Blockchain and General Data Protection Regulation (GDPR) compliance issues (2019)

Blockchain and General Data Protection Regulation (GDPR) compliance issues (2019)

I. Brief

  Blockchain technology can solve the problem of trust between data demanders and data providers. In other words, in a centralized mode, data demanders can only choose to believe that the centralized platform will not contain the false information. However, in the decentralized mode, data demanders can directly verify information such as data source, time, and authorization on the blockchain without worrying about the correctness and authenticity of the data.

  Take the “immutable” for example, it is conflict with the right to erase (also known as the right to be forgotten) in the GDPR.With encryption and one-time pad (OTP) technology, data subjects can make data off-chain storaged or modified at any time in a decentralized platform, so the problem that data on blockchain not meet the GDPR regulation has gradually faded away.

II. What is GDPR?

  The purpose of the EU GDPR is to protect user’s data and to prevent large-scale online platforms or large enterprises from collecting or using user’s data without their permission. Violators will be punished by the EU with up to 20 million Euros (equal to 700 million NT dollars) or 4% of the worldwide annual revenue of the prior financial year.

  The aim is to promote free movement of personal data within the European Union, while maintaining adequate level of data protection. It is a technology-neutral law, any type of technology which is for processing personal data is applicable.

  So problem about whether the data on blockchain fits GDPR regulation has raise. Since the blockchain is decentralized, one of the original design goals is to avoid a large amount of centralized data being abused.

  Blockchain can be divided into permissioned blockchains and permissionless blockchains. The former can also be called “private chains” or “alliance chains” or “enterprise chains”, that means no one can join the blockchain without consent. The latter can also be called “public chains”, which means that anyone can participate on chain without obtaining consent.

  Sometimes, private chain is not completely decentralized. The demand for the use of blockchain has developed a hybrid of two types of blockchain, called “alliance chain”, which not only maintains the privacy of the private chain, but also maintains the characteristics of public chains. The information on the alliance chain will be open and transparent, and it is in conflict with the application of GDPR.

III. How to GDPR apply to blockchain ?

  First, it should be determined whether the data on the blockchain is personal data protected by GDPR. Second, what is the relationship and respective responsibilities of the data subject, data controller, and data processor? Finally, we discuss the common technical characteristics of blockchain and how it is applicable to GDPR.

1. Data on the blockchain is personal data protected by GDPR?

  First of all, starting from the technical characteristics of the blockchain, blockchain technology is commonly decentralized, anonymous, immutable, trackable and encrypted. The other five major characteristics are immutability, authenticity, transparency, uniqueness, and collective consensus.

  Further, the blockchain is an open, decentralized ledger technology that can effectively verify and permanently store transactions between two parties, and can be proved.

  It is a distributed database, all users on the chain can access to the database and the history record, also can directly verify transaction records. Each nodes use peer-to-peer transmission for upload or transfer information without third-party intermediation, which is the unique “decentralization” feature of the blockchain.

  In addition, the node or any user on the chain has a unique and identifiable set of more than 30 alphanumeric addresses, but the user may choose to be anonymous or provide identification, which is also a feature of transparency with pseudonymity[1]; Data on blockchain is irreversibility of records. Once the transaction is recorded and updated on the chain, it is difficult to change and is permanently stored in the database, that is to say, it has the characteristics of “tamper-resistance”[2].

  According to Article 4 (1) of the GDPR, “personal data” means any information relating to an identified or identifiable natural person (‘data subject’); an identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identifier such as a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person.

  Therefore, if data subject cannot be identified by the personal data on the blockchain, that is an anonymous data, excluding the application of GDPR.

(1) What is Anonymization?

  According to Opinion 05/2014 on Anonymization Techniques by Article 29 Data Protection Working Party of the European Union, “anonymization” is a technique applied to personal data in order to achieve irreversible de-identification[3].

  And it also said the “Hash function” of blockchain is a pseudonymization technology, the personal data is possible to be re-identified. Therefore it’s not an “anonymization”, the data on the blockchain may still be the personal data stipulated by the GDPR.

  As the blockchain evolves, it will be possible to develop technologies that are not regulated by GDPR, such as part of the encryption process, which will be able to pass the court or European data protection authorities requirement of anonymization. There are also many compliance solutions which use technical in the industry, such as avoiding transaction data stored directly on the chain.

2. International data transmission

  Furthermore, in accordance with Article 3 of the GDPR, “This Regulation applies to the processing of personal data in the context of the activities of an establishment of a controller or a processor in the Union, regardless of whether the processing takes place in the Union or not. This Regulation applies to the processing of personal data of data subjects who are in the Union by a controller or processor not established in the Union, where the processing activities are related to: (a) the offering of goods or services, irrespective of whether a payment of the data subject is required, to such data subjects in the Union; or (b) the monitoring of their behaviour as far as their behaviour takes place within the Union”.[4]

  In other words, GDPR applies only when the data on the blockchain is not anonymized, and involves the processing of personal data of EU citizens.

3. Identification of data controllers and data processors

  Therefore, if the encryption technology involves the public storage of EU citizens' personal data and passes it to a third-party controller, it may be identified as the “data controller” under Article 4 of GDPR, and all nodes and miners of the platform may be deemed as the “co-controller” of the data, and be assumed joint responsibility with the data controller by GDPR. For example, the parties can claim the right to delete data from the data controller.

  In addition, a blockchain operator may be identified as a “processor”, for example, Backend as a Service (BaaS) products, the third parties provide network infrastructure for users, and let users manage and store personal data. Such Cloud Services Companies provide online services on behalf of customers, do not act as “data controllers”. Some commentators believe that in the case of private chains or alliance chains, such as land records transmission, inter-bank customer information sharing, etc., compared to public chain applications: such as cryptocurrencies (Bitcoin for example), is not completely decentralized, and more likely to meet GDPR requirements[5]. For example, in the case of a private chain or alliance chain, it is a closed platform, which contains only a small number of trusted nodes, is more effective in complying with the GDPR rules.

4. Data subject claims

  In accordance with Article 17 of the GDPR, The data subject shall have the right to obtain from the controller the erasure of personal data concerning him or her without undue delay and the controller shall have the obligation to erase personal data without undue delay under some grounds.

  Off-chain storage technology can help the blockchain industry comply with GDPR rules, allowing offline storage of personal data, or allow trusted nodes to delete the private key of encrypted information, which leaving data that cannot be read and identified on the chain. If the data is in accordance with the definition of anonymization by GDPR, there is no room for GDPR to be applied.

IV. Conclusion

  In summary, it’s seem that the application of blockchain to GDPR may include: (a) being difficulty to identified the data controllers and data processors after the data subject upload their data. (b) the nature of decentralized storage is transnational storage, and Whether the country where the node is located, is meets the “adequacy decision” of Article 45 of the GDPR.

  If it cannot be met, then it needs to consider whether it conforms to the transfers subject to appropriate safeguards of Article 46, or the derogations for specific situations of Article 49 of the GDPR.

 

Reference:

[1] DONNA K. HAMMAKER, HEALTH RECORDS AND THE LAW 392 (5TH ED. 2018).

[2] Iansiti, Marco, and Karim R. Lakhani, The Truth about Blockchain, Harvard Business Review 95, no. 1 (January-February 2017): 118-125, available at https://hbr.org/2017/01/the-truth-about-blockchain

[3] Article 29 Data Protection Working Party, Opinion 05/2014 on Anonymisation Techniques (2014), https://www.pdpjournals.com/docs/88197.pdf

[4] Directive 95/46/EC (General Data Protection Regulation), https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32016R0679&from=EN

[5] Queen Mary University of London, Are blockchains compatible with data privacy law? https://www.qmul.ac.uk/media/news/2018/hss/are-blockchains-compatible-with-data-privacy-law.html

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(3)Facilitating transfer of knowledge and technology between the academic sector and industrial sector   KTT Support (Knowledge & Technology Transfer (KTT Support) is identified as another policy instrument dedicated to boosting innovation by the CTI. It is intended to facilitate the exchange of knowledge and technology between academic research institutions and private enterprises, in order to transfer and expand the innovation energy.   As of 2013, the CTI has launched a brand new KTT Support project targeting at small-sized and medium-sized enterprises. The new KTT Support project consisted of three factors, including National Thematic Networks (NTNs), Innovation Mentors, and Physical and web-based platforms. Upon the CTI’s strict evaluation and consideration, a total of 8 cooperative innovation subjects were identified in 2012, namely, carbon fiber composite materials, design idea innovation, surface innovation, food study, Swiss biotechnology, wood innovation, photonics and logistics network, etc.[15] One NTN would be established per subject. The CTI would fund these NTNs to support the establishment of liaison channels and cooperative relations between academic research institutions and industries and provide small- and medium-sized enterprises in Switzerland with more rapid and easy channel to access technologies to promote the exchange of knowledge and technology between both parties. Innovation Mentors were professionals retained by the CTI, primarily responsible for evaluating the small-sized and medium-sized enterprises’ need and chance for innovation R&D and helping the enterprises solicit competent academic research partners to engage in the transfer of technology. The third factor of KTT Support, Physical and web-based platforms, is intended to help academic research institutions and private enterprises establish physical liaison channels through organization of activities and installation of network communication platforms, to enable the information about knowledge and technology transfer to be more transparent and communicable widely.   In conclusion, the CTI has been dedicated to enhancing the link between scientific research and the industries and urging the industrial sector to involve and boost the R&D projects with market potential. The CTI’s business lines are all equipped with corresponding policy instruments to achieve the industrial-academic cooperation target and mitigate the gap between the industry and academic sectors in the innovation chain. The various CTI policy instruments may be applied in the following manner as identified in the following figure. Data source: CTI Annual Report 2011 Fig. 5  Application of CTI Policy Instrument to Innovation Chain III. Swiss Technology R&D Budget Management and Allocation   The Swiss Federal Government has invested considerable expenditures in technology R&D. According to statistic data provided by Swiss Federal Statistical Office (FSO) and OECD, the Swiss research expenditures accounted for 2.37% of the Federal Government’s total expenditures, following the U.S.A. and South Korea (see Fig. 6). Meanwhile, the research expenditures of the Swiss Government grew from CHF2.777 billion in 2000 to CHF4.639 billion in 2010, an average yearly growth rate of 5.9% (see Fig. 7). It is clear that Switzerland highly values its technology R&D. Data source: FSO and OECD Fig. 6 Percentage of Research Expenditures in Various Country Governments’ Total Expenditures (2008) Data source: FSO and OECD Fig. 7  Swiss Government Research Expenditures 2000-2010 1.Management of Swiss Technology R&D Budget   Swiss research expenditures are primarily allocated to the education, R&D and innovation areas, and play an important role in the Swiss innovation system. Therefore, a large part of the Swiss research expenditures are allocated to institutions of higher education, including ETH, universities, and UASs. The Swiss research expenditures are utilized by three hierarchies[16] (see Fig. 8): Government R&D funding agencies: The Swiss research budget is primarily executed by three agencies, including SERI, Federal Department of Economic Affairs, Education and Research, and Swiss Agency for Development and Cooperation (SDC). Intermediary R&D funding agencies: Including SNSC and CTI. Funding of R&D performing institutions: Including private enterprises, institutions of higher education and private non-profit-making business, et al.   Therefore, the Swiss Government research expenditures may be utilized by the Federal Government directly, or assigned to intermediary agencies, which will allocate the same to the R&D performing institutions. SERI will allocate the research expenditures to institutions of higher education and also hand a lot of the expenditures over to SNSF for consolidated funding to the basic science of R&D. Data source: FSO Fig. 8  Swiss Research Fund Utilization Mechanism ~to be continued~ [1] ORGANIZATION FOR ECONNOMIC CO-OPERATION AND DEVELOPMENT [OECD], OECD Reviews of Innovation Policy: Switzerland 27 (2006). [2] As of January 1, 2013, the Federal Ministry of Economic Affairs was reorganized, and renamed into Federal Department of Economic Affairs, Education and Research (EAER). [3] The Commission for Technology and Innovation CTI, THE COMMISSION FOR TECHOLOGY AND INNOVATION CTI, http://www.kti.admin.ch/org/00079/index.html?lang=en (last visited Jun. 3, 2013). [4] Id. [5] CTI INVEST, Swiss Venture Guide 2012 (2012), at 44, http://www.cti-invest.ch/getattachment/7f901c03-0fe6-43b5-be47-6d05b6b84133/Full-Version.aspx (last visited Jun. 4, 2013). [6] CTI, CTI Activity Report 2012 14 (2013), available at http://www.kti.admin.ch/dokumentation/00077/index.html?lang=en&download=NHzLpZeg7t,lnp6I0NTU042l2Z6ln1ad1IZn4Z2qZpnO2Yuq2Z6gpJCDen16fmym162epYbg2c_JjKbNoKSn6A-- (last visited Jun. 3, 2013). [7] CTI Voucher, THE COMMISSION FOR TECHOLOGY AND INNOVATION CTI, http://www.kti.admin.ch/projektfoerderung/00025/00135/index.html?lang=en (last visited Jun. 3, 2013). [8] Id. [9] CTI, CTI Activity Report 2011 20 (2012), available at http://www.kti.admin.ch/dokumentation/00077/index.html?lang=en&download=NHzLpZeg7t,lnp6I0NTU042l2Z6ln1ad1IZn4Z2qZpnO2Yuq2Z6gpJCDeYR,gWym162epYbg2c_JjKbNoKSn6A--(last visited Jun. 3, 2013). [10] CTI Start-up Brings Science to Market, THE COMMISSION FOR TECHOLOGY AND INNOVATION CTI, http://www.ctistartup.ch/en/about/cti-start-/cti-start-up/ (last visited Jun. 5, 2013). [11] Id. [12] Supra note 8, at 45. [13] Id. [14] CTI Invest, http://www.cti-invest.ch/About/CTI-Invest.aspx (last visited Jun. 5, 2013). [15] KTT Support, CTI, http://www.kti.admin.ch/netzwerke/index.html?lang=en (last visited Jun.5, 2013). [16] Swiss Federal Statistics Office (SFO), Public Funding of Research in Switzerland 2000–2010 (2012), available at http://www.bfs.admin.ch/bfs/portal/en/index/themen/04/22/publ.Document.163273.pdf (last visited Jun. 20, 2013).

The Study of Estonian Human Genes Database

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Tax Incentives to Promote Investments (I) Tax deductions for R&D expenditures   Governments around the world seek to encourage corporate R&D activities, that Tax incentives are put in place to reduce R&D costs and foster a healthy environment of investment for more R&D initiatives. Neighboring countries such as Japan, Korea and Singapore are frequently practicing belowing tax burdens to encourage R&D efforts. Article 35 of the Act for Development of Small and Medium Enterprises in Taiwan allows accelerated depreciation and offers tax cuts[2] to stimulate R&D and innovations and create an investment friendly environment for SMEs. 1. Taxpaying Entities and Requirements (1) Qualifications for SMEs   Article 35 of the Act is applicable to qualified SMEs and individual taxpayers, which are (1) from manufacturing, construction & engineering, mining and quarrying industries, with paid-in capital below or equal to NT$80 million or with the number of full-time employees less than 200 people; (2) from other industries with the sales of the previous year below or equal to NT$100 million or with the number of full-time employees less than 100 people. Thus, the qualifications of Small and Medium Enterprises are based on either paid-in capital/sales or number of employees under the Act[3].Meanwhile, SMEs may not have an independent R&D department due to the limit of size or operating cost.Therefore, if the taxpayers hiring full-time R&D personnel that can provide records of job descriptions and work logs to R&D activities, the SMEs can access the tax incentives provided that the R&D functions. The recognized by government agencies is increasingly flexibility for SMEs seeking policy support. 2. Taxpayers and requirements (1) A certain degree of innovativeness   As the tax incentive regime strives to promote innovations, the R&D expenses should be used to fund innovative developments. According to the official letters from the Small and Medium Enterprise Administration, Ministry of Economic Affairs, there is no high bar as forward-looking, risky and innovative as usually” required for other incentives previously, which is considering the size of SMEs and their industry characteristics. The “certain degree” of innovativeness shall be based on industry environments and SME businesses as determined by competent authorities in a flexible manner. (2) Flexibility in the utilization of business income tax reductions   To encourage regular R&D activities, The case that SMEs may not have R&D undertakings each year due to funding constraints, or start-up company may have incurred R&D expenditures but are not yet profitable and hence have no tax liabilities during the year, Corporate taxpayers were able to choose beside deduct the payable taxes during a single year, and reduce the payable taxes during the current year over three years starting from the year when tax incentives are applicable. 3. Tax incentive effects   As previously mentioned, Article 35 of the Act for Development of Small and Medium Enterprises accommodates the characteristics of SMEs by allowing reductions of corporate business taxes for up to 15% R&D expenditures during the current year, or spreading the tax reductions by spreading up to 10% of the R&D expenditures over three years from the first year when the incentives are applicable. It is worth noting that the tax deductions shall not exceed 30% of the payable business income taxes during a single year.   If the instruments and equipment for R&D, experiments or quality inspections have a lifetime over two years or longer, it is possible to accelerate the depreciation within half of the years of service prescribed by the income tax codes for fixed assets. However, the final year less than 12 months over the shortened service years shall not be counted. Accelerated depreciation brings in tax benefits for fixed asset investments during the initial stage, that meets the requirements for new technologies and risk management by frontloading the equipment depreciation and creates a buffer for capital utilization. (II) Deferred taxations on licensing/capitalization of intellectual properties   The deferral of tax payments under the Act for Development of Small and Medium Enterprises is meant to avoid any adverse effect on the application of technological R&Ds by SMEs. As the equity stakes via capitalization of intellectual properties by inventors or creators are not cashed out yet and the subsequent gains may not be at the same valuation as determined at the time of capitalization, the immediate taxation may hinder the willingness to transfer intellectual properties. Therefore, assisting SMEs to release intellectual properties with potential economic value, the licensing and capitalization of intellectual properties is strongly encouraged. The tax expenses shall be deferred within SME or an individual acquires stakes on a non-publicly-listed company by transferring their intellectual properties.   This is to stimulate the applications and sharing of relevant manufacturing technologies. When an SME or an individual acquires stakes on a non-publicly-listed company by transferring their intellectual properties, their tax expenses shall be deferred. 1. Taxpayers and requirements (1) Qualifications for individuals or SMEs   Article 35-1 of the Act for Development of Small and Medium Enterprises is applicable to SMEs and individual taxpayers. This is to foster the growth of SMEs and enhancement of industry competitiveness by encouraging R&D and innovations from individuals and start-ups. To promote the commercialize of intellectual properties in different ways, the Act for Development of Small and Medium Enterprises provides income tax incentives to individuals and SMEs transferring intellectual properties. The purpose is to encourage different paths to industry upgrades. (2) Ownership of intellectual properties   To ensure that the proceeds of intellectual property is linked to the activity of intellectual properties which perform by individuals or SMEs. Only the owners of the intellectual properties capitalized and transferred can enjoy the tax benefits.   Intellectual properties referred to in the Act for Development of Small and Medium Enterprises are the properties with value created with human activities and hence conferred with legal rights. These include but are not limited to copyrights, patent rights, trademarks, trade secrets, integrated circuit layouts, plant variety rights and any other intellectual properties protected by laws[4]. (3) Acquisition of stock options   The abovementioned tax incentives are offered to the individuals or SMEs who transfer intellectual properties to non-listed companies in exchange of their new shares. The income taxes on the owners of intellectual properties are deferred until acquisition of shares. These shares are not registered with the book-entry system yet. Before the transferrers of intellectual properties dispose or offload these shares, immediate taxations will impose economic burdens and funding challenges given the unknown prices of the eventual cash-out. Therefore, this legislation is only applicable to taxpayers who obtain options for new shares. 2. Taxpayers and requirements (1) Transfer of intellectual properties   According to Article 36 of the Copyright Act as interpreted by official letters issued by the Ministry of Finance, the transfer of intellectual properties is the conferring of intellectual properties to others, and the transferees access these intellectual properties within the scope of the transfer. In terms “transfer” of the first and second paragraphs of Article 36 does not include licensing[5], but such as granting, licensing and inheritance. (2) Timing of income tax payments   In general, the particular time that calculation of taxes payable is based on when the taxpayers acquire the incomes, less relevant expenses or costs. The taxes payable timing should be depending on when the taxpayers obtain the newly issued shares by transferring intellectual properties. However, the levy of income taxes at the time of intellectual property transfers and new share acquisitions may cause a sudden jump in taxes payable in the progressive system and thus a burden on the economics of SMEs and individuals concerned. Thus, to avoid disruptions to company operations or personal finance planning, Article 36 makes the exception for the incomes earned by subscribing to new shares as a result of transferring intellectual properties. Such incomes are not subject to taxes during the year when the shares are acquired, in order to mitigate the tax barriers concerned.   In sum, the taxes shall be paid when such shares are transferred, gifted or distributed. 3. Tax incentive effects   Article 35-1 of the Act for Development of Small and Medium Enterprises provides tax incentives to stimulate the mobilization of intellectual properties by smoothing out the impact of income taxes payable. This is applicable to (1) SMEs who can postpone the business income taxes payable from the year when they acquire new shares of non-listed companies by transferring the intellectual properties they own; (2) individuals who can postpone the individual income taxes payable from the year when they acquire new shares of non-listed companies by transferring the intellectual properties they own. IV. Tax incentives aiming to improve the business environment (I) Tax reductions for wages to additional headcounts   SMEs are vital to the Taiwan, making uo 90% of the companies accounting in Taiwan, who employ more than 6.5 million people or 72.8% of the total workforce. Any economic recession may make it difficult for SMEs to maintain their labor costs given their smaller funding size and external challenges. This will cause higher unemployment rates and hurt the economy, which may cause impairment of the capacity or create a labor gap for SMEs, eventually shrink the industry scale. To lower the burden of operational and investment costs and learn from the legislatives in Japan and the U.S.[6], tax incentives are put in place as a buffer for adverse effects of external environments. The first paragraph of Article 36-2 of the Act for Development of Small and Medium Enterprises provide tax incentives for employee salaries of new headcounts based on the assessment on the economy over a time period. This is intended to encourage domestic investments and avoid the pitfall of direct government subsidies distorting salary structures. It is hoped that investments from SMEs can stimulate the momentum of economic growth. 1. Taxpayers   The tax incentives under Article 36-2 of the Act for Development of Small and Medium Enterprises aim to assist SMEs through difficult times in an economic downturn. The threshold of the period time is based on the unemployment rate has been below the economic indicator predetermined for six consecutive months, which calculated by the Directorate General of Budget, Accounting and Statistics, Executive Yuan. In number of the unemployment rate has been below the economic indicator predetermined for six consecutive months, it is deemed that the business environment is not friendly to SMEs. In this instance, the Regulations for the Tax Preferences Provided to Small and Medium-sized Enterprises on Additional Wage Payment will trigger the tax incentives. The abovementioned economic indicator shall be published by the competent authorities once every two years.   Moreover, to qualify for the tax incentives for new employees, SMEs should investing new ventures or instill new capital by at least $500,000[7] or hiring workforce at least two full-time headcounts compared with the previous fiscal year, that constitute at the Article 36-2 of the Act for Development of Small and Medium Enterprises, which aims to encourage SMEs investments. 2. Taxpayers (1) Qualifications of additional headcounts   As the dispatched human resource services typically meet temporary or short-term requirements and contractors do not enjoy employment security, this is not consistent with the spirit of the legislation to create jobs and reduce unemployment. Therefore, to avoid the one-time increase of headcounts from accessing the tax reductions during the year and the deterioration of labor relations in Taiwan. Tax incentive is not offered to the additional recruitment of part-time or contracted workers.   Meanwhile, the tax incentives are only applicable to the additional employment of Taiwanese nationals, above or below 24 years old. A tax deduction of 50% based on annual wages is provided for the hiring of people below 24 years old. The extra tax deduction will stimulate young employment. (2) Definition of additional employment   The number of additional headcounts is based on permanent hires and calculated as the difference between the average number of Taiwanese employees covered by labor insurance per month throughout a single fiscal year or before and after the incremental increase of workforce. The conversion of regular contracts to indefinite employment in writing or signing up for indefinite R&D headcounts under the military service scheme can also be deemed as additional employment. It is worth noting, however, the new headcounts resulted from M&A activities or transfer between affiliated companies are excluded in this legislation. (3) Calculation of wages   Companies are also required to increase employment as well as the Comparable Wages. The comparable wages are estimated with the summation of 30% of the wages for the year before and after additional employment that based on the aggregate of the new hires comparable wages compared to the prior year. In other words, if the aggregate wages paid out are higher than comparable wages during the year, the companies concerned have indeed incurred higher personnel expenses. Tax incentives are thus granted because it improves the business environment and it is the purpose of this legislation. 3. Tax incentive effects   The first paragraph of Article 36-2 of the Act for Development of Small and Medium Enterprises provides deductions of business income taxes during the year to qualified SMEs at an amount equivalent to 130% of the incremental wages paid to new headcounts who are Taiwanese nationals. The deductible amount is equivalent to 150% of the incremental wages if new headcounts are Taiwanese nationals below 24 years old. (II) Tax incentives for companies that increase salaries   Companies are subject to the effect of changes in the external factors such as global supply and demand on the international market, as well as the domestic business environment as a result of risk aversion from investors and expectation from customers. These uncertainties associated with investments and the rising prices for consumers will suppress the wage levels in Taiwan. This the reason why the second paragraph of Article 36-2 of the Act for Development of Small and Medium Enterprises grants tax deductions for the companies who increase salaries, to encourage companies share earnings with employees and enhance private-sector consumption. SMEs may deduct their business income taxes payable during the year up to 30% of salary increase for existing entry-level employees who are Taiwanese nationals, not as a result of statutory requirement for basic wage adjustments. 1. Taxpayers   The tax incentives are applicable to SMEs as defined by the Regulations for the Tax Preferences Provided to Small and Medium-sized Enterprises on Additional Wage Payment and based on the same economic indicators previously mentioned. 2. Qualification for tax incentives (1) Definition of entry-level employees   The object of taxation under this act is the enterprise's average wage payment to the entry-level employees. The entry-level employees referred to in this act are authorized by the "Small and medium-sized enterprise employee salary increase, salary deduction act " that refers to employees of local nationality with an average monthly recurring salary below nt $50,000[8] whose were entered into indefinite employment contracts with SMEs. Through such conditions, the effect of tax concessions will be concentrated on promoting the salary level of grassroots staff and helping enterprises to cope with changes in the industrial environment. (2) Average salaries   The salaries to entry-level employees refer to the basic salaries, fixed allowances and bonuses paid on a monthly basis. Payment-in-kind shall be discounted based on the actual prices and included into the regular salaries. Meanwhile, regular salaries should be calculated with annualized averages, as this legislation seeks to boost salary levels. The regular salaries to entry-level employees during the year are estimated with the monthly number of entry-level employees during the same year. Only when the average basis salaries during the year are higher than those in the prior year can the tax incentives be applicable. 3. Tax incentive effects   Applying this article, SMEs can deduct their business income taxes each year up to 130% of salary increase for existing entry-level employees who are Taiwanese nationals, which are not as a result of statutory requirement for basic wage adjustments. However, it is not allowed to double count the increased personnel expenses for new headcounts applicable to the first and second paragraphs of the same article. V. Conclusions   The funding scales and relatively weak financial structures are the factors that led SMEs be susceptible influenced by supply change dynamics and business cycles. To the extent that is suppressing the flexible in capital utilization for SMEs, also influencing on the sustainability of SMEs. Differ from government subsidies require budgeting, reviewing and implementations, there are complications regarding the allocation of administrative resources. Therefore, it is important to plan for tax incentives in order to stimulate R&D, innovation and job creation by SMEs and ultimately make SMEs more competitive.   The tax incentives to SMEs amended in 2016 by the Small and Medium Enterprise Administration are known for the following: (I) The lowering of thresholds for tax reductions of R&D expenses in order to encourage SMEs to invest in R&D activities with a “certain degree” of innovativeness and enhance the momentum for SMEs to upgrade and transform themselves; (II) Deferral the income taxations on the transfer of intellectual properties for equity, in order to encourage application and utilization of such intellectual properties, provide incentives for R&D programs or innovations by individuals and SMEs. This also creates a catalyst for industry upgrade; (III) Tax deductions for the employment of new headcounts or the increase of employee wages during the time the economic indicators have reached a certain threshold and based on the health of the investment environment. This is to encourage company investments and capital increases in Taiwan and mitigate the volatility of economic cycles, in order to get ready for business improvement.   The above tax incentive programs, i.e. tax deductions for R&D and innovations; deferral of taxations on the transfer of intellectual properties for equity; tax deductions for the hiring of new headcounts and the increase of employee salaries, are meant to boost the investment from SMEs and the competitiveness of SMEs. The Act for Development of Small and Medium Enterprises seeks to reduce tax burdens of SMEs actively investing for their future and competitive advantages. Tax incentives help to mitigate the adverse effect of the economy on the business environment. It is also the fostering of the sources of business income tax revenues for the government. This is the very purpose of the Act for Development of Small and Medium Enterprises. [1]White Paper on Small and Medium Enterprises in Taiwan, 2018, p21 (November 9, 2018) published by the Ministry of Economic Affairs [2]Pursuant to the authorization conferred by Article 35 of the Act for Development of Small and Medium Enterprises, the Ministry of Economic Affairs has announced the Regulations Governing the Reduction of Expenditures for Small and Medium Enterprises Research and Development as Investment. [3]Article 2 on the definition of SMEs. The abovementioned criterion is universally applicable to the Act for Development of Small and Medium Enterprises. It also applies to the eligibility of tax incentives to be introduced in this paper unless otherwise specified. [4]Official Letter Economic-Business No. 10304605790, Ministry of Economic Affairs [5]Official Letter Taiwan-Finance No. 10300207480, Ministry of Finance [6]“Assessment of the Taxations under Article 35, Article 35-1, the first paragraph and the second paragraph of Article 36-2, the Act for Development of Small and Medium Enterprises” published by the Small and Medium Enterprise Administration, Ministry of Economic Affairs, pages 15-17, https://www.moeasmea.gov.tw/files/2670/93B9AF54-84E2-4293-A5CA-EA7DD9FAA05A(most recently browsed date September 9, 2019). [7]Order of Interpretation Economics-Business No. 104004602510 from the Ministry of Economic Affairs: “Second, on the day when the economic indicator has reached the threshold, the paid-in capital of the new business should be at least NT$500,000 and there is no need to instill additional capital during the period when tax incentives are applicable. For existing businesses, there is no limitation on the number of capital increases during the applicable period. So long as the cumulative increase in capital reaches NT$500,000 and new employees are hired during the same fiscal year or during the prior fiscal year.” [8]Paragraph 1, Article 2 of the Regulations for the Tax Preferences Provided to Small and Medium-sized Enterprises on Additional Wage Payment

Executive Yuan roll-out The Policy of “The Free Economic Pilot Zones”

Executive Yuan roll-out The Policy of “The Free Economic Pilot Zones”1.Executive Yuan approved a Bill titled “The Free Economic Pilot Zones Special Act”The “Free Economic Demonstration Zones” (hereinafter as FEDZs) is a critical part to improve the liberalization and internationalization of the economy of Republic of China (R.O.C). By deregulation, FEDZs was conceived as trial zones. Once the results of the program were promising, it would be expanded to the entire country. In order to engage in the regional economic and trade integration, the Executive Yuan approved a Bill titled “The Free Economic Pilot Zones Special Act” (hereinafter as Bill) on April 26th, 2013.On Mar 6th, 2014, the Joint Economic, Internal Administration , and Finance Committee of the Legislation Yuan (the Congress) discussed the Bill for reports and questions. By the end of the March, 2014, the Congress will hold five public hearings. Not until the discussion of the Bill item by item and the passage in the Congress, the second stage of the FEDZ program would not be initiated. There are five main points, including the treatments on foreigners and people from mainland China, tax incentives for Taiwanese businessman, foreign professionals and foreign companies, regulations on untaxed goods and labor, regulations on industrial development, such as the agriculture and the medical, and certain new items on education and professional services.For the reason that the government considered the need of human resources to sustain the operation of the industries, the Executive Yuan is trying to promote innovative education in FEPZs. Since the education requirements for both of public and private universities are unified in local, colleges and universities were restrained and missed some great opportunities to discover their own niches in education. Hence, innovative education in FEPZs is trying to help higher education system to introduce foreign education resources and foresight concepts, and to attract more international students. The innovative educational projects within FEPZs will also facilitate the cooperations among domestic and foreign universities, and set up experimental branch campuses, colleges, degree programs or professional courses. Besides, the financial service sector is also included. Since FEDZs is an important pusher for R.O.C to move forward in regional economic integration, accordingly, the most significant liberate item for the financial industry in the FEPZs is to allow offshore banking units and offshore security units to provide financial products and service (e.g. OSU and OBU). Meanwhile, the financial industry is predicted to receive an NTD$140 billion or more in revenues over the next five year.In summary, FEPZs is regarded as a engine propelling liberalization and internationalization. To gain the international competitiveness, the government will continue to promote policies and measures. By establishing the free economic demonstration zone, it is expected to create innovative effects into the education system and to create more job opportunities.2.Legislation Yuan has reviewd “The Free Ecomonic Pilot Zones Special Act”The Republic of China (R.O.C) have been carried out “free economic” recent years, by promoting “Free Economic Pilot Zone” (hereinafter as FEPZs) to encourage every industrial and foreign investment. Besides, FEPZs will not only keep talents and technologies in R.O.C but also liberalize and internationalize our economic.The Executive Yuan had approved a Bill titled “The Free Economic Pilot Zones Special Act” (hereinafter as the Bill) on Dec. 26th, 2013. At the end of May, the Joint Economic, Internal Administration, and Finance Committee of the Legislation Yuan (the Congress) have taken five public hearings for the Bill, and amended the Bill according to the advices proposed by specialists. Not until the deliberation of the Bill item by item and its passage in the Congress, the second stage of the FEDZ program would not be initiated. There are five main points, including the treatments on foreigners, tax incentives for R.O.C businessman, foreign professionals and foreign companies, regulations on untaxed goods and labor, regulations on industrial development, such as the agriculture and the medical service, and certain new items on education and professional services.The government considers that there have to be enough human resource to sustain the opened industries, so Executive Yuan is trying to promote innovative education in FEPZs. The core concept of FEPZs is foresight, liberalization and internationalization, the premier said, and the higher education systems belong to high-end service and have much more marketability and variability compared to other education systems. Through innovative and efficient way to manage the school could let University being much more liberalized. Furthermore, the higher education systems in R.O.C. have to connect with international education to avoid being marginalized. Our first stage of education innovation will promote to set up “degree programs” and “professional courses”. The first phase for the Ministry of Education is going to found “degree programs” or “professional courses” through collaboration way. The Ministry of Education will also draw up related regulations or guidance on standards for school cooperation, co-regulation, setup conditions, supervision, enrolling new student, and recruiting staff.? Once the Bills pass, The Ministry of Education plans to establish “branch school” and “independence campus” helping R.O.C. higher education goes internationalized.On the other hand, Our medical service also has strong international competitiveness. R.O.C is engage in developing international medical and health industry. The premier said, the Ministry of Health and Welfare have proposed some measures, such as limitation to the number of medical centre, medical personnel working hours, and NHI is not allow to use in the zones.The premier added, on the extemporaneous sittings, “The Free Economic Pilot Zones Special Act” will be the priority bills and be deliberated in the end of June By establishing the free economic demonstration zone, it is expected to propel R.O.C take part in Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).3.Executive Yuan’s rapid roll-out of “The Free Economic Pilot Zones”, and has published a report concerning the legal and economic implications of its the BillThe “Free Economic Pilot Zones” (hereinafter as FEPZs) plays a pivotal role in promoting market liberalization, especially at an international level. Premier of the Executive Yuan, Mr. Jiang Yi-Hua has stated that the “market economy” and “innovation economy” allows for tremendous economic prosperity to be embraced by the Republic of China (hereinafter as R.O.C). The seizing of such opportunity has been the goal of government efforts, which can be attested by the recent proposal of the “The Free Economic Pilot Zones Special Act” (hereinafter as the Bill), currently undergoing review and consultation proceedings. The Premier further stressed that the national economy should not be left excluded from international commerce, on the other hand, it is imperative that closer economic bonds with other nations are forged, therefore allowing itself open up to wider scope of opportunities for growth. The key in rendering this possible is through the enactment of laws. At a time, when Trans-Pacific nations, including the United States of America, Japan and countries from Southeast Asia, are working towards regional economic cooperation, if R.O.C. is to be left out, it is feared that its position in the global market would further be marginalized.The core innovative strengths of the FEPZs include “Smart Logistics”, “International healthcare services”, “Value added agriculture”, “Financial Services”, “Education Innovation”, all of which are implemented by employing R.O.C.’s finest workforce, knowledge, information and communications technology (ICT), geographical position and cross-strait relationship advantages, leading way for an advantageous basis for pioneering economic development. The first stage of development will be based on 6 locations proximal to the sea (including Keelung Port, Taipei Port, Kaohsiung Port, Suao Harbor, Anping Port, Taichung Port) and Taoyuan Aerotropolis and Pingtung Agricultural Biotech Park. The second stage of development would only commence after the Bill have been approved by the legislative Yuan, which would attract much capital investment, hence boosting high employment rates. Presently, besides the aforementioned regions opened up for the FEPZs, other cities and industrial sites (including those from offshore islands), are striving to gain membership of the FEPZs, or applying for empirical research of the FEPZs.The Executive Yuan has published a report concerning the legal and economic implications of its the Bill on May 2014. The report largely consists of assessments made by varying governing bodies, such as Ministry of Home Affairs, Financial Supervisory Commission etc., on the implications of the draft concerning real estate, employment, fiscal income, logistics, conditions for medical care, agriculture, higher education, social environment and social wealth redistribution etc.Furthermore, international attention has been closely centered on the progress of FEPZs. During the “The third review of the trade policies and practices of Chinese Taipei” after R.O.C accession to the World Trade Organization (WTO) held on the 17th of September 2014 in Geneva, each member state has demonstrated expectations arising out of the direction and planning undertaken for the FEPZs. National economic and international commercial reforms are under way and have seen much progress in further promoting the overall strength of the economic system, in an effort to respond to the rapid global political and economic developments, for example, through the signing of Economic Cooperation Framework Agreement (ECFA), and the implementation of FEPZs policies. In the future, it will be expected that R.O.C. will strive for a more integral international commercial system, allowing much capital investment inflows as well as the cultivating of high-caliber human resources.To promote more liberal and internationalized development of Taiwan economy, government of Republic of China (R.O.C) approved the “Free Economic Pilot Zone (FEPZ) Plan,” which the Bill is currently censored in Legislation Yuan and the measures would be implemented in two phases. The first phase of FEPZs would be initiated within six free trade ports, Taoyuan airport free trade zone, and Pingtung Agricultural Biotechnology Park; other industries that match up with the idea of liberalization, internationalization and foresight can all be incorporated into FEPZ through continuing examination under Execution Yuan. After this special legislation is passed, the set-ups of demonstration zones can be applied by authorities either of central or of local government and the related promotion works of the second phase will be unfolded immediately.Heading to the target of becoming Kin-Xiao (Kinmen and Xiaomen) Free Trade Zone, Kinmen government planned to apply to be one of the FEPZs and thus cooperated with Taiwan Institute of Economic Research (TIER) on December 11, for a commissioned research (which was later released on the conference of accelerating Kin-Xia FTZ on December 19) on evaluating if Kinmen is qualified for an application of FEPZs. Kinmen’s critical location and the featured industries have composed a perfect environment complying with the ideas such as value-added agriculture, international healthcare and innovative education for FEPZ. For instance, the white liquor industry in Kinmen represents the international management and promotion of agricultural products, and is the best example for value-added agriculture. “Long-term Healthcare Village in Kinmen,” which is currently developing in Kinmen, would also be a drive for international healthcare industry. Based on the Taiwan-featured culture, “International Education City” could be developed with a liberal and innovative atmosphere, which would attract famous schools in world to set up their branch school in Kinmen. Above all, Kinmen County vice Mayor, Wu Yo-Chin, indicated that Kinmen would be the first choice for FEPZ and would hold the key to open a new gate for the Cross-Strait. The vice Mayor emphasized that Kinmen government has well budgeting and financial management, which needn’t the extra aids from central government, yet Kinmen was excluded in the first phase of FEPZs. Although Kinmen would apply to be a FEPZ in the second phase after the special legislation passed, Kinmen still strived for taking part in the first phase of FEPZs due to the uncertain schedule for implementation of regulations on FEPZs.National Development Council (NDC), however, gave an opinion on issue of Kinmen applying to be in the first phase of FEPZs, which declared again the original plan for the first phase only included six free trade ports, Taoyuan airport free trade zone, and Pingtung Agricultural Biotechnology Park. NDC also suggested Kinmen could still follow after the first phase and apply to be a FEPZ in the second phase.

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