1. 1 Free Trade Zones in Taiwan Ministry of Transportation and Communications, Taiwan, R.O.C. 2011

2. 2 I. The Planning of FTZs II. The Special Features of the System III. Introduction to Each FTZ IV. Operating Models for FTZ Enterprises Contents

3. 3 The Planning of FTZs The meaning and status of FTZs Special zones that are inside national territory but outside customs: Creating an excellent environment for transnational business operations by lowering barriers to the flow of goods, commerce and people. The creation of special zones for logistics, transshipment, and value adding: Combining the functions of seaports and airports with meeting all the needs for supply-chain management, to strengthen users competitive advantage. Special zones as trial points for comprehensive trade liberalization: Placing stress on autonomous enterprise management, while expanding liberalization across the plane through point and line trial implementation. Ships or airplanes arriving at seaports or airports Simple-processing, storage, & transshipment operations zone Flow of goods at import/export points Tax Area, Bonded Zone Multi-stage value-added operations zone Business services center Flow of people at entry/exit points FTZs

4. 4 Convenient business entry (Convenient entry visa for business people, with facilities provided for exhibition and trade activities) Practical organizational form (Can set up in a zone as a branch, office, operations department, etc.) Tax preferences (Goods,machines and equipment for operation and private use are exempted from relevant taxes and fees. Goods purchased domestically are free from business tax. Foreign for-profit businesses storing and/or performing simple processing are exempted from business income tax.) Relaxation of foreign- worker hiring ratio (Foreign workers may constitute up to 40% of employees) Diversified operational scope (Can carry out rearrangement, processing, fabrication, etc.) FTZs The Special Features of the System Free flow of goods (Exempt from customs checking, inspection, and escort; adoption of reporting or monthly reporting system) Single-window administrative service (Each FTZ has a single administrative service and management authority) Special coordinating mechanism (An FTZ Cross-Departmental Working Group is specially charged with deliberating on related policy and coordinating inter-zonal affairs) Service side Cost side Efficiency side Functional side Source: Compiled by CEPD,MOTC.

5. 5 The Special Features of the System Efficiency Side Other FTZs Bonded zones Processing zones Science parks Tax areas Reporting Customs clearance under bonding regulations Customs clearance under export/import regulations Guard Reporting FTZ Enterprise Reporting 1. No customs clearance, and no document checks as a rule. 2. Simple entrepot consignment operations handled under provisions of Customs Act. 3. No limitation on storage time. 5. Can opt for monthly reporting, with inter-zonal customs reporting of FTZ goods. 6. Can opt for monthly customs reporting and clearance. 7. Can opt for monthly customs reporting and clearance. 4. Can opt for monthly reporting. FTZ Logistics

6. 6 Cost side 1: Tax preferences Tax areas Other FTZs Bonded zones FTZ enterprise FTZ enterprise Subject to bonded cargo regulations. Zero-rated business tax. Subject to export cargo regulations. Subject to import cargo taxation. Exempt from payment of tax 1. Goods and equipment imported are exempt from related taxes and fees. 6. Taxed on value on leaving FTZ minus value added in the FTZ. 7. Shipped back to FTZ after processing outsourced outside zone. 8. Exempt from trade promotion service charges unless shipped to tax area. 3. Zero-rated business tax for domestic procurement. 4. Zero-rated business tax for goods stored in FTZ for export by sales from bonded area to exporting company or from tax area to bonded area. 5. Zero-rated business tax for operator outside FTZ transporting goods to zone under instructions of foreign customer and obtaining foreign exchange. 2. Zero-rated business tax on sale of services within FTZ. The Special Features of the System Cost Side (1/2) FTZ Exempt from payment of tax

7. 7 Cost side 2: Tax preferences Preferential measures for business income tax: Foreign for-profit businesses or their branch companies in Taiwan that apply for establishment or delegate free-trade-zone enterprises to store and/or perform simple processing in FTZs and sell the products in and out of Taiwan shall be exempted from business income tax. In the event that the annual domestic sales exceed 10% of the total of annual domestic and foreign sales, the exceeded portion shall not be exempted from business income tax. Overseas customer FTZ enterprise Owner of foreign goods 100% of the total sales exempted from tax Commissioning to store & simple processing The Special Features of the System Cost Side (2/2) Domestic Customer 10% of the total sales exempted from tax

8. 8 The Special Features of the System Functional Side Tax areas / bonded zones Guard FTZ Enterprise FTZ Enterprise 1. May import and store unopened goods from China. 2. Allowing FTZ enterprises to conduct a diverse range of business, including trade, logistics, transshipment, value- adding, and technical services. FTZ Enterprise FTZ Enterprise 3.The entity applying for establishment as an FTZ enterprise is a company or the Taiwan branch of a foreign company, while the operating entity can be an office or other operating unit. FTZ Applying entity 5. Permitted imports from China may be shipped to tax zones 4. May be labeled as Assembled in Taiwan after rearrangement that does not amount to substantive transformation.

9. 9 The Special Features of the System Service Side (1/2) 1.Policy review of FTZ development 2.Reviewing on the case of FTZ application and establishment 3.Coordination of cross- department affaires convener Political Deputy Minister of MOTC Vice-convener Director of Department of Aviation and Navigation Staff Members vice-chiefs of bureau,department and office from MOF and MOEA 1.Execution of FTZ affaires 2.Single-window administration services FTZ enterprises FTZ Cross- Ministries committee,MOTC FTZ Working Group Convener Vice-Chief of administration Staff:harbor bureau(CAA) Staff members: National Immigration Agency, Customs, Harbor Police( air police),Fire Control, Local Government and other relevant ministries and commissions 1.Coordination of FTZ issues 2.reviewing on cases of FTZ business application and establishment 3.reviewing on the certificate letter of owner of foreign goods FTZ Administrative Authorities (CAA HB)

10. 10 The Special Features of the System Service Side (2/2) Application by business to operate in FTZ Eligibility Undertaking of trading, warehousing, logistics, container (cargo) terminal, entrepot, transshipment, freight forwarding, customs reporting service, assembling, rearrangement, packing, repair, processing, manufacturing, inspection, testing,exhibition, technical services, or FTZ storage businesses. Documentation required 1. Application form. 2. Business plan (including financial plan). 3. Goods control plan. 4. Explanation of customs reporting and book keeping. 5. Investors identification documents. Application Qualified Operation Approval After 6 months in operation, check whether operating in accordance with submitted documentation. Review by FTZmanagementauthority jointlywith Handled and assisted by specially assigned personnel Customs and otherrelated agencies

11. 11 FTZs and Industrial Zones Hsinchu Science Park Electronics and information Software Opto-electronics (photonics) Kaohsiung Petrochemicals Steel Electronics Yunlin Science Park Textiles Opto-electronics (photonics) Nangang Software Park Software Knowledge-based industries Southern Taiwan Science Park Opto-electronics (photonics) Machinery Food Biotechnology Environmental protection Central Taiwan Science Park Opto-electronics (photonics) Precision machinery Nano materials Aviation and space industry Keelung Port FTZ Taipei Port FTZ Taichung Port FTZ Taoyuan Air Cargo Park FTZ Kaohsiung Port FTZ Source: Compiled by CEPD,MOTC Introduction to Each FTZ Suao Port FTZ Opto-electronics (solar energy) Chemical Engineering, ironware machinery Computer peripherals Lize & Londe Industrial Park

12. 12 Suitable Operating Models for FTZ Taiwans FTZ can develop variable operating models such as transit, exhibition, international logistics distribution, testing/maintenance/repairing, Multi-countries Value-added Consolidation, branding & research, etc. Operating Models & Position of FTZ Niche Aspect Feasible Operating Models Transit/Transshipm ent Services International Logistics Distribution Testing /Maintenanc e /Repairing Services Multi-countries Value- added Consolidation Branding/Research Transshipment Center Distribution Center Testing Center Value-Adding Service Center R&D Center Key Position Value-Added Transit Commercial Exhibition Procurement Center Regional Division Headquarter Regional Headquarter

13. 13 Benefits 1.Related tax preferences customs, operating tax, good tax 2.Linking up with the supply chain of Taiwans vehicle industry, assisting subcontractors to expand international market, establishing the cooperation model of parts production, uplifting the quality and contingent value 3.Cutting down the cost to make whole industry more competitive and attract foreign headquarters to place orders Developed Operating Models (1/6) Multi-countries Value-added Consolidation Out-contracted cars assembly Overseas FTZ (Associated Companies) Tax areas/ bonded zones Foreign Parts delegated business Finished cars stored Export Cars assembling Warehousing Logistics Distribution Assembled to semi-product Subcontractors Out-contracted processing Semi-products transported to delegated business for out-contracted processing

14. 14 Multi-countries Value-added Consolidation Oil drilling platform assembled & exported through out-contracted processing Benefits Tax-free for high-price imported parts leads to cost-down Developed Operating Models (2/6) FTZ Foreign Parts entered & stored at FTZ warehouse Out-contracted processing Semi-products are sent back to Kaohsiung Harbor for processing Process & export Kaohsiung Harbor Tax areas Overseas Warehousing Export Factory in Tax area Out-contracted processing

15. 15 International Logistic Distribution Packaging & distribution of cosmetics and health food Benefits 1.Shorten clearing time(F1 & F5 are excluded from review & check/ shortest average distance to market 2.Tax preferences(Owners of foreign goods are exempted from business income tax) Developed Operating Models (3/6) overseas FTZ Packaging, labeling & exporting Foreign Goods Tax/Bonded areas Bottles are sent to FTZ for packaging Goods exported

16. 16 Testing/Maintenance/Repairing Services Semiconductor after-sale services & Asian maintenance center Benefits 1.Leveraging FTZs tax preferences and high efficiency to make Taiwan able to rival with Singapore & become a logistic center of Semiconductor parts/equipment in the Asian region 2.Great advantage to the processing technology, production volume & outsourcing opportunity of parts for Taiwans semiconductor industry Developed Operating Models (4/6) FTZ Asian Maintenance / Repairing center Inventory management of spare parts Domestic Tax/Bonded Areas or Foreign business simple maintenance Spare parts new & spare parts entered & stored Semiconductor equipment sold Non-simple maintenance case: parts replaced by new ones,then returned to customer high-price parts are sent back for repairing & returned Overseas headquarters

17. 17 International Logistics Distribution-Fuel Oil Distribution FTZ Warehousing, Inventory Management,Logistics Distribution Foreign Domestic (Refueling Ship) Niches 1. Due to large amount of stored-transit fuel oil, relevant tax preferences can alleviate pressure from cost of interest 2. Without entering into tax area, reporting can be adopted to proceed fast clearance, avoiding the import restriction of oil, thus the refueling and store/transit/re-export can be done just in time. Fuel oil shipped to FTZ (Foreign Ship) Developed Operating Models(5/6)

18. 18 Developed Operating Models(6/6) Testing/Maintenance/Repairing-Repairing of Electrical Forklift Foreign Customers FTZ 1.Maintenance & repairing of Electrical Forklift,Electrical motor(including replacing of battery module) 2.Assembly of battery module Tax/Bonded Area Products to be repaired To customer Battery/Parts Foreign Parts Vendors Foreign Parts Processing of reusable battery Non-usable battery

19. 19 Invest in Taiwan, operate globally ! End