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Cablegate: Taiwan's 2008 Investment Climate Statement

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RR RUEHGH
DE RUEHIN #0079/01 0162344
ZNR UUUUU ZZH
R 162344Z JAN 08 ZFR
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 7895
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RUEHHK/AMCONSUL HONG KONG 8979
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SUBJECT: Taiwan's 2008 Investment Climate Statement

REF: State 158802

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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

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


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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

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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

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

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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.

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


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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.

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

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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%

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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

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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 00000079 013 OF 024

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,

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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

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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.

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

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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

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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

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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

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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.

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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 00000079 021 OF 024


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 00000079 022 OF 024


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 00000079 023 OF 024


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 00000079 024 OF 024


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

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