment may not exceed 40% of the investing

company's net worth or paid-in capital (whichever is less),unless

the company charter waived the 40% limit or unless such investment

is approved by shareholders. A local company is not required to

obtain prior approval for overseas investments; however, such an

approval exempts the company from the annual capital outflow limit

of US$50 million. Investments in China are subject to additional

restrictions.



10. Taiwan has significantly relaxed restrictions on Taiwan

entities' direct investment in China down to a negative list

covering about 100 manufacturing products and 430 agricultural

products. Taiwan has abolished a requirement for direct investment

in China to go through third nations or areas and removed a direct

investment limit of US$50 million. The ceiling on small and medium

enterprises' investment in China is NT$80 million (US$2.5 million).

For large enterprises, total China investment may not exceed 20% of

the company's net worth exceeding NT$10 billion, 30% of net worth

from NT$5 billion to NT$10 billion (US$308 - 615 million),and 40%

of the net worth below NT$5 billion (US$154 million). For

investments below US$200,000, approval can be issued on the same day

of submitting the application. Taiwan authorities require an

investor to submit a quarterly financial report if the cumulative

investment in a project exceeds US$20 million. Investors are

encouraged to repatriate their capital and earnings.



11. Taiwan authorities have actively encouraged investment in

Southeast Asia and India. Investments are also encouraged in a

number of countries with which Taiwan has diplomatic relations,

mainly in Central America. Incentives include loans and/or overseas

investment insurance from Taiwan's Export-Import Bank.



--------------

A.3 Expropriation and Compensation

--------------



12. No foreign-invested firm has ever been nationalized or

expropriated in Taiwan. No examples of "creeping expropriation" or

official actions tantamount to expropriation have been reported.

Under Taiwan law no venture with 45% or more foreign investment can

be nationalized for a period of 20 years after the venture is

established. Expropriation can be justified only for national

defense needs and "reasonable" compensation must be given.



--------------

A.4 Dispute Settlement

--------------





TAIPEI 00000073 004 OF 037





13. Taiwan is not a member of the International Center for the

Settlement of Investment Disputes or the New York Convention of 1958

on the recognition and enforcement of foreign arbitrage awards.

Investment disputes with the Taiwan authorities are not common.

Normally, Taiwan resolves disputes according to domestic laws and

regulations.



14. Taiwan has comprehensive commercial laws, including the Company

Law, Commercial Registration Law, Business Registration Law,

Commercial Accounting Law as well as laws for specific industries.

Taiwan's Bankruptcy Law guarantees that all creditors have the right

to share the assets of a bankrupt debtor on a proportional basis.

Secured interests in property, both chattel and real, are recognized

and enforced through a registration system.



15. Taiwan's court system is generally viewed as independent and

free from overt interference by the other official branches. Judges

are generally over-worked. In response to complaints about the slow

pace of judicial decision-making, Taiwan authorities adopted

measures in 2002 to monitor case processing time. Simplified courts

have been set up to deal with minor cases that can be resolved

quickly. The legislature enacted a bill to set up special courts

for intellectual property rights (IPR) cases in March 2007, and the

courts are scheduled to start reviewing cases in July 2008. The

judgments of foreign courts with jurisdictional authority are

enforced in Taiwan by local courts on a reciprocal basis.



--------------

A.5 Performance Requirements and Incentives

--------------



16. All of Taiwan's performance requirements were removed in

January 2002 upon Taiwan's WTO accession. Like domestic firms,

foreign-invested companies must be located in areas zoned for

appropriate industrial or commercial use. Taiwan does not require

that firms transfer technology, locate in specified areas, or hire a

minimum number of local employees as a prerequisite to investment.



17. Manufacturing firms located in export-processing zones and

science-based industrial parks are required to export all of their

production to obtain tariff-free treatment of production inputs.

However, these firms may sell on the domestic market upon payment of

relevant import duties.



18. When acceding to the WTO in January 2002, Taiwan promised to

accede to the Government Procurement Agreement (GPA). Taiwan also

promised to phase out industrial offset requirements (IOR) for

non-military public procurement upon signing the GPA. Taiwan has

yet to accede to the GPA, but even without GPA membership, Taiwan

started reducing the IOR coverage of non-military procurements in

2004. Currently, only railway and power generation projects are

subject to IOR. For these two categories, a contract of US$10

million or more triggers an offset obligation of at least 33%. For

military procurements, the threshold is US$5 million, and the

minimum offset obligation is 40%. In some military cases, the

offset ratio has reached 70% due to legislative pressure. Since the

first industrial offset contract (IOC) was signed in 1988, Taiwan

has signed IOCs with 51 suppliers from 12 foreign countries.

Commitment value of these contracts total US$8.4 billion, and

realized contracts amounted to US$5.3 billion. Forty-six percent of

the total realized value was directed to transfer of technologies,

27% to foreign direct investment in Taiwan, 15% to procurement from

Taiwan, 5% to trade promotion, 4% to personnel training, and 2% to

assessment certification. Taiwan has published industrial offset

rules in both Chinese and English to which readers can access



TAIPEI 00000073 005 OF 037





online.



-------------- ---

A.6 Right to Private Ownership and Establishment

-------------- ---



19. Private investors have the right to establish and own business

enterprises, except in a limited number of industries involving

national security and environmental protection. Private entities

can freely acquire and dispose of interests in business enterprises.

Private firms have the same access as state-owned companies to

markets, credit, licenses, and supplies. Taiwan authorities have

eliminated state-owned monopolies.



--------------

A.7 Protection of Property Rights

--------------



20. Taiwan has continued efforts to improve its IPR legal regime

and enforcement. The Intellectual Property Office (TIPO) under the

Ministry of Economic Affairs as well as other relevant agencies have

adopted programs to crack down on Internet and physical piracy. In

addition, the Ministry of Education (MOE) announced a campus IPR

action plan in October 2007 to strengthen management of academic

computer networks and restrict illegal textbook coping by students.

Taiwan has amended laws and regulations to meet international

standards and requirements. Taiwan has also amended the Patent Law

and Copyright Law to extend the term of protection from 18 years to

20 years for some patents and to define computer software as

literary works. Taiwan has enacted the Optical Media Law to address

CD/DVD piracy problems. The law has established a legal framework

for regulation of CD manufacturing plants through licensing and the

use of Source Identification (SID) codes in production. Convicted

violators may receive prison terms of up to three years and fines of

up to NT$6 million (US$184,600). The Optical Media Law, together

with effective enforcement, has led to a dramatic decrease in

large-scale production of counterfeit CD products. Amendments to

the Copyright Law in 2003 and 2004 made copyright infringement a

public crime, increased penalties for counterfeiters and made it

illegal to tamper with technical protection measures. The

Pharmaceutical Law as amended in 2004 and 2007 stiffened penalties

for production, distribution and sale of counterfeit medicines. A

2005 amendment to the Law to authorized pharmaceutical data

exclusivity for five years to prevent unfair commercial data use

--the same data-exclusivity period as in the United States--but U.S.

original-drug manufacturers complain that Taiwan authorities

unfairly allow generic-pharmaceutical makers to apply for a license

and a Bureau of National Health Insurance reimbursement price for

their knock-off drugs even before the original drug's

data-exclusivity period has expired. A June 2007 amendment to the

Copyright Law subjects illegal file sharing, such as P2P, to a

maximum jail term of two years. In March 2007, Taiwan completed

legislation of the IP Court Organization Law for establishment of a

specialized IP court which is scheduled to start reviewing cases in

July 2008.



21. In 2003, Taiwan established the Integrated Enforcement Task

Force (IETF),which consists of 220 IP police officers. In 2004,

the task force was transformed to a permanent IP police squadron.

The IP police have frequently raided retail optical- media sales

points. This has led to a significant decrease in the number of

counterfeit CD and DVD vendors. Other enforcement measures include

increasing the reward by ten times to NT$10 million (US$300,000) to

IPR informants for counterfeit -goods seizures , and setting up an

anti-pirating CD export task force to strengthen inspection of



TAIPEI 00000073 006 OF 037





commodities entering or leaving Taiwan.



22. While Taiwan has improved IPR protection, transshipment of

counterfeit products from China to the United States remains a

problem. Counterfeit goods from Taiwan seized by U.S. Customs

dropped from $26.5 million in 2002 to $1.1 million in 2005. The

value of seized counterfeit goods was $1.8 million in 2006 and $2.8

million in the first half of FY2007. In addition, Taiwan is facing

a growing Internet-based piracy threat. Rights owners continue to

complain of slow progress in judicial cases, or poor protection on

trade dress properties, such as unregistered marks, packing

configurations, and outward appearance features. Although

counterfeit and parallel imported pharmaceuticals are still found in

the Taiwan marketplace, the legislature passed amendments to the

Pharmaceutical Law in 2004 and 2007 to increase the penalties for

dealing in counterfeit pharmaceuticals, resulting in marked

increases in fines and jail terms over the past several years.



--------------

A.8 Transparency of the Regulatory System

--------------



23. Taiwan has a set of comprehensive laws and regulations

regarding taxes, labor, health and safety.



24. Foreign investors note that in addition to tax incentives,

Taiwan's science-based industrial parks and export processing zones

have simple and transparent bureaucratic procedures for the

investment application process. Outside of these areas, the

Department of Investment Services (DOIS) functions as the

coordinator between investors and all agencies involved in the

investment process. The Investment Commission (IC) is charged with

reviewing and approving inbound and outbound investments.



25. Taiwan has simplified work-permit procedures for foreign

white-collar employees. In March 2004, the Council of Labor Affairs

(CLA) set up a single window to issue work permits for all

white-collar workers. It takes 7 to 10 days for the CLA to issue

work permits. The work permit may be extended indefinitely as long

as the employer considers the employment necessary.



26. Taiwan has removed the job experience requirement for

employment of foreign management professionals by global operational

headquarters and R&D centers as well as business firms of designated

industries. White-collar workers having a master's degree or above

are not subject to any job experience requirement. Those with lower

education levels are required to have job experience. Foreign

white- and blue-collar workers have the right to obtain permanent

residence status after they have legally stayed in Taiwan for seven

consecutive years with the minimum time of residence of 180 days per

year in Taiwan. The seven-year requirement is waived for high-tech

personnel and those who have made "significant contributions" to

Taiwan.



27. The entry-visa issuance procedures for foreign white-collar

workers who work for foreign-invested companies are relatively

simple. A foreign executive who enters Taiwan with a tourist visa

is no longer required to leave the island before the tourist visa

can be changed to an employment visa. A foreign executive whose

employment visa expires is not required to exit before renewing the

visa.



-------------- --------------

A.9 Efficient Capital Markets and Portfolio Investment

-------------- --------------



TAIPEI 00000073 007 OF 037







28. A wide variety of credit instruments, all allocated on market

terms, are available to both domestic- and foreign-invested firms.

Legal accounting systems are largely transparent and consistent with

international standards. The regulatory system is generally fair.

Foreign portfolio investors are no longer subject to foreign

ownership limits or investment fund limits. In recent years, Taiwan

authorities have taken a number of steps to encourage a more

efficient flow of financial resources and credit. The limit on NT

dollar deposits that a branch of a foreign bank may take has been

lifted. Non-residents are permitted to open NT dollar bank

accounts, which are subject to capital-flow controls which limit

each remittance to US$100,000. There are no restrictions on

residents opening bank accounts overseas. Limits on branch banking

have been lifted. A freeze on new bank branches to encourage

consolidation was removed in 2007. Restrictions on capital flows

relating to portfolio investment have been removed. The insurance

and securities industries have been liberalized and opened to

foreign investment. Access to Taiwan's securities markets by

foreign institutional investors has also been broadened.



29. Taiwan abolished a complicated regulatory system governing

foreign portfolio investment in October 2003. Since then, any

foreign institutional investor is allowed to enter Taiwan's markets.

Subsequent registration has replaced the need for prior approval.

There is no minimum asset requirement. Investment and capital flows

are not limited. On-shore foreign investors (like other residents)

are still subject to capital flow limits of US$5 million for an

individual foreign investor and US$50 million for an unregistered

foreign company.



30. Taiwan has removed all legal limits on foreign ownership except

for investors from China in nearly all companies listed on the

Taiwan Stock Exchange (TAIEX). These exceptions include power

distribution, telecommunications, mass media firms, and airline

companies. There have been no reports of private or official

efforts to restrict the participation of foreign-invested firms in

industry standards-setting consortia or organizations.



31. Taiwan has a tightly regulated banking system. Since the

mid-1980s, the financial sector as a whole has been steadily opening

to private investment. The market share held by foreign banks had

been relatively small until four foreign banks and three foreign

private equity funds completed their acquisitions of Taiwan banks in

2007. The market share of all foreign banks in Taiwan (including

the seven acquired by foreign investors in 2007) increased from 8%

in 2006 to 15% in terms of assets in 2007, or from below 3% to

nearly 7% in terms of loans. The establishment of a number of new

securities firms, banks, insurance companies, and holding companies

has underscored this liberalization trend and enhanced competition.

Over the past decade, nine state-owned banks have been privatized.

The only Taiwan-based reinsurance company was privatized in 2002.

State-controlled banks still dominate the banking sector, however,

and hold a market share of 51% in terms of assets and 56% in terms

of loans. This share has been falling in recent years as Taiwan has

begun privatization efforts.



--------------

A.10 Political Violence

--------------



32. Taiwan is a relatively young multi-party democracy with

democratic political institutions that are still evolving. The

close margin in the 2004 presidential election resulted in an attack

on election offices and several large-scale demonstrations.



TAIPEI 00000073 008 OF 037





Nevertheless, these incidents and other protests were peacefully

resolved in a short time. There have been no reports of politically

motivated damage to foreign investment. Both local and foreign

companies have, however, been subject to protests and demonstrations

relating to labor disputes and environmental issues.



--------------

A.11.a. Corruption

--------------



33. Taiwan has implemented laws, regulations, and penalties to

combat corruption. The Corruption Punishment Statute and the

criminal code contain specific penalties for corrupt activities. In

January 2004, legislation doubled the penalties for corruption by

financial personnel, including maximum jail sentences of up to ten

years.



34. We are not aware of cases where bribes have been solicited for

investment approval. Both central and local governments offer

investors incentives, including free rent on land for the first

several years and discounts in subsequent years. Taiwan authorities

encourage foreign investment and would take action against officials

and individuals convicted of profiting illegally from foreign

investors.



35. The Government Procurement Law promulgated in 1998 and amended

in February 2001 was an element of promised significant improvements

upon WTO accession. The Public Construction Commission (PCC) now

publishes all major state procurement projects that require open

bidding, in accordance with WTO transparency requirements. The PCC

organizes inspection teams to monitor all public procurement

projects both at the central and local levels, and publishes results

of bidding and of inspections. A task force has been organized to

investigate complaints.



36. Authorities generally investigate allegations of corruption and

take action to penalize corrupt officials. Since its inauguration

in May 2000, the Chen Administration has strengthened

anti-corruption efforts. Since then, prosecutors have indicted

10,807 persons for corruption, including prominent personalities,

632 senior officials (department director level and above) and 623

elected officials. Indicted elected officials included 21

legislators. In 2006, the Taiwan High Court upheld a district

court's four-year jail sentence for a former speaker of the

legislature on a charge of taking a NT$150 million (US$4.6 million)

bribe. In 2007, prosecutors indicted a serving minister and a vice

minister for receiving bribes, while district courts convicted

another two vice ministers with jail terms of up to 16 years.



37. Attempting to bribe, or accepting a bribe from, Taiwan

officials constitutes a criminal offense, punishable under the

Corruption Punishment Statute and the Criminal Code. The Corruption

Punishment Statute as amended in late 2002 treats payment of a bribe

to a foreign official as a criminal act and makes such a bribe

subject to criminal prosecution. The maximum penalty for corruption

is life imprisonment plus a maximum fine of NT$3 million dollars

(US$92,300). In addition, the offender may be barred from holding

public office. The assets obtained from acts of corruption may be

seized and turned over to either the injured parties or the

Treasury.



--------------

B. Bilateral Investment Agreements

--------------





TAIPEI 00000073 009 OF 037





38. Taiwan has concluded bilateral investment guaranty agreements

with the following 26 countries: Argentina, Belize, Burkina Faso,

Costa Rica, Dominica, El Salvador, Guatemala, Honduras, India,

Indonesia, Liberia, Malaysia, Macedonia, the Marshall Islands,

Nicaragua, Nigeria, Panama, Paraguay, the Philippines, Saudi Arabia,

Senegal, Singapore, Swaziland, Thailand, Malawi, and Vietnam. In

addition, there is an agreement to guaranty Taiwan's investment in

Malawi and other agreements to protect U.S. investment in Taiwan

(see next paragraph). (An agreement with Latvia signed in 1992 was

revoked in August 2004.)



39. The terms of the 1948 Friendship, Commerce, and Navigation

Treaty between the Republic of China and the United States are still

in force, and under the terms of the agreement U.S. investors are

generally accorded national treatment and are provided with a number

of protections, including protection against expropriation. Taiwan

and the United tates also have an agreement, signed in 1952,

pertaining to investment guarantees that serve as the basis for the

U.S. Overseas Private Investment Corporation (OPIC) program in

Taiwan. In September 1994, representatives of the United States and

Taiwan signed a bilateral Trade and Investment Framework Agreement

(TIFA) to serve as the basis for consultations on trade and

investment issues. Consultations on a bilateral investment

agreement between the United States and Taiwan began in 1996, and

the latest round took place in Washington in 2007.



-------------- --

C. OPIC and Other Investment-Insurance Programs

-------------- --



40. OPIC programs are available to U.S. investors, though U.S.

investors have never filed an OPIC insurance claim for an investment

in Taiwan. Taiwan is not a member of the Multilateral Investment

Guaranty Agency.



--------------

D. Labor

--------------



41. Unemployment, at just under 4%, has declined since 2002, but is

still above the 1.45% to 2.99% range in the 1990s. Taiwan's aging

population, however, has prompted greater demand for foreign

caregivers. The percentage of the population aged 65 and above has

increased from below 4% in the 1970s to above 10% in late 2007. In

response, the number of foreign caregivers has grown to 160,000 and

accounts for 45% of blue-collar foreign workers in Taiwan. In the

industrial sector, despite relaxation of employment restrictions,

the number of the sector's blue-collar foreign workers declined 13%

from 228,000 in 2000 to 197,770 in November 2007.



42. There are no special hiring practices in Taiwan. Wages

typically include a one-month bonus at the end of a year. Benefits

often include meals, transportation, and dormitory housing.

Dividend-sharing is common among high-tech industries. A standard

labor insurance program is mandatory. The program provides paid

maternity leave, a lump-sum or annuity retirement plan, and other

benefits. A new retirement system implemented in July 2005

abolishes the voluntary retirement scheme under an old system which

still covers 30% of total employment population. The old system

grants employees voluntary retirement at age 55 with 15 years of

service. Employees hired after July 2005 must join the new system,

with a retirement age of 60. The new system requires employers to

contribute six percent of their monthly wage to accounts at

designated banking institutions. The accounts follow employees as

they move from one employer to another. A universal national health



TAIPEI 00000073 010 OF 037





insurance system, to which employers contribute, covers all Taiwan

residents.



43. Taiwan provides unemployment relief based on the Employment

Insurance Law enacted in 2002. Alternatives for unemployment pay

include vocational training allowance for jobless persons and

employment subsidies to encourage employment of jobless persons.

The Labor Standards Law (LSL) sets a standard eight-hour workday and

a biweekly maximum of 84 hours. Legislation adopted in late 2000

set a five-day workweek for the public sector, effective January

2001. Over half of private firms have adopted the five-day

workweek. The LSL restricts child labor and requires employers to

provide overtime pay, severance pay, and retirement benefits. The

LSL covers both manufacturing and service sectors. Violators are

liable to criminal penalties (jail terms) and administrative

punishments (fines).



44. In July 2007, Taiwan raised the minimum monthly wage by 9.1% to

NT$17,280 (US$532) and the minimum hourly wage from NT$66 (US$2) to

NT$95 (US$2.9). Monthly manufacturing sector wages in the first ten

months of 2007 averaged NT$43,704 (US$1,345) including overtime,

allowances and bonuses.



45. Labor unions have become more active and independent since

Taiwan's martial law was lifted in 1987. Privatization and the new

retirement system contributed to an increase in labor disputes over

the past three years. Taiwan is not a member of the International

Labor Organization (ILO) but adheres to the ILO Conventions in

protection of worker's rights.



--------------

E. Foreign Trade Zones/Free Ports

--------------



46. The first free trade/free port zone began operation at Keelung,

Taiwan's northern port, in November 2004. Another four were

established in 2005. These four are located at Taoyuan

International Airport and the international harbors in Kaohsiung,

Taichung, and Taipei. Taiwan authorities have relaxed restrictions

on movement of merchandise, capital and personnel into and out of

such zones. Foreign investors are accorded national treatment.



--------------

F. Foreign Direct Investment Statistics

--------------



47. Statistics on foreign direct investment in Taiwan are available

from two sources. The Investment Commission (IC) publishes monthly

and yearly foreign investment approval statistics by industry and by

country. The Central Bank of the ROC (Taiwan) (CBT) publishes

foreign direct investment arrivals on a quarterly and yearly basis.

CBT data, contained in balance-of-payments (BOP) statistics, are not

further classified by industry or country.



48. In 2006, strong recovery of Taiwan's export sector far offset

adverse effects of delinquent credit/cash card debt problems which

dampened private consumption in the first half of the year. Growth

in exports, which account for over 60% of Taiwan's GDP, accelerated

from 8.8% in 2005 to 13% in 2006, driving Taiwan's 2006 real GDP

growth to nearly 5%, from 4.2% in 2005.



49. Unexpectedly strong economic performance in the second half of

2007 prompted both domestic and foreign forecasters to raise

Taiwan's 2007 real GDP growth estimates to 5.2-5.5%. The official

estimate is 5.46%. Year-on-year export growth increased from 7.6%



TAIPEI 00000073 011 OF 037





in the fourth quarter of 2006 to 14.4% in October-November 2007.

Meanwhile, growth in export orders rose from 9.6% to 17.6%, and

growth in manufacturing production accelerated from 0.5% to a

three-and-a-half-year high of nearly 15%. Most Taiwan forecasters

anticipate that Taiwan's economic growth in 2008 will slow to below

4.5%. They believe that the U.S. sub-prime mortgage problem, as

well as higher international prices for oil and grains, will dampen

world economic performance and reduce demand for products from the

export-oriented economy of Taiwan. In the first eleven months of

2007, approved FDI increased 20% year-on-year to US$14 billion.

Approved FDI was concentrated in banking, trade, electronics, basic

metal, and nonmetallic products. These five categories accounted

for nearly 80% of total approved FDI.



50. Approved direct investment in electronics industries (including

communications, semiconductor, TFT-LCD and other optical electronic

projects) increased from 6.4% of total approved FDI prior to 1995

and 19% in 1996-2000 to 24.5% in 2001-2005 and further to 47% in

2006. Meanwhile, the percentage share for financial services

increased from 7.6% prior to 1995 and 22% in 1996-2000 to 25.6% in

2001-2005 and 34% in 2006. Nearly 80% of the approved inbound

direct investment in Taiwan's electronics industries came from the

United States, Europe and Japan.



51. The United States and Japan used to be the two main sources of

Taiwan's foreign investment, but have been replaced by the tax

havens in the British Territories in America (BTA),which harbor a

growing number of multinational corporations (many with roots in

Taiwan). According to official Taiwan statistics, approvals for

U.S. investment from 1952 to 2006 totaled US$15 billion (US16.1

billion according to official U.S. figures),or 19% of total foreign

investment. Of total U.S. investment, 32% was directed toward the

electronics and electrical industries, and 44% toward the service

sector. Approvals for Japanese investment amounted to US$14

billion, or 18% of total foreign investment, of which 31% was in

electronics and electrical industries and 34% in the service sector.

In 2006, new EU investment exceeded that of the United States or

Japan due to a major holdings transfer by the Philips Company.



52. Approvals for investment from the BTA surged steadily from

US$76 million in 1994 to US$1.2 billion in 1999 when the BTA

surpassed the United States and Japan to become the largest source

of foreign investment in Taiwan. Investment from the BTA during

1999-2005 accounted for 27% of total approved investments, compared

to 18% from the United States, another 18% from Europe, and 15% from

Japan. In 2006, a holdings transfer by the Philips Company drove

down the BTA's share to 16.5%, the United States' share to 19% and

Japan's share to 18%, while Europe's share reached 21.6%. One

quarter of the investment from the BTA was directed towards

financial services and another quarter to the electronic and

electrical industries.



53. As a relatively open and liberal economy, Taiwan receives

foreign investment while its businesses invest overseas, especially

in China, Southeast Asia and the Americas. According to

balance-of-payments statistics compiled by the central bank,

outbound direct investment has exceeded inbound direct investment

every year since 1988. According to IC statistics, by 2006,

cumulative approvals for outbound investments totaled US$103.7

billion. The main recipient of Taiwan investment has been China,

which has received over half of Taiwan's outbound investment.

Approved investments in China increased by 27% in 2006 when 64% of

Taiwan's new overseas investment went to China.



54. Taiwan business firms started to relocate their production



TAIPEI 00000073 012 OF 037





bases to China in the late 1980s. Production lines in China

gradually shifted from cheap labor-oriented industries in the late

1980s to products requiring lower-end technologies, such as PCs and

motherboards, in the early 2000s. The WTO accession of China and

Taiwan in 2002 prompted Taiwanese business firms to accelerate

relocation to China to sharpen their competitive edge in exports.

Taiwan factories based in China use the lower labor and land costs

to process Taiwan-made production inputs into finished goods for

exports to such industrial markets as the United States, Japan and

Europe, and also for final sale in China. Rising labor and land

costs in China have prompted some Taiwan firms to move from China to

nations in South and Southeast Asia, including Vietnam.



56. Taiwan's annual registered direct investment across the Taiwan

Strait grew from US$1.25 billion in 1999 to US$6.0 billion in 2005

and US$7.6 billion in 2006. As a result of this trend Taiwan

factories, primarily those based in China and Vietnam, produced

nearly 50% of export orders received by Taiwan companies'

headquarters by November 2007, up from 11.5% in early 2000, and 2007

ratio reached 85% for information technology (IT) firms. Greater

China (China plus Hong Kong) replaced the United States as Taiwan's

largest export market in 2001, and Greater China's share of Taiwan's

exports in the first 11 months of 2007 reached 41%, much higher than

the 13% for the United States and 11% for the European Union.



Table 1

Foreign Investment Approvals by Year and by Area

(1952-2006) (unit: US$ million)



Central Hong

Year U.S.A. Japan America Europe Kong Other Total

-------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------

52-89 3,067 2,983 341 1,312 1,198 2,049 10,950

1990 581 839 66 283 236 297 2,302

1991 612 535 60 165 129 277 1,778

1992 220 421 37 165 213 405 1,461

1993 235 278 38 214 169 279 1,213

UNCLASSIFIED



SIPDIS

PROG 01/15/2008

ECON:HSMITH

ECON:YSWANG

ECON:MCAVANAUGH

ECON1



AIT TAIPEI

SECSTATE WASHDC

DEPT OF TREASURY WASHDC

INFO USDOC WASHDC

CIMS NTDB WASHDC

AMEMBASSY BANGKOK

AMEMBASSY BEIJING

AMEMBASSY SEOUL

AMEMBASSY SINGAPORE

AMEMBASSY TOKYO

AMEMBASSY MANILA

AMEMBASSY JAKARTA

AMEMBASSY KUALA LUMPUR

AMEMBASSY HANOI

AMEMBASSY CANBERRA

AMEMBASSY WELLINGTON

AMCONSUL HONG KONG

AMCONSUL SHANGHAI

AMCONSUL GUANGZHOU



SIPDIS



TAIPEI 00000073 013 OF 037







STATE PLEASE PASS USTR

STATE FOR EB/IFD/OIA/HATCHER, KAMBARA, and TRACTON, EAP/RSP/TC,

EAP/EP

USTR FOR KATZ, STRATFORD and BEHAR

USDOC FOR 3132/USFCS/OIO/EAP/WZARIT

TREASURY FOR OASIA/TTYANG AND HAARSAGER

TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF

GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB

MARI BOLIS



E.O. 12958: N/A

TAGS: EINV, EFIN, ECON, PINR, OPIC, KTDB, USTR, KIPR, TW

SUBJECT: Taiwan's 2008 Investment Climate Statement



REF: State 158802



--------------

A.1 Openness to Foreign Investment

--------------



1. Taiwan officially welcomes foreign direct investment. Taiwan's

science-based industrial parks, export processing zones, and free

trade zones offer streamlined procedures. Taiwan has made

significant improvement in protecting intellectual property.



2. As part of its efforts to improve the investment climate, Taiwan

no longer has a list of permitted investments, but maintains a

"negative" list of industries closed to foreign investment to

maintain security and environmental protection. Liberalization has

reduced that list to less than one percent of manufacturing

categories and less than five percent of service industries. The

latest significant liberalization took place in February of 2003

when alcohol production, agricultural production, fishing, and

animal husbandry were opened to foreign investors. Prior approval

is required, but this requirement will be dropped for projects with

an investment below NT$8 million (U$246,000) if legislation pending

before the legislature passes into law. To live up to its WTO

accession commitments, Taiwan opened private production of

cigarettes in 2004 without any foreign ownership limit. Railway

transport, freight transport by small trucks, pesticide manufacture,

real estate development, brokerage, leasing, and trading are all

completely open to foreign investment. After its accession to the

WTO in January 2002, Taiwan started permitting imports of gasoline

and liquid natural gas (LNG) by the private sector, without any

foreign ownership restriction. It also permitted private wine and

cigarette imports. In April 2004, Taiwan dropped mining and

ordinary trucking services from the negative list but added

single-axle truck leasing.



3. Most foreign ownership limits have been removed. The foreign

ownership limit on wireless and wireline telecommunications firms is

60%, including a direct foreign investment limit of 49%. For the

state-owned Chunghwa Telecom Co., which controls 97% of the fixed

line telecom market, the limit on direct and indirect foreign

investment was raised from 49% to 55% in December 2007. There is a

20% limit on foreign direct investment on cable television broadcast

services, but foreign ownership of up to 60% is allowed through

indirect investment via a Taiwan entity. Foreign investors now

control three of the five largest cable TV networks in Taiwan.

Foreign ownership limits are 49.99% for satellite television

broadcasting services and piped distribution of natural gas and 49%

for high-speed railways. A 50% foreign ownership limit remains on

Taiwan-flagged merchant ships, power transmission and distribution,

ground-handling firms, air-cargo terminals, air-catering companies,



TAIPEI 00000073 014 OF 037





and air-cargo forwarders. The 50% foreign ownership limit for

ground-handling firms, air-cargo terminals, air-catering companies,

and air-cargo forwarders was removed for investors from WTO members

in November 2001. In July 2007, the foreign ownership limit on

airline companies was raised from 33.33% to 49%, with a separate

limit of 25% for any single foreign investor.



4. Regulations governing foreign direct investment principally

derive from the Statute for Investment by Foreign Nationals (SIFN)

and the Statute for Investment by Overseas Chinese (SIOC). These

two laws permit foreign investors to use either foreign currencies

or NT dollars. In mid-2006, Taiwan authorities started permitting

NT dollar loans obtained from local banks to serve as sources of

foreign direct investment. Companies with foreign ownership below

one-third are exempt from limitations on the negative list. Both

the SIFN and the SIOC specify that foreign-invested enterprises must

receive the same regulatory treatment accorded local firms. Foreign

companies may invest in state-owned firms undergoing privatization

and are eligible to participate in publicly-financed research and

development programs.



5. The Investment Commission (IC) of the Ministry of Economic

Affairs screens applications for investment, acquisitions, and

mergers. According to the IC, approximately 98% of projects with an

investment value less than NT$500 million (US$15.4 million at an

exchange rate of NT$32.5 per US$) are excluded from the negative

list; the IC estimates that approval for these projects is generally

granted within two working days at the IC division chief level. For

investments in the range of NT$500 million (US$15.4 million) to

NT$1,500 million (US$46.2 million) excluded from the negative

list, approval authority rests with the IC Executive Secretary and

normally is granted within three working days. Approval of

investments in industries above NT$1,500 million or on the negative

list requires two weeks because those investments must be referred

to the relevant supervisory ministries and require approval of the

IC Chairman or IC Executive Secretary. Investments involving

complications such as mergers and acquisitions require screening at

the monthly meeting of an inter-ministerial commission.



6. Taiwan offers incentives to encourage investment, including

accelerated depreciation and tax credits for investments in emerging

or strategic industries, pollution-control systems, production

automation, and energy conservation. Equipment for R&D purposes can

be brought into Taiwan duty-free. Other incentives include

low-interest loans for developing new and/or cutting edge products,

upgrading traditional industries, and importing automation or

pollution-control equipment. A broad five-year tax holiday for new

investments was re-instituted in January 1995. Incentives for

manufacturing firms to locate factories in designated industrial

parks to include free rent the first two years, 40% discount on rent

the next two years, and 20% discount on rent in the fifth and sixth

years has been extended to December 2008. Under another incentive

program, state-owned land is available for investors rent-free for

the first four years and 50% off for the next six years. As part of

its financial reform plan, Taiwan encourages and provides incentives

for banks, insurance companies, securities firms, and financial

holding companies to merge.



7. In 2005 and 2006, Taiwan authorities slashed some investment tax

incentives as a part of a tax reform designed to reduce the fiscal

deficit. A new law to levy a ten-percent alternative minimum tax on

business firms became effective in January 2006. Since early 2005,

Taiwan authorities have cut the number of industries entitled to tax

incentives by one-third and doubled the thresholds in annual R&D

expenses for tax offsets from NT$15-20 million (US$462 thousand to



TAIPEI 00000073 015 OF 037





US$615 thousand) to NT$30-40 million (US$923 thousand to US$1.23

million). The tax credit for procurement of automation equipment

has been lowered from 11% to 7% and that for procurement of

technologies reduced from 10% to 5%. The tax credit for projects in

remote poor areas has been cut from 20% to 15%.



--------------

A.2 Conversion and Transfer Policies

--------------



8. There are relatively few restrictions on converting or

transferring direct investment funds. Foreign investors with

approved investments can readily obtain foreign exchange from a

large number of designated banks. The remittance of capital

invested in Taiwan must be reported in advance to the IC, but IC

approval is not requited. Declared earnings, capital gains,

dividends, royalties, management fees, and other returns on

investments can be repatriated at any time. For large transactions

requiring the exchange of NT$ into foreign currency which could

potentially disrupt Taiwan's shallow foreign exchange market, the

central bank may require the transaction to be scheduled over

several days. There is no written guideline on the size of such

transactions, but amounts in excess of US$100 million may be

affected. Capital movements arising from trade in merchandise and

services, as well as from debt servicing, are not restricted. No

prior approval is required for movement of foreign currency funds

not requiring exchange between the NT dollar and the foreign

currency. No prior approval is required if the cumulative amount of

inward or outward remittances does not exceed the annual limit of

US$5 million for an individual or US$50 million for a corporate

entity.



9. Total outbound investment may not exceed 40% of the investing

company's net worth or paid-in capital (whichever is less),unless

the company charter waived the 40% limit or unless such investment

is approved by shareholders. A local company is not required to

obtain prior approval for overseas investments; however, such an

approval exempts the company from the annual capital outflow limit

of US$50 million. Investments in China are subject to additional

restrictions.



10. Taiwan has significantly relaxed restrictions on Taiwan

entities' direct investment in China down to a negative list

covering about 100 manufacturing products and 430 agricultural

products. Taiwan has abolished a requirement for direct investment

in China to go through third nations or areas and removed a direct

investment limit of US$50 million. The ceiling on small and medium

enterprises' investment in China is NT$80 million (US$2.5 million).

For large enterprises, total China investment may not exceed 20% of

the company's net worth exceeding NT$10 billion, 30% of net worth

from NT$5 billion to NT$10 billion (US$308 - 615 million),and 40%

of the net worth below NT$5 billion (US$154 million). For

investments below US$200,000, approval can be issued on the same day

of submitting the application. Taiwan authorities require an

investor to submit a quarterly financial report if the cumulative

investment in a project exceeds US$20 million. Investors are

encouraged to repatriate their capital and earnings.



11. Taiwan authorities have actively encouraged investment in

Southeast Asia and India. Investments are also encouraged in a

number of countries with which Taiwan has diplomatic relations,

mainly in Central America. Incentives include loans and/or overseas

investment insurance from Taiwan's Export-Import Bank.



--------------



TAIPEI 00000073 016 OF 037





A.3 Expropriation and Compensation

--------------



12. No foreign-invested firm has ever been nationalized or

expropriated in Taiwan. No examples of "creeping expropriation" or

official actions tantamount to expropriation have been reported.

Under Taiwan law no venture with 45% or more foreign investment can

be nationalized for a period of 20 years after the venture is

established. Expropriation can be justified only for national

defense needs and "reasonable" compensation must be given.



--------------

A.4 Dispute Settlement

--------------



13. Taiwan is not a member of the International Center for the

Settlement of Investment Disputes or the New York Convention of 1958

on the recognition and enforcement of foreign arbitrage awards.

Investment disputes with the Taiwan authorities are not common.

Normally, Taiwan resolves disputes according to domestic laws and

regulations.



14. Taiwan has comprehensive commercial laws, including the Company

Law, Commercial Registration Law, Business Registration Law,

Commercial Accounting Law as well as laws for specific industries.

Taiwan's Bankruptcy Law guarantees that all creditors have the right

to share the assets of a bankrupt debtor on a proportional basis.

Secured interests in property, both chattel and real, are recognized

and enforced through a registration system.



15. Taiwan's court system is generally viewed as independent and

free from overt interference by the other official branches. Judges

are generally over-worked. In response to complaints about the slow

pace of judicial decision-making, Taiwan authorities adopted

measures in 2002 to monitor case processing time. Simplified courts

have been set up to deal with minor cases that can be resolved

quickly. The legislature enacted a bill to set up special courts

for intellectual property rights (IPR) cases in March 2007, and the

courts are scheduled to start reviewing cases in July 2008. The

judgments of foreign courts with jurisdictional authority are

enforced in Taiwan by local courts on a reciprocal basis.



--------------

A.5 Performance Requirements and Incentives

--------------



16. All of Taiwan's performance requirements were removed in

January 2002 upon Taiwan's WTO accession. Like domestic firms,

foreign-invested companies must be located in areas zoned for

appropriate industrial or commercial use. Taiwan does not require

that firms transfer technology, locate in specified areas, or hire a

minimum number of local employees as a prerequisite to investment.



17. Manufacturing firms located in export-processing zones and

science-based industrial parks are required to export all of their

production to obtain tariff-free treatment of production inputs.

However, these firms may sell on the domestic market upon payment of

relevant import duties.



18. When acceding to the WTO in January 2002, Taiwan promised to

accede to the Government Procurement Agreement (GPA). Taiwan also

promised to phase out industrial offset requirements (IOR) for

non-military public procurement upon signing the GPA. Taiwan has

yet to accede to the GPA, but even without GPA membership, Taiwan

started reducing the IOR coverage of non-military procurements in



TAIPEI 00000073 017 OF 037





2004. Currently, only railway and power generation projects are

subject to IOR. For these two categories, a contract of US$10

million or more triggers an offset obligation of at least 33%. For

military procurements, the threshold is US$5 million, and the

minimum offset obligation is 40%. In some military cases, the

offset ratio has reached 70% due to legislative pressure. Since the

first industrial offset contract (IOC) was signed in 1988, Taiwan

has signed IOCs with 51 suppliers from 12 foreign countries.

Commitment value of these contracts total US$8.4 billion, and

realized contracts amounted to US$5.3 billion. Forty-six percent of

the total realized value was directed to transfer of technologies,

27% to foreign direct investment in Taiwan, 15% to procurement from

Taiwan, 5% to trade promotion, 4% to personnel training, and 2% to

assessment certification. Taiwan has published industrial offset

rules in both Chinese and English to which readers can access

online.



-------------- ---

A.6 Right to Private Ownership and Establishment

-------------- ---



19. Private investors have the right to establish and own business

enterprises, except in a limited number of industries involving

national security and environmental protection. Private entities

can freely acquire and dispose of interests in business enterprises.

Private firms have the same access as state-owned companies to

markets, credit, licenses, and supplies. Taiwan authorities have

eliminated state-owned monopolies.



--------------

A.7 Protection of Property Rights

--------------



20. Taiwan has continued efforts to improve its IPR legal regime

and enforcement. The Intellectual Property Office (TIPO) under the

Ministry of Economic Affairs as well as other relevant agencies have

adopted programs to crack down on Internet and physical piracy. In

addition, the Ministry of Education (MOE) announced a campus IPR

action plan in October 2007 to strengthen management of academic

computer networks and restrict illegal textbook coping by students.

Taiwan has amended laws and regulations to meet international

standards and requirements. Taiwan has also amended the Patent Law

and Copyright Law to extend the term of protection from 18 years to

20 years for some patents and to define computer software as

literary works. Taiwan has enacted the Optical Media Law to address

CD/DVD piracy problems. The law has established a legal framework

for regulation of CD manufacturing plants through licensing and the

use of Source Identification (SID) codes in production. Convicted

violators may receive prison terms of up to three years and fines of

up to NT$6 million (US$184,600). The Optical Media Law, together

with effective enforcement, has led to a dramatic decrease in

large-scale production of counterfeit CD products. Amendments to

the Copyright Law in 2003 and 2004 made copyright infringement a

public crime, increased penalties for counterfeiters and made it

illegal to tamper with technical protection measures. The

Pharmaceutical Law as amended in 2004 and 2007 stiffened penalties

for production, distribution and sale of counterfeit medicines. A

2005 amendment to the Law to authorized pharmaceutical data

exclusivity for five years to prevent unfair commercial data use

--the same data-exclusivity period as in the United States--but U.S.

original-drug manufacturers complain that Taiwan authorities

unfairly allow generic-pharmaceutical makers to apply for a license

and a Bureau of National Health Insurance reimbursement price for

their knock-off drugs even before the original drug's

data-exclusivity period has expired. A June 2007 amendment to the



TAIPEI 00000073 018 OF 037





Copyright Law subjects illegal file sharing, such as P2P, to a

maximum jail term of two years. In March 2007, Taiwan completed

legislation of the IP Court Organization Law for establishment of a

specialized IP court which is scheduled to start reviewing cases in

July 2008.



21. In 2003, Taiwan established the Integrated Enforcement Task

Force (IETF),which consists of 220 IP police officers. In 2004,

the task force was transformed to a permanent IP police squadron.

The IP police have frequently raided retail optical- media sales

points. This has led to a significant decrease in the number of

counterfeit CD and DVD vendors. Other enforcement measures include

increasing the reward by ten times to NT$10 million (US$300,000) to

IPR informants for counterfeit -goods seizures , and setting up an

anti-pirating CD export task force to strengthen inspection of

commodities entering or leaving Taiwan.



22. While Taiwan has improved IPR protection, transshipment of

counterfeit products from China to the United States remains a

problem. Counterfeit goods from Taiwan seized by U.S. Customs

dropped from $26.5 million in 2002 to $1.1 million in 2005. The

value of seized counterfeit goods was $1.8 million in 2006 and $2.8

million in the first half of FY2007. In addition, Taiwan is facing

a growing Internet-based piracy threat. Rights owners continue to

complain of slow progress in judicial cases, or poor protection on

trade dress properties, such as unregistered marks, packing

configurations, and outward appearance features. Although

counterfeit and parallel imported pharmaceuticals are still found in

the Taiwan marketplace, the legislature passed amendments to the

Pharmaceutical Law in 2004 and 2007 to increase the penalties for

dealing in counterfeit pharmaceuticals, resulting in marked

increases in fines and jail terms over the past several years.



--------------

A.8 Transparency of the Regulatory System

--------------



23. Taiwan has a set of comprehensive laws and regulations

regarding taxes, labor, health and safety.



24. Foreign investors note that in addition to tax incentives,

Taiwan's science-based industrial parks and export processing zones

have simple and transparent bureaucratic procedures for the

investment application process. Outside of these areas, the

Department of Investment Services (DOIS) functions as the

coordinator between investors and all agencies involved in the

investment process. The Investment Commission (IC) is charged with

reviewing and approving inbound and outbound investments.



25. Taiwan has simplified work-permit procedures for foreign

white-collar employees. In March 2004, the Council of Labor Affairs

(CLA) set up a single window to issue work permits for all

white-collar workers. It takes 7 to 10 days for the CLA to issue

work permits. The work permit may be extended indefinitely as long

as the employer considers the employment necessary.



26. Taiwan has removed the job experience requirement for

employment of foreign management professionals by global operational

headquarters and R&D centers as well as business firms of designated

industries. White-collar workers having a master's degree or above

are not subject to any job experience requirement. Those with lower

education levels are required to have job experience. Foreign

white- and blue-collar workers have the right to obtain permanent

residence status after they have legally stayed in Taiwan for seven

consecutive years with the minimum time of residence of 180 days per



TAIPEI 00000073 019 OF 037





year in Taiwan. The seven-year requirement is waived for high-tech

personnel and those who have made "significant contributions" to

Taiwan.



27. The entry-visa issuance procedures for foreign white-collar

workers who work for foreign-invested companies are relatively

simple. A foreign executive who enters Taiwan with a tourist visa

is no longer required to leave the island before the tourist visa

can be changed to an employment visa. A foreign executive whose

employment visa expires is not required to exit before renewing the

visa.



-------------- --------------

A.9 Efficient Capital Markets and Portfolio Investment

-------------- --------------



28. A wide variety of credit instruments, all allocated on market

terms, are available to both domestic- and foreign-invested firms.

Legal accounting systems are largely transparent and consistent with

international standards. The regulatory system is generally fair.

Foreign portfolio investors are no longer subject to foreign

ownership limits or investment fund limits. In recent years, Taiwan

authorities have taken a number of steps to encourage a more

efficient flow of financial resources and credit. The limit on NT

dollar deposits that a branch of a foreign bank may take has been

lifted. Non-residents are permitted to open NT dollar bank

accounts, which are subject to capital-flow controls which limit

each remittance to US$100,000. There are no restrictions on

residents opening bank accounts overseas. Limits on branch banking

have been lifted. A freeze on new bank branches to encourage

consolidation was removed in 2007. Restrictions on capital flows

relating to portfolio investment have been removed. The insurance

and securities industries have been liberalized and opened to

foreign investment. Access to Taiwan's securities markets by

foreign institutional investors has also been broadened.



29. Taiwan abolished a complicated regulatory system governing

foreign portfolio investment in October 2003. Since then, any

foreign institutional investor is allowed to enter Taiwan's markets.

Subsequent registration has replaced the need for prior approval.

There is no minimum asset requirement. Investment and capital flows

are not limited. On-shore foreign investors (like other residents)

are still subject to capital flow limits of US$5 million for an

individual foreign investor and US$50 million for an unregistered

foreign company.



30. Taiwan has removed all legal limits on foreign ownership except

for investors from China in nearly all companies listed on the

Taiwan Stock Exchange (TAIEX). These exceptions include power

distribution, telecommunications, mass media firms, and airline

companies. There have been no reports of private or official

efforts to restrict the participation of foreign-invested firms in

industry standards-setting consortia or organizations.



31. Taiwan has a tightly regulated banking system. Since the

mid-1980s, the financial sector as a whole has been steadily opening

to private investment. The market share held by foreign banks had

been relatively small until four foreign banks and three foreign

private equity funds completed their acquisitions of Taiwan banks in

2007. The market share of all foreign banks in Taiwan (including

the seven acquired by foreign investors in 2007) increased from 8%

in 2006 to 15% in terms of assets in 2007, or from below 3% to

nearly 7% in terms of loans. The establishment of a number of new

securities firms, banks, insurance companies, and holding companies

has underscored this liberalization trend and enhanced competition.



TAIPEI 00000073 020 OF 037





Over the past decade, nine state-owned banks have been privatized.

The only Taiwan-based reinsurance company was privatized in 2002.

State-controlled banks still dominate the banking sector, however,

and hold a market share of 51% in terms of assets and 56% in terms

of loans. This share has been falling in recent years as Taiwan has

begun privatization efforts.



--------------

A.10 Political Violence

--------------



32. Taiwan is a relatively young multi-party democracy with

democratic political institutions that are still evolving. The

close margin in the 2004 presidential election resulted in an attack

on election offices and several large-scale demonstrations.

Nevertheless, these incidents and other protests were peacefully

resolved in a short time. There have been no reports of politically

motivated damage to foreign investment. Both local and foreign

companies have, however, been subject to protests and demonstrations

relating to labor disputes and environmental issues.



--------------

A.11.a. Corruption

--------------



33. Taiwan has implemented laws, regulations, and penalties to

combat corruption. The Corruption Punishment Statute and the

criminal code contain specific penalties for corrupt activities. In

January 2004, legislation doubled the penalties for corruption by

financial personnel, including maximum jail sentences of up to ten

years.



34. We are not aware of cases where bribes have been solicited for

investment approval. Both central and local governments offer

investors incentives, including free rent on land for the first

several years and discounts in subsequent years. Taiwan authorities

encourage foreign investment and would take action against officials

and individuals convicted of profiting illegally from foreign

investors.



35. The Government Procurement Law promulgated in 1998 and amended

in February 2001 was an element of promised significant improvements

upon WTO accession. The Public Construction Commission (PCC) now

publishes all major state procurement projects that require open

bidding, in accordance with WTO transparency requirements. The PCC

organizes inspection teams to monitor all public procurement

projects both at the central and local levels, and publishes results

of bidding and of inspections. A task force has been organized to

investigate complaints.



36. Authorities generally investigate allegations of corruption and

take action to penalize corrupt officials. Since its inauguration

in May 2000, the Chen Administration has strengthened

anti-corruption efforts. Since then, prosecutors have indicted

10,807 persons for corruption, including prominent personalities,

632 senior officials (department director level and above) and 623

elected officials. Indicted elected officials included 21

legislators. In 2006, the Taiwan High Court upheld a district

court's four-year jail sentence for a former speaker of the

legislature on a charge of taking a NT$150 million (US$4.6 million)

bribe. In 2007, prosecutors indicted a serving minister and a vice

minister for receiving bribes, while district courts convicted

another two vice ministers with jail terms of up to 16 years.



37. Attempting to bribe, or accepting a bribe from, Taiwan



TAIPEI 00000073 021 OF 037





officials constitutes a criminal offense, punishable under the

Corruption Punishment Statute and the Criminal Code. The Corruption

Punishment Statute as amended in late 2002 treats payment of a bribe

to a foreign official as a criminal act and makes such a bribe

subject to criminal prosecution. The maximum penalty for corruption

is life imprisonment plus a maximum fine of NT$3 million dollars

(US$92,300). In addition, the offender may be barred from holding

public office. The assets obtained from acts of corruption may be

seized and turned over to either the injured parties or the

Treasury.



--------------

B. Bilateral Investment Agreements

--------------



38. Taiwan has concluded bilateral investment guaranty agreements

with the following 26 countries: Argentina, Belize, Burkina Faso,

Costa Rica, Dominica, El Salvador, Guatemala, Honduras, India,

Indonesia, Liberia, Malaysia, Macedonia, the Marshall Islands,

Nicaragua, Nigeria, Panama, Paraguay, the Philippines, Saudi Arabia,

Senegal, Singapore, Swaziland, Thailand, Malawi, and Vietnam. In

addition, there is an agreement to guaranty Taiwan's investment in

Malawi and other agreements to protect U.S. investment in Taiwan

(see next paragraph). (An agreement with Latvia signed in 1992 was

revoked in August 2004.)



39. The terms of the 1948 Friendship, Commerce, and Navigation

Treaty between the Republic of China and the United States are still

in force, and under the terms of the agreement U.S. investors are

generally accorded national treatment and are provided with a number

of protections, including protection against expropriation. Taiwan

and the United States also have an agreement, signed in 1952,

pertaining to investment guarantees that serve as the basis for the

U.S. Overseas Private Investment Corporation (OPIC) program in

Taiwan. In September 1994, representatives of the United States and

Taiwan signed a bilateral Trade and Investment Framework Agreement

(TIFA) to serve as the basis for consultations on trade and

investment issues. Consultations on a bilateral investment

agreement between the United States and Taiwan began in 1996, and

the latest round took place in Washington in 2007.



-------------- --

C. OPIC and Other Investment-Insurance Programs

-------------- --



40. OPIC programs are available to U.S. investors, though U.S.

investors have never filed an OPIC insurance claim for an investment

in Taiwan. Taiwan is not a member of the Multilateral Investment

Guaranty Agency.



--------------

D. Labor

--------------



41. Unemployment, at just under 4%, has declined since 2002, but is

still above the 1.45% to 2.99% range in the 1990s. Taiwan's aging

population, however, has prompted greater demand for foreign

caregivers. The percentage of the population aged 65 and above has

increased from below 4% in the 1970s to above 10% in late 2007. In

response, the number of foreign caregivers has grown to 160,000 and

accounts for 45% of blue-collar foreign workers in Taiwan. In the

industrial sector, despite relaxation of employment restrictions,

the number of the sector's blue-collar foreign workers declined 13%

from 228,000 in 2000 to 197,770 in November 2007.





TAIPEI 00000073 022 OF 037





42. There are no special hiring practices in Taiwan. Wages

typically include a one-month bonus at the end of a year. Benefits

often include meals, transportation, and dormitory housing.

Dividend-sharing is common among high-tech industries. A standard

labor insurance program is mandatory. The program provides paid

maternity leave, a lump-sum or annuity retirement plan, and other

benefits. A new retirement system implemented in July 2005

abolishes the voluntary retirement scheme under an old system which

still covers 30% of total employment population. The old system

grants employees voluntary retirement at age 55 with 15 years of

service. Employees hired after July 2005 must join the new system,

with a retirement age of 60. The new system requires employers to

contribute six percent of their monthly wage to accounts at

designated banking institutions. The accounts follow employees as

they move from one employer to another. A universal national health

insurance system, to which employers contribute, covers all Taiwan

residents.



43. Taiwan provides unemployment relief based on the Employment

Insurance Law enacted in 2002. Alternatives for unemployment pay

include vocational training allowance for jobless persons and

employment subsidies to encourage employment of jobless persons.

The Labor Standards Law (LSL) sets a standard eight-hour workday and

a biweekly maximum of 84 hours. Legislation adopted in late 2000

set a five-day workweek for the public sector, effective January

2001. Over half of private firms have adopted the five-day

workweek. The LSL restricts child labor and requires employers to

provide overtime pay, severance pay, and retirement benefits. The

LSL covers both manufacturing and service sectors. Violators are

liable to criminal penalties (jail terms) and administrative

punishments (fines).



44. In July 2007, Taiwan raised the minimum monthly wage by 9.1% to

NT$17,280 (US$532) and the minimum hourly wage from NT$66 (US$2) to

NT$95 (US$2.9). Monthly manufacturing sector wages in the first ten

months of 2007 averaged NT$43,704 (US$1,345) including overtime,

allowances and bonuses.



45. Labor unions have become more active and independent since

Taiwan's martial law was lifted in 1987. Privatization and the new

retirement system contributed to an increase in labor disputes over

the past three years. Taiwan is not a member of the International

Labor Organization (ILO) but adheres to the ILO Conventions in

protection of worker's rights.



--------------

E. Foreign Trade Zones/Free Ports

--------------



46. The first free trade/free port zone began operation at Keelung,

Taiwan's northern port, in November 2004. Another four were

established in 2005. These four are located at Taoyuan

International Airport and the international harbors in Kaohsiung,

Taichung, and Taipei. Taiwan authorities have relaxed restrictions

on movement of merchandise, capital and personnel into and out of

such zones. Foreign investors are accorded national treatment.



--------------

F. Foreign Direct Investment Statistics

--------------



47. Statistics on foreign direct investment in Taiwan are available

from two sources. The Investment Commission (IC) publishes monthly

and yearly foreign investment approval statistics by industry and by

country. The Central Bank of the ROC (Taiwan) (CBT) publishes



TAIPEI 00000073 023 OF 037





foreign direct investment arrivals on a quarterly and yearly basis.

CBT data, contained in balance-of-payments (BOP) statistics, are not

further classified by industry or country.



48. In 2006, strong recovery of Taiwan's export sector far offset

adverse effects of delinquent credit/cash card debt problems which

dampened private consumption in the first half of the year. Growth

in exports, which account for over 60% of Taiwan's GDP, accelerated

from 8.8% in 2005 to 13% in 2006, driving Taiwan's 2006 real GDP

growth to nearly 5%, from 4.2% in 2005.



49. Unexpectedly strong economic performance in the second half of

2007 prompted both domestic and foreign forecasters to raise

Taiwan's 2007 real GDP growth estimates to 5.2-5.5%. The official

estimate is 5.46%. Year-on-year export growth increased from 7.6%

in the fourth quarter of 2006 to 14.4% in October-November 2007.

Meanwhile, growth in export orders rose from 9.6% to 17.6%, and

growth in manufacturing production accelerated from 0.5% to a

three-and-a-half-year high of nearly 15%. Most Taiwan forecasters

anticipate that Taiwan's economic growth in 2008 will slow to below

4.5%. They believe that the U.S. sub-prime mortgage problem, as

well as higher international prices for oil and grains, will dampen

world economic performance and reduce demand for products from the

export-oriented economy of Taiwan. In the first eleven months of

2007, approved FDI increased 20% year-on-year to US$14 billion.

Approved FDI was concentrated in banking, trade, electronics, basic

metal, and nonmetallic products. These five categories accounted

for nearly 80% of total approved FDI.



50. Approved direct investment in electronics industries (including

communications, semiconductor, TFT-LCD and other optical electronic

projects) increased from 6.4% of total approved FDI prior to 1995

and 19% in 1996-2000 to 24.5% in 2001-2005 and further to 47% in

2006. Meanwhile, the percentage share for financial services

increased from 7.6% prior to 1995 and 22% in 1996-2000 to 25.6% in

2001-2005 and 34% in 2006. Nearly 80% of the approved inbound

direct investment in Taiwan's electronics industries came from the

United States, Europe and Japan.



51. The United States and Japan used to be the two main sources of

Taiwan's foreign investment, but have been replaced by the tax

havens in the British Territories in America (BTA),which harbor a

growing number of multinational corporations (many with roots in

Taiwan). According to official Taiwan statistics, approvals for

U.S. investment from 1952 to 2006 totaled US$15 billion (US16.1

billion according to official U.S. figures),or 19% of total foreign

investment. Of total U.S. investment, 32% was directed toward the

electronics and electrical industries, and 44% toward the service

sector. Approvals for Japanese investment amounted to US$14

billion, or 18% of total foreign investment, of which 31% was in

electronics and electrical industries and 34% in the service sector.

In 2006, new EU investment exceeded that of the United States or

Japan due to a major holdings transfer by the Philips Company.



52. Approvals for investment from the BTA surged steadily from

US$76 million in 1994 to US$1.2 billion in 1999 when the BTA

surpassed the United States and Japan to become the largest source

of foreign investment in Taiwan. Investment from the BTA during

1999-2005 accounted for 27% of total approved investments, compared

to 18% from the United States, another 18% from Europe, and 15% from

Japan. In 2006, a holdings transfer by the Philips Company drove

down the BTA's share to 16.5%, the United States' share to 19% and

Japan's share to 18%, while Europe's share reached 21.6%. One

quarter of the investment from the BTA was directed towards

financial services and another quarter to the electronic and



TAIPEI 00000073 024 OF 037





electrical industries.



53. As a relatively open and liberal economy, Taiwan receives

foreign investment while its businesses invest overseas, especially

in China, Southeast Asia and the Americas. According to

balance-of-payments statistics compiled by the central bank,

outbound direct investment has exceeded inbound direct investment

every year since 1988. According to IC statistics, by 2006,

cumulative approvals for outbound investments totaled US$103.7

billion. The main recipient of Taiwan investment has been China,

which has received over half of Taiwan's outbound investment.

Approved investments in China increased by 27% in 2006 when 64% of

Taiwan's new overseas investment went to China.



54. Taiwan business firms started to relocate their production

bases to China in the late 1980s. Production lines in China

gradually shifted from cheap labor-oriented industries in the late

1980s to products requiring lower-end technologies, such as PCs and

motherboards, in the early 2000s. The WTO accession of China and

Taiwan in 2002 prompted Taiwanese business firms to accelerate

relocation to China to sharpen their competitive edge in exports.

Taiwan factories based in China use the lower labor and land costs

to process Taiwan-made production inputs into finished goods for

exports to such industrial markets as the United States, Japan and

Europe, and also for final sale in China. Rising labor and land

costs in China have prompted some Taiwan firms to move from China to

nations in South and Southeast Asia, including Vietnam.



56. Taiwan's annual registered direct investment across the Taiwan

Strait grew from US$1.25 billion in 1999 to US$6.0 billion in 2005

and US$7.6 billion in 2006. As a result of this trend Taiwan

factories, primarily those based in China and Vietnam, produced

nearly 50% of export orders received by Taiwan companies'

headquarters by November 2007, up from 11.5% in early 2000, and 2007

ratio reached 85% for information technology (IT) firms. Greater

China (China plus Hong Kong) replaced the United States as Taiwan's

largest export market in 2001, and Greater China's share of Taiwan's

exports in the first 11 months of 2007 reached 41%, much higher than

the 13% for the United States and 11% for the European Union.



Table 1

Foreign Investment Approvals by Year and by Area

(1952-2006) (unit: US$ million)



Central Hong

Year U.S.A. Japan America Europe Kong Other Total

-------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------

52-89 3,067 2,983 341 1,312 1,198 2,049 10,950

1990 581 839 66 283 236 297 2,302

1991 612 535 60 165 129 277 1,778

1992 220 421 37 165 213 405 1,461

1993 235 278 38 214 169 279 1,213

UNCLASSIFIED



SIPDIS

PROG 01/15/2008

ECON:HSMITH

ECON:YSWANG

ECON:MCAVANAUGH

ECON1



AIT TAIPEI

SECSTATE WASHDC

DEPT OF TREASURY WASHDC

INFO USDOC WASHDC

CIMS NTDB WASHDC

AMEMBASSY BANGKOK



TAIPEI 00000073 025 OF 037





AMEMBASSY BEIJING

AMEMBASSY SEOUL

AMEMBASSY SINGAPORE

AMEMBASSY TOKYO

AMEMBASSY MANILA

AMEMBASSY JAKARTA

AMEMBASSY KUALA LUMPUR

AMEMBASSY HANOI

AMEMBASSY CANBERRA

AMEMBASSY WELLINGTON

AMCONSUL HONG KONG

AMCONSUL SHANGHAI

AMCONSUL GUANGZHOU



SIPDIS



STATE PLEASE PASS USTR

STATE FOR EB/IFD/OIA/HATCHER, KAMBARA, and TRACTON, EAP/RSP/TC,

EAP/EP

USTR FOR KATZ, STRATFORD and BEHAR

USDOC FOR 3132/USFCS/OIO/EAP/WZARIT

TREASURY FOR OASIA/TTYANG AND HAARSAGER

TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF

GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB

MARI BOLIS



E.O. 12958: N/A

TAGS: EINV, EFIN, ECON, PINR, OPIC, KTDB, USTR, KIPR, TW

SUBJECT: Taiwan's 2008 Investment Climate Statement



REF: State 158802



--------------

A.1 Openness to Foreign Investment

--------------



1. Taiwan officially welcomes foreign direct investment. Taiwan's

science-based industrial parks, export processing zones, and free

trade zones offer streamlined procedures. Taiwan has made

significant improvement in protecting intellectual property.



2. As part of its efforts to improve the investment climate, Taiwan

no longer has a list of permitted investments, but maintains a

"negative" list of industries closed to foreign investment to

maintain security and environmental protection. Liberalization has

reduced that list to less than one percent of manufacturing

categories and less than five percent of service industries. The

latest significant liberalization took place in February of 2003

when alcohol production, agricultural production, fishing, and

animal husbandry were opened to foreign investors. Prior approval

is required, but this requirement will be dropped for projects with

an investment below NT$8 million (U$246,000) if legislation pending

before the legislature passes into law. To live up to its WTO

accession commitments, Taiwan opened private production of

cigarettes in 2004 without any foreign ownership limit. Railway

transport, freight transport by small trucks, pesticide manufacture,

real estate development, brokerage, leasing, and trading are all

completely open to foreign investment. After its accession to the

WTO in January 2002, Taiwan started permitting imports of gasoline

and liquid natural gas (LNG) by the private sector, without any

foreign ownership restriction. It also permitted private wine and

cigarette imports. In April 2004, Taiwan dropped mining and

ordinary trucking services from the negative list but added

single-axle truck leasing.





TAIPEI 00000073 026 OF 037





3. Most foreign ownership limits have been removed. The foreign

ownership limit on wireless and wireline telecommunications firms is

60%, including a direct foreign investment limit of 49%. For the

state-owned Chunghwa Telecom Co., which controls 97% of the fixed

line telecom market, the limit on direct and indirect foreign

investment was raised from 49% to 55% in December 2007. There is a

20% limit on foreign direct investment on cable television broadcast

services, but foreign ownership of up to 60% is allowed through

indirect investment via a Taiwan entity. Foreign investors now

control three of the five largest cable TV networks in Taiwan.

Foreign ownership limits are 49.99% for satellite television

broadcasting services and piped distribution of natural gas and 49%

for high-speed railways. A 50% foreign ownership limit remains on

Taiwan-flagged merchant ships, power transmission and distribution,

ground-handling firms, air-cargo terminals, air-catering companies,

and air-cargo forwarders. The 50% foreign ownership limit for

ground-handling firms, air-cargo terminals, air-catering companies,

and air-cargo forwarders was removed for investors from WTO members

in November 2001. In July 2007, the foreign ownership limit on

airline companies was raised from 33.33% to 49%, with a separate

limit of 25% for any single foreign investor.



4. Regulations governing foreign direct investment principally

derive from the Statute for Investment by Foreign Nationals (SIFN)

and the Statute for Investment by Overseas Chinese (SIOC). These

two laws permit foreign investors to use either foreign currencies

or NT dollars. In mid-2006, Taiwan authorities started permitting

NT dollar loans obtained from local banks to serve as sources of

foreign direct investment. Companies with foreign ownership below

one-third are exempt from limitations on the negative list. Both

the SIFN and the SIOC specify that foreign-invested enterprises must

receive the same regulatory treatment accorded local firms. Foreign

companies may invest in state-owned firms undergoing privatization

and are eligible to participate in publicly-financed research and

development programs.



5. The Investment Commission (IC) of the Ministry of Economic

Affairs screens applications for investment, acquisitions, and

mergers. According to the IC, approximately 98% of projects with an

investment value less than NT$500 million (US$15.4 million at an

exchange rate of NT$32.5 per US$) are excluded from the negative

list; the IC estimates that approval for these projects is generally

granted within two working days at the IC division chief level. For

investments in the range of NT$500 million (US$15.4 million) to

NT$1,500 million (US$46.2 million) excluded from the negative

list, approval authority rests with the IC Executive Secretary and

normally is granted within three working days. Approval of

investments in industries above NT$1,500 million or on the negative

list requires two weeks because those investments must be referred

to the relevant supervisory ministries and require approval of the

IC Chairman or IC Executive Secretary. Investments involving

complications such as mergers and acquisitions require screening at

the monthly meeting of an inter-ministerial commission.



6. Taiwan offers incentives to encourage investment, including

accelerated depreciation and tax credits for investments in emerging

or strategic industries, pollution-control systems, production

automation, and energy conservation. Equipment for R&D purposes can

be brought into Taiwan duty-free. Other incentives include

low-interest loans for developing new and/or cutting edge products,

upgrading traditional industries, and importing automation or

pollution-control equipment. A broad five-year tax holiday for new

investments was re-instituted in January 1995. Incentives for

manufacturing firms to locate factories in designated industrial

parks to include free rent the first two years, 40% discount on rent



TAIPEI 00000073 027 OF 037





the next two years, and 20% discount on rent in the fifth and sixth

years has been extended to December 2008. Under another incentive

program, state-owned land is available for investors rent-free for

the first four years and 50% off for the next six years. As part of

its financial reform plan, Taiwan encourages and provides incentives

for banks, insurance companies, securities firms, and financial

holding companies to merge.



7. In 2005 and 2006, Taiwan authorities slashed some investment tax

incentives as a part of a tax reform designed to reduce the fiscal

deficit. A new law to levy a ten-percent alternative minimum tax on

business firms became effective in January 2006. Since early 2005,

Taiwan authorities have cut the number of industries entitled to tax

incentives by one-third and doubled the thresholds in annual R&D

expenses for tax offsets from NT$15-20 million (US$462 thousand to

US$615 thousand) to NT$30-40 million (US$923 thousand to US$1.23

million). The tax credit for procurement of automation equipment

has been lowered from 11% to 7% and that for procurement of

technologies reduced from 10% to 5%. The tax credit for projects in

remote poor areas has been cut from 20% to 15%.



--------------

A.2 Conversion and Transfer Policies

--------------



8. There are relatively few restrictions on converting or

transferring direct investment funds. Foreign investors with

approved investments can readily obtain foreign exchange from a

large number of designated banks. The remittance of capital

invested in Taiwan must be reported in advance to the IC, but IC

approval is not requited. Declared earnings, capital gains,

dividends, royalties, management fees, and other returns on

investments can be repatriated at any time. For large transactions

requiring the exchange of NT$ into foreign currency which could

potentially disrupt Taiwan's shallow foreign exchange market, the

central bank may require the transaction to be scheduled over

several days. There is no written guideline on the size of such

transactions, but amounts in excess of US$100 million may be

affected. Capital movements arising from trade in merchandise and

services, as well as from debt servicing, are not restricted. No

prior approval is required for movement of foreign currency funds

not requiring exchange between the NT dollar and the foreign

currency. No prior approval is required if the cumulative amount of

inward or outward remittances does not exceed the annual limit of

US$5 million for an individual or US$50 million for a corporate

entity.



9. Total outbound investment may not exceed 40% of the investing

company's net worth or paid-in capital (whichever is less),unless

the company charter waived the 40% limit or unless such investment

is approved by shareholders. A local company is not required to

obtain prior approval for overseas investments; however, such an

approval exempts the company from the annual capital outflow limit

of US$50 million. Investments in China are subject to additional

restrictions.



10. Taiwan has significantly relaxed restrictions on Taiwan

entities' direct investment in China down to a negative list

covering about 100 manufacturing products and 430 agricultural

products. Taiwan has abolished a requirement for direct investment

in China to go through third nations or areas and removed a direct

investment limit of US$50 million. The ceiling on small and medium

enterprises' investment in China is NT$80 million (US$2.5 million).

For large enterprises, total China investment may not exceed 20% of

the company's net worth exceeding NT$10 billion, 30% of net worth



TAIPEI 00000073 028 OF 037





from NT$5 billion to NT$10 billion (US$308 - 615 million),and 40%

of the net worth below NT$5 billion (US$154 million). For

investments below US$200,000, approval can be issued on the same day

of submitting the application. Taiwan authorities require an

investor to submit a quarterly financial report if the cumulative

investment in a project exceeds US$20 million. Investors are

encouraged to repatriate their capital and earnings.



11. Taiwan authorities have actively encouraged investment in

Southeast Asia and India. Investments are also encouraged in a

number of countries with which Taiwan has diplomatic relations,

mainly in Central America. Incentives include loans and/or overseas

investment insurance from Taiwan's Export-Import Bank.



--------------

A.3 Expropriation and Compensation

--------------



12. No foreign-invested firm has ever been nationalized or

expropriated in Taiwan. No examples of "creeping expropriation" or

official actions tantamount to expropriation have been reported.

Under Taiwan law no venture with 45% or more foreign investment can

be nationalized for a period of 20 years after the venture is

established. Expropriation can be justified only for national

defense needs and "reasonable" compensation must be given.



--------------

A.4 Dispute Settlement

--------------



13. Taiwan is not a member of the International Center for the

Settlement of Investment Disputes or the New York Convention of 1958

on the recognition and enforcement of foreign arbitrage awards.

Investment disputes with the Taiwan authorities are not common.

Normally, Taiwan resolves disputes according to domestic laws and

regulations.



14. Taiwan has comprehensive commercial laws, including the Company

Law, Commercial Registration Law, Business Registration Law,

Commercial Accounting Law as well as laws for specific industries.

Taiwan's Bankruptcy Law guarantees that all creditors have the right

to share the assets of a bankrupt debtor on a proportional basis.

Secured interests in property, both chattel and real, are recognized

and enforced through a registration system.



15. Taiwan's court system is generally viewed as independent and

free from overt interference by the other official branches. Judges

are generally over-worked. In response to complaints about the slow

pace of judicial decision-making, Taiwan authorities adopted

measures in 2002 to monitor case processing time. Simplified courts

have been set up to deal with minor cases that can be resolved

quickly. The legislature enacted a bill to set up special courts

for intellectual property rights (IPR) cases in March 2007, and the

courts are scheduled to start reviewing cases in July 2008. The

judgments of foreign courts with jurisdictional authority are

enforced in Taiwan by local courts on a reciprocal basis.



--------------

A.5 Performance Requirements and Incentives

--------------



16. All of Taiwan's performance requirements were removed in

January 2002 upon Taiwan's WTO accession. Like domestic firms,

foreign-invested companies must be located in areas zoned for

appropriate industrial or commercial use. Taiwan does not require



TAIPEI 00000073 029 OF 037





that firms transfer technology, locate in specified areas, or hire a

minimum number of local employees as a prerequisite to investment.



17. Manufacturing firms located in export-processing zones and

science-based industrial parks are required to export all of their

production to obtain tariff-free treatment of production inputs.

However, these firms may sell on the domestic market upon payment of

relevant import duties.



18. When acceding to the WTO in January 2002, Taiwan promised to

accede to the Government Procurement Agreement (GPA). Taiwan also

promised to phase out industrial offset requirements (IOR) for

non-military public procurement upon signing the GPA. Taiwan has

yet to accede to the GPA, but even without GPA membership, Taiwan

started reducing the IOR coverage of non-military procurements in

2004. Currently, only railway and power generation projects are

subject to IOR. For these two categories, a contract of US$10

million or more triggers an offset obligation of at least 33%. For

military procurements, the threshold is US$5 million, and the

minimum offset obligation is 40%. In some military cases, the

offset ratio has reached 70% due to legislative pressure. Since the

first industrial offset contract (IOC) was signed in 1988, Taiwan

has signed IOCs with 51 suppliers from 12 foreign countries.

Commitment value of these contracts total US$8.4 billion, and

realized contracts amounted to US$5.3 billion. Forty-six percent of

the total realized value was directed to transfer of technologies,

27% to foreign direct investment in Taiwan, 15% to procurement from

Taiwan, 5% to trade promotion, 4% to personnel training, and 2% to

assessment certification. Taiwan has published industrial offset

rules in both Chinese and English to which readers can access

online.



-------------- ---

A.6 Right to Private Ownership and Establishment

-------------- ---



19. Private investors have the right to establish and own business

enterprises, except in a limited number of industries involving

national security and environmental protection. Private entities

can freely acquire and dispose of interests in business enterprises.

Private firms have the same access as state-owned companies to

markets, credit, licenses, and supplies. Taiwan authorities have

eliminated state-owned monopolies.



--------------

A.7 Protection of Property Rights

--------------



20. Taiwan has continued efforts to improve its IPR legal regime

and enforcement. The Intellectual Property Office (TIPO) under the

Ministry of Economic Affairs as well as other relevant agencies have

adopted programs to crack down on Internet and physical piracy. In

addition, the Ministry of Education (MOE) announced a campus IPR

action plan in October 2007 to strengthen management of academic

computer networks and restrict illegal textbook coping by students.

Taiwan has amended laws and regulations to meet international

standards and requirements. Taiwan has also amended the Patent Law

and Copyright Law to extend the term of protection from 18 years to

20 years for some patents and to define computer software as

literary works. Taiwan has enacted the Optical Media Law to address

CD/DVD piracy problems. The law has established a legal framework

for regulation of CD manufacturing plants through licensing and the

use of Source Identification (SID) codes in production. Convicted

violators may receive prison terms of up to three years and fines of

up to NT$6 million (US$184,600). The Optical Media Law, together



TAIPEI 00000073 030 OF 037





with effective enforcement, has led to a dramatic decrease in

large-scale production of counterfeit CD products. Amendments to

the Copyright Law in 2003 and 2004 made copyright infringement a

public crime, increased penalties for counterfeiters and made it

illegal to tamper with technical protection measures. The

Pharmaceutical Law as amended in 2004 and 2007 stiffened penalties

for production, distribution and sale of counterfeit medicines. A

2005 amendment to the Law to authorized pharmaceutical data

exclusivity for five years to prevent unfair commercial data use

--the same data-exclusivity period as in the United States--but U.S.

original-drug manufacturers complain that Taiwan authorities

unfairly allow generic-pharmaceutical makers to apply for a license

and a Bureau of National Health Insurance reimbursement price for

their knock-off drugs even before the original drug's

data-exclusivity period has expired. A June 2007 amendment to the

Copyright Law subjects illegal file sharing, such as P2P, to a

maximum jail term of two years. In March 2007, Taiwan completed

legislation of the IP Court Organization Law for establishment of a

specialized IP court which is scheduled to start reviewing cases in

July 2008.



21. In 2003, Taiwan established the Integrated Enforcement Task

Force (IETF),which consists of 220 IP police officers. In 2004,

the task force was transformed to a permanent IP police squadron.

The IP police have frequently raided retail optical- media sales

points. This has led to a significant decrease in the number of

counterfeit CD and DVD vendors. Other enforcement measures include

increasing the reward by ten times to NT$10 million (US$300,000) to

IPR informants for counterfeit -goods seizures , and setting up an

anti-pirating CD export task force to strengthen inspection of

commodities entering or leaving Taiwan.



22. While Taiwan has improved IPR protection, transshipment of

counterfeit products from China to the United States remains a

problem. Counterfeit goods from Taiwan seized by U.S. Customs

dropped from $26.5 million in 2002 to $1.1 million in 2005. The

value of seized counterfeit goods was $1.8 million in 2006 and $2.8

million in the first half of FY2007. In addition, Taiwan is facing

a growing Internet-based piracy threat. Rights owners continue to

complain of slow progress in judicial cases, or poor protection on

trade dress properties, such as unregistered marks, packing

configurations, and outward appearance features. Although

counterfeit and parallel imported pharmaceuticals are still found in

the Taiwan marketplace, the legislature passed amendments to the

Pharmaceutical Law in 2004 and 2007 to increase the penalties for

dealing in counterfeit pharmaceuticals, resulting in marked

increases in fines and jail terms over the past several years.



--------------

A.8 Transparency of the Regulatory System

--------------



23. Taiwan has a set of comprehensive laws and regulations

regarding taxes, labor, health and safety.



24. Foreign investors note that in addition to tax incentives,

Taiwan's science-based industrial parks and export processing zones

have simple and transparent bureaucratic procedures for the

investment application process. Outside of these areas, the

Department of Investment Services (DOIS) functions as the

coordinator between investors and all agencies involved in the

investment process. The Investment Commission (IC) is charged with

reviewing and approving inbound and outbound investments.



25. Taiwan has simplified work-permit procedures for foreign



TAIPEI 00000073 031 OF 037





white-collar employees. In March 2004, the Council of Labor Affairs

(CLA) set up a single window to issue work permits for all

white-collar workers. It takes 7 to 10 days for the CLA to issue

work permits. The work permit may be extended indefinitely as long

as the employer considers the employment necessary.



26. Taiwan has removed the job experience requirement for

employment of foreign management professionals by global operational

headquarters and R&D centers as well as business firms of designated

industries. White-collar workers having a master's degree or above

are not subject to any job experience requirement. Those with lower

education levels are required to have job experience. Foreign

white- and blue-collar workers have the right to obtain permanent

residence status after they have legally stayed in Taiwan for seven

consecutive years with the minimum time of residence of 180 days per

year in Taiwan. The seven-year requirement is waived for high-tech

personnel and those who have made "significant contributions" to

Taiwan.



27. The entry-visa issuance procedures for foreign white-collar

workers who work for foreign-invested companies are relatively

simple. A foreign executive who enters Taiwan with a tourist visa

is no longer required to leave the island before the tourist visa

can be changed to an employment visa. A foreign executive whose

employment visa expires is not required to exit before renewing the

visa.



-------------- --------------

A.9 Efficient Capital Markets and Portfolio Investment

-------------- --------------



28. A wide variety of credit instruments, all allocated on market

terms, are available to both domestic- and foreign-invested firms.

Legal accounting systems are largely transparent and consistent with

international standards. The regulatory system is generally fair.

Foreign portfolio investors are no longer subject to foreign

ownership limits or investment fund limits. In recent years, Taiwan

authorities have taken a number of steps to encourage a more

efficient flow of financial resources and credit. The limit on NT

dollar deposits that a branch of a foreign bank may take has been

lifted. Non-residents are permitted to open NT dollar bank

accounts, which are subject to capital-flow controls which limit

each remittance to US$100,000. There are no restrictions on

residents opening bank accounts overseas. Limits on branch banking

have been lifted. A freeze on new bank branches to encourage

consolidation was removed in 2007. Restrictions on capital flows

relating to portfolio investment have been removed. The insurance

and securities industries have been liberalized and opened to

foreign investment. Access to Taiwan's securities markets by

foreign institutional investors has also been broadened.



29. Taiwan abolished a complicated regulatory system governing

foreign portfolio investment in October 2003. Since then, any

foreign institutional investor is allowed to enter Taiwan's markets.

Subsequent registration has replaced the need for prior approval.

There is no minimum asset requirement. Investment and capital flows

are not limited. On-shore foreign investors (like other residents)

are still subject to capital flow limits of US$5 million for an

individual foreign investor and US$50 million for an unregistered

foreign company.



30. Taiwan has removed all legal limits on foreign ownership except

for investors from China in nearly all companies listed on the

Taiwan Stock Exchange (TAIEX). These exceptions include power

distribution, telecommunications, mass media firms, and airline



TAIPEI 00000073 032 OF 037





companies. There have been no reports of private or official

efforts to restrict the participation of foreign-invested firms in

industry standards-setting consortia or organizations.



31. Taiwan has a tightly regulated banking system. Since the

mid-1980s, the financial sector as a whole has been steadily opening

to private investment. The market share held by foreign banks had

been relatively small until four foreign banks and three foreign

private equity funds completed their acquisitions of Taiwan banks in

2007. The market share of all foreign banks in Taiwan (including

the seven acquired by foreign investors in 2007) increased from 8%

in 2006 to 15% in terms of assets in 2007, or from below 3% to

nearly 7% in terms of loans. The establishment of a number of new

securities firms, banks, insurance companies, and holding companies

has underscored this liberalization trend and enhanced competition.

Over the past decade, nine state-owned banks have been privatized.

The only Taiwan-based reinsurance company was privatized in 2002.

State-controlled banks still dominate the banking sector, however,

and hold a market share of 51% in terms of assets and 56% in terms

of loans. This share has been falling in recent years as Taiwan has

begun privatization efforts.



--------------

A.10 Political Violence

--------------



32. Taiwan is a relatively young multi-party democracy with

democratic political institutions that are still evolving. The

close margin in the 2004 presidential election resulted in an attack

on election offices and several large-scale demonstrations.

Nevertheless, these incidents and other protests were peacefully

resolved in a short time. There have been no reports of politically

motivated damage to foreign investment. Both local and foreign

companies have, however, been subject to protests and demonstrations

relating to labor disputes and environmental issues.



--------------

A.11.a. Corruption

--------------



33. Taiwan has implemented laws, regulations, and penalties to

combat corruption. The Corruption Punishment Statute and the

criminal code contain specific penalties for corrupt activities. In

January 2004, legislation doubled the penalties for corruption by

financial personnel, including maximum jail sentences of up to ten

years.



34. We are not aware of cases where bribes have been solicited for

investment approval. Both central and local governments offer

investors incentives, including free rent on land for the first

several years and discounts in subsequent years. Taiwan authorities

encourage foreign investment and would take action against officials

and individuals convicted of profiting illegally from foreign

investors.



35. The Government Procurement Law promulgated in 1998 and amended

in February 2001 was an element of promised significant improvements

upon WTO accession. The Public Construction Commission (PCC) now

publishes all major state procurement projects that require open

bidding, in accordance with WTO transparency requirements. The PCC

organizes inspection teams to monitor all public procurement

projects both at the central and local levels, and publishes results

of bidding and of inspections. A task force has been organized to

investigate complaints.





TAIPEI 00000073 033 OF 037





36. Authorities generally investigate allegations of corruption and

take action to penalize corrupt officials. Since its inauguration

in May 2000, the Chen Administration has strengthened

anti-corruption efforts. Since then, prosecutors have indicted

10,807 persons for corruption, including prominent personalities,

632 senior officials (department director level and above) and 623

elected officials. Indicted elected officials included 21

legislators. In 2006, the Taiwan High Court upheld a district

court's four-year jail sentence for a former speaker of the

legislature on a charge of taking a NT$150 million (US$4.6 million)

bribe. In 2007, prosecutors indicted a serving minister and a vice

minister for receiving bribes, while district courts convicted

another two vice ministers with jail terms of up to 16 years.



37. Attempting to bribe, or accepting a bribe from, Taiwan

officials constitutes a criminal offense, punishable under the

Corruption Punishment Statute and the Criminal Code. The Corruption

Punishment Statute as amended in late 2002 treats payment of a bribe

to a foreign official as a criminal act and makes such a bribe

subject to criminal prosecution. The maximum penalty for corruption

is life imprisonment plus a maximum fine of NT$3 million dollars

(US$92,300). In addition, the offender may be barred from holding

public office. The assets obtained from acts of corruption may be

seized and turned over to either the injured parties or the

Treasury.



--------------

B. Bilateral Investment Agreements

--------------



38. Taiwan has concluded bilateral investment guaranty agreements

with the following 26 countries: Argentina, Belize, Burkina Faso,

Costa Rica, Dominica, El Salvador, Guatemala, Honduras, India,

Indonesia, Liberia, Malaysia, Macedonia, the Marshall Islands,

Nicaragua, Nigeria, Panama, Paraguay, the Philippines, Saudi Arabia,

Senegal, Singapore, Swaziland, Thailand, Malawi, and Vietnam. In

addition, there is an agreement to guaranty Taiwan's investment in

Malawi and other agreements to protect U.S. investment in Taiwan

(see next paragraph). (An agreement with Latvia signed in 1992 was

revoked in August 2004.)



39. The terms of the 1948 Friendship, Commerce, and Navigation

Treaty between the Republic of China and the United States are still

in force, and under the terms of the agreement U.S. investors are

generally accorded national treatment and are provided with a number

of protections, including protection against expropriation. Taiwan

and the United States also have an agreement, signed in 1952,

pertaining to investment guarantees that serve as the basis for the

U.S. Overseas Private Investment Corporation (OPIC) program in

Taiwan. In September 1994, representatives of the United States and

Taiwan signed a bilateral Trade and Investment Framework Agreement

(TIFA) to serve as the basis for consultations on trade and

investment issues. Consultations on a bilateral investment

agreement between the United States and Taiwan began in 1996, and

the latest round took place in Washington in 2007.



-------------- --

C. OPIC and Other Investment-Insurance Programs

-------------- --



40. OPIC programs are available to U.S. investors, though U.S.

investors have never filed an OPIC insurance claim for an investment

in Taiwan. Taiwan is not a member of the Multilateral Investment

Guaranty Agency.





TAIPEI 00000073 034 OF 037





--------------

D. Labor

--------------



41. Unemployment, at just under 4%, has declined since 2002, but is

still above the 1.45% to 2.99% range in the 1990s. Taiwan's aging

population, however, has prompted greater demand for foreign

caregivers. The percentage of the population aged 65 and above has

increased from below 4% in the 1970s to above 10% in late 2007. In

response, the number of foreign caregivers has grown to 160,000 and

accounts for 45% of blue-collar foreign workers in Taiwan. In the

industrial sector, despite relaxation of employment restrictions,

the number of the sector's blue-collar foreign workers declined 13%

from 228,000 in 2000 to 197,770 in November 2007.



42. There are no special hiring practices in Taiwan. Wages

typically include a one-month bonus at the end of a year. Benefits

often include meals, transportation, and dormitory housing.

Dividend-sharing is common among high-tech industries. A standard

labor insurance program is mandatory. The program provides paid

maternity leave, a lump-sum or annuity retirement plan, and other

benefits. A new retirement system implemented in July 2005

abolishes the voluntary retirement scheme under an old system which

still covers 30% of total employment population. The old system

grants employees voluntary retirement at age 55 with 15 years of

service. Employees hired after July 2005 must join the new system,

with a retirement age of 60. The new system requires employers to

contribute six percent of their monthly wage to accounts at

designated banking institutions. The accounts follow employees as

they move from one employer to another. A universal national health

insurance system, to which employers contribute, covers all Taiwan

residents.



43. Taiwan provides unemployment relief based on the Employment

Insurance Law enacted in 2002. Alternatives for unemployment pay

include vocational training allowance for jobless persons and

employment subsidies to encourage employment of jobless persons.

The Labor Standards Law (LSL) sets a standard eight-hour workday and

a biweekly maximum of 84 hours. Legislation adopted in late 2000

set a five-day workweek for the public sector, effective January

2001. Over half of private firms have adopted the five-day

workweek. The LSL restricts child labor and requires employers to

provide overtime pay, severance pay, and retirement benefits. The

LSL covers both manufacturing and service sectors. Violators are

liable to criminal penalties (jail terms) and administrative

punishments (fines).



44. In July 2007, Taiwan raised the minimum monthly wage by 9.1% to

NT$17,280 (US$532) and the minimum hourly wage from NT$66 (US$2) to

NT$95 (US$2.9). Monthly manufacturing sector wages in the first ten

months of 2007 averaged NT$43,704 (US$1,345) including overtime,

allowances and bonuses.



45. Labor unions have become more active and independent since

Taiwan's martial law was lifted in 1987. Privatization and the new

retirement system contributed to an increase in labor disputes over

the past three years. Taiwan is not a member of the International

Labor Organization (ILO) but adheres to the ILO Conventions in

protection of worker's rights.



--------------

E. Foreign Trade Zones/Free Ports

--------------



46. The first free trade/free port zone began operation at Keelung,



TAIPEI 00000073 035 OF 037





Taiwan's northern port, in November 2004. Another four were

established in 2005. These four are located at Taoyuan

International Airport and the international harbors in Kaohsiung,

Taichung, and Taipei. Taiwan authorities have relaxed restrictions

on movement of merchandise, capital and personnel into and out of

such zones. Foreign investors are accorded national treatment.



--------------

F. Foreign Direct Investment Statistics

--------------



47. Statistics on foreign direct investment in Taiwan are available

from two sources. The Investment Commission (IC) publishes monthly

and yearly foreign investment approval statistics by industry and by

country. The Central Bank of the ROC (Taiwan) (CBT) publishes

foreign direct investment arrivals on a quarterly and yearly basis.

CBT data, contained in balance-of-payments (BOP) statistics, are not

further classified by industry or country.



48. In 2006, strong recovery of Taiwan's export sector far offset

adverse effects of delinquent credit/cash card debt problems which

dampened private consumption in the first half of the year. Growth

in exports, which account for over 60% of Taiwan's GDP, accelerated

from 8.8% in 2005 to 13% in 2006, driving Taiwan's 2006 real GDP

growth to nearly 5%, from 4.2% in 2005.



49. Unexpectedly strong economic performance in the second half of

2007 prompted both domestic and foreign forecasters to raise

Taiwan's 2007 real GDP growth estimates to 5.2-5.5%. The official

estimate is 5.46%. Year-on-year export growth increased from 7.6%

in the fourth quarter of 2006 to 14.4% in October-November 2007.

Meanwhile, growth in export orders rose from 9.6% to 17.6%, and

growth in manufacturing production accelerated from 0.5% to a

three-and-a-half-year high of nearly 15%. Most Taiwan forecasters

anticipate that Taiwan's economic growth in 2008 will slow to below

4.5%. They believe that the U.S. sub-prime mortgage problem, as

well as higher international prices for oil and grains, will dampen

world economic performance and reduce demand for products from the

export-oriented economy of Taiwan. In the first eleven months of

2007, approved FDI increased 20% year-on-year to US$14 billion.

Approved FDI was concentrated in banking, trade, electronics, basic

metal, and nonmetallic products. These five categories accounted

for nearly 80% of total approved FDI.



50. Approved direct investment in electronics industries (including

communications, semiconductor, TFT-LCD and other optical electronic

projects) increased from 6.4% of total approved FDI prior to 1995

and 19% in 1996-2000 to 24.5% in 2001-2005 and further to 47% in

2006. Meanwhile, the percentage share for financial services

increased from 7.6% prior to 1995 and 22% in 1996-2000 to 25.6% in

2001-2005 and 34% in 2006. Nearly 80% of the approved inbound

direct investment in Taiwan's electronics industries came from the

United States, Europe and Japan.



51. The United States and Japan used to be the two main sources of

Taiwan's foreign investment, but have been replaced by the tax

havens in the British Territories in America (BTA),which harbor a

growing number of multinational corporations (many with roots in

Taiwan). According to official Taiwan statistics, approvals for

U.S. investment from 1952 to 2006 totaled US$15 billion (US16.1

billion according to official U.S. figures),or 19% of total foreign

investment. Of total U.S. investment, 32% was directed toward the

electronics and electrical industries, and 44% toward the service

sector. Approvals for Japanese investment amounted to US$14

billion, or 18% of total foreign investment, of which 31% was in



TAIPEI 00000073 036 OF 037





electronics and electrical industries and 34% in the service sector.

In 2006, new EU investment exceeded that of the United States or

Japan due to a major holdings transfer by the Philips Company.



52. Approvals for investment from the BTA surged steadily from

US$76 million in 1994 to US$1.2 billion in 1999 when the BTA

surpassed the United States and Japan to become the largest source

of foreign investment in Taiwan. Investment from the BTA during

1999-2005 accounted for 27% of total approved investments, compared

to 18% from the United States, another 18% from Europe, and 15% from

Japan. In 2006, a holdings transfer by the Philips Company drove

down the BTA's share to 16.5%, the United States' share to 19% and

Japan's share to 18%, while Europe's share reached 21.6%. One

quarter of the investment from the BTA was directed towards

financial services and another quarter to the electronic and

electrical industries.



53. As a relatively open and liberal economy, Taiwan receives

foreign investment while its businesses invest overseas, especially

in China, Southeast Asia and the Americas. According to

balance-of-payments statistics compiled by the central bank,

outbound direct investment has exceeded inbound direct investment

every year since 1988. According to IC statistics, by 2006,

cumulative approvals for outbound investments totaled US$103.7

billion. The main recipient of Taiwan investment has been China,

which has received over half of Taiwan's outbound investment.

Approved investments in China increased by 27% in 2006 when 64% of

Taiwan's new overseas investment went to China.



54. Taiwan business firms started to relocate their production

bases to China in the late 1980s. Production lines in China

gradually shifted from cheap labor-oriented industries in the late

1980s to products requiring lower-end technologies, such as PCs and

motherboards, in the early 2000s. The WTO accession of China and

Taiwan in 2002 prompted Taiwanese business firms to accelerate

relocation to China to sharpen their competitive edge in exports.

Taiwan factories based in China use the lower labor and land costs

to process Taiwan-made production inputs into finished goods for

exports to such industrial markets as the United States, Japan and

Europe, and also for final sale in China. Rising labor and land

costs in China have prompted some Taiwan firms to move from China to

nations in South and Southeast Asia, including Vietnam.



56. Taiwan's annual registered direct investment across the Taiwan

Strait grew from US$1.25 billion in 1999 to US$6.0 billion in 2005

and US$7.6 billion in 2006. As a result of this trend Taiwan

factories, primarily those based in China and Vietnam, produced

nearly 50% of export orders received by Taiwan companies'

headquarters by November 2007, up from 11.5% in early 2000, and 2007

ratio reached 85% for information technology (IT) firms. Greater

China (China plus Hong Kong) replaced the United States as Taiwan's

largest export market in 2001, and Greater China's share of Taiwan's

exports in the first 11 months of 2007 reached 41%, much higher than

the 13% for the United States and 11% for the European Union.



Table 1

Foreign Investment Approvals by Year and by Area

(1952-2006) (unit: US$ million)



Central Hong

Year U.S.A. Japan America Europe Kong Other Total

-------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------

52-89 3,067 2,983 341 1,312 1,198 2,049 10,950

1990 581 839 66 283 236 297 2,302

1991 612 535 60 165 129 277 1,778



TAIPEI 00000073 037 OF 037





1992 220 421 37 165 213 405 1,461

1993 235 278 38 214 169 279 1,213