Introduction to Tax Incentive Regime for SMEs

Introduction to Tax Incentive Regime for SMEs

I. Introduction

  The developments of SMEs (small-and-medium enterprises) plays an important pillar of development of industries and creation of jobs in Taiwan. In 2017, the total number of SMEs in Taiwan was 1,437,616. They offer 8,904,000 jobs, accounting for 78.44% of the workforce[1]. However, SMEs have difficulties in entering international supply chains because of their weakness in finance. Therefore, how to enhance the global competitiveness of SMEs is an important issue for the concerned authority. Chapter 4 of the Act for Development of Small and Medium Enterprises prescribes the tax incentive regime based on the financial capability of SMEs and characteristics of industries in order to facilitate the development of SMEs, especially the globalization of SMEs. This paper will review the importance of tax incentives to SMEs and introduces the tax incentive regime under the Act for Development of Small and Medium Enterprises In order to help SMES have an understanding of such regime.

II. SME Tax Incentives Scheme

  As the gatekeeper of the market, the government may intervene the market with various policies or tools to reallocate and improve the soundness of the market environment when the market competitions is impaired due to information asymmetry or externalities. At this juncture, preferential tax rates or tax deductions can be offered to specific taxpayers through legal institution. This allows these taxpayers to retain higher post-tax earnings so that they are incentified to invest more resources in the legally defined economic activities. Tax incentives targeting at risky or spillover investments to create benefits to specific economic activities will help the development of industries and markets.

  Whilst Article 10 of the Statute for Industrial Innovation has provided tax cuts for R&D expenditures, these incentives are not focus on SMEs and hence not supportive to their research and innovations. This was the reason for the 2016 amendment of the Act for Development of Small and Medium Enterprises added Article 35 to offer tax incentives in order to encourage R&D and innovative efforts and Article 35-1 to activate intellectual properties via licensing. These articles aim to accelerate the momentum of innovations and transformations which promoting investments for SMEs. OthersTo assist SMEs to cope with change of the business environment, the Article 36-2 added the tax incentives for salary or headcount increases, to contribute to the sustainability of SMEs and stabilize the labour market and industrial structures. Following is an explanation of the applicability of these schemes and the requirements to qualify such incentives.

III. 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

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※Introduction to Tax Incentive Regime for SMEs,STLI, https://stli.iii.org.tw/en/article-detail.aspx?no=105&tp=2&i=168&d=8483 (Date:2025/07/04)
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(2) The monitoring plan must include monitoring strategies, monitoring personnel responsibilities, monitoring methods, rationale for such implementation, and critical data and processes that must be monitored. It must also generate comprehensive monitoring reports for audit purposes. (3) The sponsor is responsible for ensuring the implementation of remote monitoring, and must conduct risk assessments regarding the implementation process’ data protection and information confidentiality. 7. Information Systems and Electronic Data Collection, Processing, and Storage (1) In accordance with the Regulations for Good Clinical Practice, data recorded in clinical trials must be trustworthy, reliable, and verifiable. (2) It must be ensured that all organizations participating in the clinical trial have a full picture of the data flow. It is recommended that the trial protocol and trial-related documents include data flow diagrams and additional explanations. (3) Define the types and scopes of subject personal data that will be collected, and ensure that every step in the process properly protects their data in accordance with the Personal Data Protection Act. II. A Comparison with Decentralized Trial Regulations in Other Countries Denmark became the first country in the world to release regulatory measures on decentralized trials, issuing the “Danish Medicines Agency’s Guidance on the Implementation of Decentralized Elements in Clinical Trials with Medicinal Products” in September 2021[2]. In December 2022, the European Union as a whole released its “Recommendation Paper on Decentralized Elements in Clinical Trials”[3]. The United States issued the draft “Decentralized Clinical Trials for Drugs, Biological Products, and Devices” document in May 2023[4]. The comparison in Table 1 shows that Taiwan’s guidelines a relatively similar in structure to those of Denmark and the EU; the US guidelines also cover medical device clinical trials. Table 1: Summary of Decentralized Clinical Trial Guidelines in Taiwan, Denmark, the European Union as a whole, and the United States Taiwan Denmark European Union as a whole United States What do the guidelines apply to? Medicinal products Medicinal products Medicinal products Medicinal products and medical devices Trial subject recruitment and electronic informed consent Covers informed consent process; informed consent interview; digital information sheet; trial subject consent form signing; etc. Covers informed consent process; informed consent interview; trial subject consent form signing; etc. Covers informed consent process; informed consent interview; digital information sheet; trial subject consent form signing; etc. Covers informed consent process; informed consent interview; etc. Delivery and provision of investigational medicinal products Delegated, specifically-trained trial personnel deliver and provide investigational medicinal products. The investigator or delegated personnel deliver and provide investigational medicinal products. The investigator, delegated personnel, or a third-party, Good Distribution Practice-compliant logistics provider deliver and provide investigational medicinal products. The principal investigator, delegated personnel, or a distributor deliver and provide investigational products. Remote monitoring of trial subject safety Trial subjects may do return visits at trial sites, via phone calls, via video calls, or via home visits, and may undergo testing at nearby laboratories. Trial subjects may do return visits at trial sites, via phone calls, via video calls, or via home visits, and may undergo testing at nearby laboratories. Trial subjects may do return visits at trial sites, via phone calls, via video calls, or via home visits. Trial subjects may do return visits at trial sites, via phone calls, via video calls, or via home visits, and may undergo testing at nearby laboratories. Trial subject reporting of adverse events Trial subjects may self-report adverse events through a digital platform. Trial subjects may self-report adverse events through a digital platform. Trial subjects may self-report adverse events through a digital platform. Trial subjects may self-report adverse events through a digital platform. Remote data monitoring The sponsor may conduct remote data monitoring. The sponsor may conduct remote data monitoring. The sponsor may conduct remote data monitoring (not permitted in some countries). The sponsor may conduct remote data monitoring. Information systems and electronic data collection, processing, and storage The recorded data must be credible, reliable, and verifiable. Requires an information system that is validated, secure, and user-friendly. The recorded data must be credible, reliable, and verifiable. Must ensure data reliability, security, privacy, and confidentiality. III. Conclusion The implementation of decentralized clinical trials must be approached with careful assessment of risks and rationality, with trial subject safety, rights, and well-being as top priorities. Since Taiwan’s Guidelines for Implementing Decentralized Elements in Medicinal Product Clinical Trials were just announced in June of this year, the status of decentralized clinical trial implementation is still pending industry feedback to confirm feasibility. The overall goal is to enhance and optimize the clinical trial environment in Taiwan. Reference: [1] 衛生福利部食品藥物管理署,〈藥品臨床試驗執行分散式措施指引〉,2023/6/12,https://www.fda.gov.tw/TC/siteListContent.aspx?sid=9354&id=43548(最後瀏覽日:2023/11/2)。 [2] [DMA] DANISH MEDICINES AGENCY, The Danish Medicines Agency’s guidance on the Implementation of decentralised elements in clinical trials with medicinal products (2021),https://laegemiddelstyrelsen.dk/en/news/2021/guidance-on-the-implementation-of-decentralised-elements-in-clinical-trials-with-medicinal-products-is-now-available/ (last visited Nov. 2, 2023). [3] [HMA] HEADS OF MEDICINES AGENCIES, [EC] EUROPEAN COMMISSION & [EMA] EUROPEAN MEDICINES AGENCY, Recommendation paper on decentralised elements in clinical trials (2022),https://health.ec.europa.eu/latest-updates/recommendation-paper-decentralised-elements-clinical-trials-2022-12-14_en (last visited Nov. 2, 2023). [4] [US FDA] US FOOD AND DRUG ADMINISTRATION, Decentralized Clinical Trials for Drugs, Biological Products, and Devices (draft, 2023),https://www.fda.gov/regulatory-information/search-fda-guidance-documents/decentralized-clinical-trials-drugs-biological-products-and-devices (last visited Nov. 2, 2023).

The use of automated facial recognition technology and supervision mechanism in UK

The use of automated facial recognition technology and supervision mechanism in UK I. Introduction   Automatic facial recognition (AFR) technology has developed rapidly in recent years, and it can identify target people in a short time. The UK Home Office announced the "Biometrics Strategy" on June 28, 2018, saying that AFR technology will be introduced in the law enforcement, and the Home Office will also actively cooperate with other agencies to establish a new oversight and advisory board in order to maintain public trust. AFR technology can improve law enforcement work, but its use will increase the risk of intruding into individual liberty and privacy.   This article focuses on the application of AFR technology proposed by the UK Home Office. The first part of this article describes the use of AFR technology by the police. The second part focuses on the supervision mechanism proposed by the Home Office in the Biometrics Strategy. However, because the use of AFR technology is still controversial, this article will sort out the key issues of follow-up development through the opinions of the public and private sectors. The overview of the discussion of AFR technology used by police agencies would be helpful for further policy formulation. II. Overview of the strategy of AFR technology used by the UK police   According to the Home Office’s Biometrics Strategy, the AFR technology will be used in law enforcement, passports and immigration and national security to protect the public and make these public services more efficient[1]. Since 2017 the UK police have worked with tech companies in testing the AFR technology, at public events like Notting Hill Carnival or big football matches[2].   In practice, AFR technology is deployed with mobile or fixed camera systems. When a face image is captured through the camera, it is passed to the recognition software for identification in real time. Then, the AFR system will process if there is a ‘match’ and the alarm would solicit an operator’s attention to verify the match and execute the appropriate action[3]. For example, South Wales Police have used AFR system to compare images of people in crowds attending events with pre-determined watch lists of suspected mobile phone thieves[4]. In the future, the police may also compare potential suspects against images from closed-circuit television cameras (CCTV) or mobile phone footage for evidential and investigatory purposes[5].   The AFR system may use as tools of crime prevention, more than as a form of crime detection[6]. However, the uses of AFR technology are seen as dangerous and intrusive by the UK public[7]. For one thing, it could cause serious harm to democracy and human rights if the police agency misuses AFR technology. For another, it could have a chilling effect on civil society and people may keep self-censoring lawful behavior under constant surveillance[8]. III. The supervision mechanism of AFR technology   To maintaining public trust, there must be a supervision mechanism to oversight the use of AFR technology in law enforcement. The UK Home Office indicates that the use of AFR technology is governed by a number of codes of practice including Police and Criminal Evidence Act 1984, Surveillance Camera Code of Practice and the Information Commissioner’s Office (ICO)’s Code of Practice for surveillance cameras[9]. (I) Police and Criminal Evidence Act 1984   The Police and Criminal Evidence Act (PACE) 1984 lays down police powers to obtain and use biometric data, such as collecting DNA and fingerprints from people arrested for a recordable offence. The PACE allows law enforcement agencies proceeding identification to find out people related to crime for criminal and national security purposes. Therefore, for the investigation, detection and prevention tasks related to crime and terrorist activities, the police can collect the facial image of the suspect, which can also be interpreted as the scope of authorization of the  PACE. (II) Surveillance Camera Code of Practice   The use of CCTV in public places has interfered with the rights of the people, so the Protection of Freedoms Act 2012 requires the establishment of an independent Surveillance Camera Commissioner (SCC) for supervision. The Surveillance Camera Code of Practice  proposed by the SCC sets out 12 principles for guiding the operation and use of surveillance camera systems. The 12 guiding principles are as follows[10]: A. Use of a surveillance camera system must always be for a specified purpose which is in pursuit of a legitimate aim and necessary to meet an identified pressing need. B. The use of a surveillance camera system must take into account its effect on individuals and their privacy, with regular reviews to ensure its use remains justified. C. There must be as much transparency in the use of a surveillance camera system as possible, including a published contact point for access to information and complaints. D. There must be clear responsibility and accountability for all surveillance camera system activities including images and information collected, held and used. E. Clear rules, policies and procedures must be in place before a surveillance camera system is used, and these must be communicated to all who need to comply with them. F. No more images and information should be stored than that which is strictly required for the stated purpose of a surveillance camera system, and such images and information should be deleted once their purposes have been discharged. G. Access to retained images and information should be restricted and there must be clearly defined rules on who can gain access and for what purpose such access is granted; the disclosure of images and information should only take place when it is necessary for such a purpose or for law enforcement purposes. H. Surveillance camera system operators should consider any approved operational, technical and competency standards relevant to a system and its purpose and work to meet and maintain those standards. I. Surveillance camera system images and information should be subject to appropriate security measures to safeguard against unauthorised access and use. J. There should be effective review and audit mechanisms to ensure legal requirements, policies and standards are complied with in practice, and regular reports should be published. K. When the use of a surveillance camera system is in pursuit of a legitimate aim, and there is a pressing need for its use, it should then be used in the most effective way to support public safety and law enforcement with the aim of processing images and information of evidential value. L. Any information used to support a surveillance camera system which compares against a reference database for matching purposes should be accurate and kept up to date. (III) ICO’s Code of Practice for surveillance cameras   It must need to pay attention to the personal data and privacy protection during the use of surveillance camera systems and AFR technology. The ICO issued its Code of Practice for surveillance cameras under the Data Protection Act 1998 to explain the legal requirements operators of surveillance cameras. The key points of ICO’s Code of Practice for surveillance cameras are summarized as follows[11]: A. The use time of the surveillance camera systems should be carefully evaluated and adjusted. It is recommended to regularly evaluate whether it is necessary and proportionate to continue using it. B. A police force should ensure an effective administration of surveillance camera systems deciding who has responsibility for the control of personal information, what is to be recorded, how the information should be used and to whom it may be disclosed. C. Recorded material should be stored in a safe way to ensure that personal information can be used effectively for its intended purpose. In addition, the information may be considered to be encrypted if necessary. D. Disclosure of information from surveillance systems must be controlled and consistent with the purposes for which the system was established. E. Individuals whose information is recoded have a right to be provided with that information or view that information. The ICO recommends that information must be provided promptly and within no longer than 40 calendar days of receiving a request. F. The minimum and maximum retention periods of recoded material is not prescribed in the Data Protection Act 1998, but it should not be kept for longer than is necessary and should be the shortest period necessary to serve the purposes for which the system was established. (IV) A new oversight and advisory board   In addition to the aforementioned regulations and guidance, the UK Home Office mentioned that it will work closely with related authorities, including ICO, SCC, Biometrics Commissioner (BC), and Forensic Science Regulator (FSR) to establish a new oversight and advisory board to coordinate consideration of law enforcement’s use of facial images and facial recognition systems[12].   To sum up, it is estimated that the use of AFR technology by law enforcement has been abided by existing regulations and guidance. Firstly, surveillance camera systems must be used on the purposes for which the system was established. Secondly, clear responsibility and accountability mechanisms should be ensured. Thirdly, individuals whose information is recoded have the right to request access to relevant information. In the future, the new oversight and advisory board will be asked to consider issues relating to law enforcement’s use of AFR technology with greater transparency. IV. Follow-up key issues for the use of AFR technology   Regarding to the UK Home Office’s Biometrics Strategy, members of independent agencies such as ICO, BC, SCC, as well as civil society, believe that there are still many deficiencies, the relevant discussions are summarized as follows: (I) The necessity of using AFR technology   Elizabeth Denham, ICO Commissioner, called for looking at the use of AFR technology carefully, because AFR is an intrusive technology and can increase the risk of intruding into our privacy. Therefore, for the use of AFR technology to be legal, the UK police must have clear evidence to demonstrate that the use of AFR technology in public space is effective in resolving the problem that it aims to address[13].   The Home Office has pledged to undertake Data Protection Impact Assessments (DPIAs) before introducing AFR technology, including the purpose and legal basis, the framework applies to the organization using the biometrics, the necessity and proportionality and so on. (II)The limitations of using facial image data   The UK police can collect, process and use personal data based on the need for crime prevention, investigation and prosecution. In order to secure the use of biometric information, the BC was established under the Protection of Freedoms Act 2012. The mission of the BC is to regulate the use of biometric information, provide protection from disproportionate enforcement action, and limit the application of surveillance and counter-terrorism powers.   However, the BC’s powers do not presently extend to other forms of biometric information other than DNA or fingerprints[14]. The BC has expressed concern that while the use of biometric data may well be in the public interest for law enforcement purposes and to support other government functions, the public benefit must be balanced against loss of privacy. Hence, legislation should be carried to decide that crucial question, instead of depending on the BC’s case feedback[15].   Because biometric data is especially sensitive and most intrusive of individual privacy, it seems that a governance framework should be required and will make decisions of the use of facial images by the police. (III) Database management and transparency   For the application of AFR technology, the scope of biometric database is a dispute issue in the UK. It is worth mentioning that the British people feel distrust of the criminal database held by the police. When someone is arrested and detained by the police, the police will take photos of the suspect’s face. However, unlike fingerprints and DNA, even if the person is not sued, their facial images are not automatically deleted from the police biometric database[16].   South Wales Police have used AFR technology to compare facial images of people in crowds attending major public events with pre-determined watch lists of suspected mobile phone thieves in the AFR field test. Although the watch lists are created for time-limited and specific purposes, the inclusion of suspects who could possibly be innocent people still causes public panic.   Elizabeth Denham warned that there should be a transparency system about retaining facial images of those arrested but not charged for certain offences[17]. Therefore, in the future the UK Home Office may need to establish a transparent system of AFR biometric database and related supervision mechanism. (IV) Accuracy and identification errors   In addition to worrying about infringing personal privacy, the low accuracy of AFR technology is another reason many people oppose the use of AFR technology by police agencies. Silkie Carlo, director of Big Brother Watch, said the police must immediately stop using the AFR technology and avoid mistaking thousands of innocent citizens as criminals; Paul Wiles, Biometrics Commissioner, also called for legislation to manage AFR technology because of its accuracy is too low and the use of AFR technology should be tested and passed external peer review[18].   In the Home Office’s Biometric Strategy, the scientific quality standards for AFR technology will be established jointly with the FSR, an independent agency under the Home Office. In other words, the Home Office plans to extend the existing forensics science regime to regulate AFR technology.   Therefore, the FSR has worked with the SCC to develop standards relevant to digital forensics. The UK government has not yet seen specific standards for regulating the accuracy of AFR technology at the present stage. V. Conclusion   From the discussion of the public and private sectors in the UK, we can summarize some rules for the use of AFR technology. Firstly, before the application of AFR technology, it is necessary to complete the pre-assessment to ensure the benefits to the whole society. Secondly, there is the possibility of identifying errors in AFR technology. Therefore, in order to maintain the confidence and trust of the people, the relevant scientific standards should be set up first to test the system accuracy. Thirdly, the AFR system should be regarded as an assisting tool for police enforcement in the initial stage. In other words, the information analyzed by the AFR system should still be judged by law enforcement officials, and the police officers should take the responsibilities.   In order to balance the protection of public interest and basic human rights, the use of biometric data in the AFR technology should be regulated by a special law other than the regulations of surveillance camera and data protection. The scope of the identification database is also a key point, and it may need legislators’ approval to collect and store the facial image data of innocent people. Last but not least, the use of the AFR system should be transparent and the victims of human rights violations can seek appeal. [1] UK Home Office, Biometrics Strategy, Jun. 28, 2018, https://www.gov.uk/government/publications/home-office-biometrics-strategy (last visited Aug. 09, 2018), at 7. [2] Big Brother Watch, FACE OFF CAMPAIGN: STOP THE MET POLICE USING AUTHORITARIAN FACIAL RECOGNITION CAMERAS, https://bigbrotherwatch.org.uk/all-campaigns/face-off-campaign/ (last visited Aug. 16, 2018). [3] Lucas Introna & David Wood, Picturing algorithmic surveillance: the politics of facial recognition systems, Surveillance & Society, 2(2/3), 177-198 (2004). [4] Supra note 1, at 12. [5] Id, at 25. [6] Michael Bromby, Computerised Facial Recognition Systems: The Surrounding Legal Problems (Sep. 2006)(LL.M Dissertation Faculty of Law University of Edinburgh), http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.197.7339&rep=rep1&type=pdf , at 3. [7] Owen Bowcott, Police face legal action over use of facial recognition cameras, The Guardian, Jun. 14, 2018, https://www.theguardian.com/technology/2018/jun/14/police-face-legal-action-over-use-of-facial-recognition-cameras (last visited Aug. 09, 2018). [8] Martha Spurrier, Facial recognition is not just useless. In police hands, it is dangerous, The Guardian, May 16, 2018, https://www.theguardian.com/commentisfree/2018/may/16/facial-recognition-useless-police-dangerous-met-inaccurate (last visited Aug. 17, 2018). [9] Supra note 1, at 12. [10] Surveillance Camera Commissioner, Surveillance camera code of practice, Oct. 28, 2014, https://www.gov.uk/government/publications/surveillance-camera-code-of-practice (last visited Aug. 17, 2018). [11] UK Information Commissioner’s Office, In the picture: A data protection code of practice for surveillance cameras and personal information, Jun. 09, 2017, https://ico.org.uk/for-organisations/guide-to-data-protection/encryption/scenarios/cctv/ (last visited Aug. 10, 2018). [12] Supra note 1, at 13. [13] Elizabeth Denham, Blog: facial recognition technology and law enforcement, Information Commissioner's Office, May 14, 2018, https://ico.org.uk/about-the-ico/news-and-events/blog-facial-recognition-technology-and-law-enforcement/ (last visited Aug. 14, 2018). [14] Monique Mann & Marcus Smith, Automated Facial Recognition Technology: Recent Developments and Approaches to Oversight, Automated Facial Recognition Technology, 10(1), 140 (2017). [15] Biometrics Commissioner, Biometrics Commissioner’s response to the Home Office Biometrics Strategy, Jun. 28, 2018, https://www.gov.uk/government/news/biometrics-commissioners-response-to-the-home-office-biometrics-strategy (last visited Aug. 15, 2018). [16] Supra note 2. [17] Supra note 13. [18] Jon Sharman, Metropolitan Police's facial recognition technology 98% inaccurate, figures show, INDEPENDENT, May 13, 2018, https://www.independent.co.uk/news/uk/home-news/met-police-facial-recognition-success-south-wales-trial-home-office-false-positive-a8345036.html (last visited Aug. 09, 2018).

Executive Yuan Yuan Promoted “Productivity 4.0” to Boost Global Competitiveness

Executive Yuan Yuan Promoted “Productivity 4.0” to Boost Global Competitiveness 1.Executive Yuan held the “Productivity 4.0: Strategy Review Board Meeting” to boost industrial transformation The Executive Yuan held the “Productivity 4.0: Strategy Review Board Meeting” on June 4-5th , 2015. The GDP per capita of manufacturing and service industries, including machinery, metal processing, transportation vehicles, 3C, food, textile, logistics, health care, and agriculture, are expected to be over 10 million NT dollars by 2024. This meeting focuses on three topics: Productivity 4.0 industry and technology development strategy, advanced development strategy on advanced manufacturing and innovation application, and strategy on engineering smart tech talents cultivation and Industry-academic Cooperation. The three main themes to be used to put the advanced manufacturing into force are smart automation and robots, sensing and control technologies from Internet of Things (IoT), and technologies used in analyzing the big data. As a result, the digitalization of small- and medium-sized business and smart operation of big business are as the cornerstones to build service-oriented systems and develop advanced manufacturing in R.O.C.. Facing challenges of labor shortages and aging labor forces, the Executive Yuan is planning to implement “Productivity 4.0” to stimulate the process of industry transformation of value-added innovation and provide new products and services in global market. In implementing the above-mentioned policy goals, the Executive Yuan is planning three directions to be followed. First, global competitiveness is depended upon key technologies. As OEMs, manufacturing industry in R.O.C. is unable to provide products of self-owned brand and is vulnerable while facing challenges from other transnational companies. Second, the Premier, Dr. Mao Chi-kuo, made reference of the bicycle industry’s successful development model as an example for the Productivity 4.0 “A-Team” model. Through combining technologies and organizations, the aim is to build competitive supply chains across all the small- and medium-sized business. Finally, the new skills training and the cultivation of talents are more urgent than ever before. While technical and vocational schools, universities and postgraduate studies are needed to be equipped with sufficient fundamental knowledge, those already in the job market have to learn the skills and knowledge necessary for industrial transformation so that they could contribute their capabilities and wisdom for Ourfuture. 2.Executive Yuan Approved “Productivity 4.0 Initiative” to Promote Industry Innovation and Transformation The Executive Yuan has approved the Productivity 4.0 Initiative on September 17, 2015. Before its approval, the Office of Science and Technology (OST) gave a presentation on the Draft of the Productivity 4.0 Initiative on July 23, 2015 detailing the underlying motives behind the program. Confronted with the challenges our traditional industries and OEMs meet, including labor shortages (the national laboring population ranging from age 15 to 65 has seen a substantial decrease of 0.18 to 0.2 million annually) and a aging labor force, the the Productivity 4.0 Initiative sets the directions for industrial development tackling these issues through six main strategies: enhancing and fine-tuning flagship industries’ smart-supply-chain ecosystems, encouraging the establishing of startups, localizing production and services, securing autonomy in key technologies, cultivating practical and technical talents and injection of industrial policy tools. After hearing the presentation on the Initiative, the Premier, Mao Chi-kuo, made reference to the core ideas of the Productivity 4.0 Initiative in his concluding remarks. “The core concept of the Productivity 4.0 Initiative is to propel R.O.C. to a pivotal position in the global manufacturing supply chain by capitalizing on the nation’s core strength in industrial technology, while fostering an outstanding work environment stimulating synergy between employees and automotive systems in order to cope with R.O.C.’s imminent labor shortage,” Mao said Also focusing on the Productivity 4.0 Initiative, the Premier gave a keynote speech titled ‘Views on the current economic and social issues’ at the Third Wednesday Club. He takes the view that the GDP downslide is of a structural nature and the government is going to guide the economy towards an upward path by assisting industries to innovate and transform. In an effort to remove the three major obstacles to innovation and entrepreneurship— discouraging laws and regulations, difficulty in raising capital and gathering financing as well as lack of international partnerships, the government has been diligently promoting the Third Party Payment Act as well as setting-up R.O.C. Rapid Innovation Prototyping League for Enterprises. Among these measures, Industry 4.0 has been at the core of the Initiative, in which cyber-physical production system (CPS) would be introduced by integrating Cloud-computing and Internet of Things technology to spur industrial transformations, specifically industrial manufacturing, added-value services and agricultural production. The Productivity 4.0 Initiative is an imperative measure in dealing with R.O.C.’s imminent issues of labor shortage, and the aging society, its promising effects are waiting to unfold. 3.Executive Yuan’s Further Addendum to “Productivity 4.0 Plan”: Attainment of Core Technologies and the Cultivation of Domestic Technical Talents In an continual effort to put in place the most integrated infrastructural setting for the flourishing of its “Productivity 4.0 Plan”, Executive Yuan Premier Mao Chi-Kuo announced on the 22nd October that the overhaul infrastructural set-up will be focused on the development of core technologies and the cultivation of skilled technical labor. To this end, the Executive Yuan is gathering participation and resources from the Ministry of Economic Affairs (hereafter MOEA), Ministry of Education, Ministry of Science and Technology, Ministry of Labor, the Council of Agriculture, among other governmental bodies, collecting experiences and knowledge from academia and researchers, in order to improve the development of pivotal technologies, the training of skilled technical labor and consequently to improve and reform the present education system so as to meet the aforementioned goals. Premier Mao Chi-Kuo pointed out that Productivity 4.0 is a production concept in which the industry is evolved from mere automation- to intelligent-based manufacturing, shifting towards a “small-volume, large-variety” production paradigm, closing the gaps between production and consumption sides through direct communication, hence allowing industry to push itself further on changing its old efficiency-based production model to an innovation-driven one. Apart from the Research and Development efforts geared towards key technologies, Premier Mao stressed that the people element, involved in this transformative process, is what dictates Productivity 4.0 Plan’s success. The cross-over or multi-disciplinary capability of the labor force is especially significant. In order to bring up the necessary work force needed for Productivity 4.0, besides raising support for the needed Research and Development, an extensive effort should be placed in reforming and upgrading the current educational system, as well as the technical labor and internal corporate educational structure. Moreover, an efficient platform should be implemented so that opinions and experiences could be pooled out, thus fostering closer ties between industry, academia and research. The MOEA stated that the fundamental premise behind the Productivity 4.0 strategy is that by way of systematic, brand-orientated formation of technical support groups, constituted by members of industry, academia and research, will we able to develop key sensor, internet and core technologies for our manufacturing, business and agriculture sector. It is estimated that by the end of year 2016, the Executive Yuan will have completed 6 major Productivity 4.0 production lines; supported the development of technical personnel in smart manufacturing, smart business and smart agriculture, amounting to 2,500 persons; established 4 inter-university, inter-disciplinary strategic partnerships in order to prepare much needed labor force for the realization of the Productivity 4.0 Plan. It is estimated that by the year 2020, industry has already developed the key technologies through the Productivity 4.0 platform, aiding to decrease by 50% the time currently needed to for Research and Development, increasing the technological sovereignty by 50% and accrue production efficiency by 15% and above. Furthermore, through the educational reforms, the nation will be able to lay solid foundations for its future labor talents, as well as connecting them to the world at large, effectively making them fit to face the global markets and to upgrade their production model.

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