Lack of cost sharing rules causes problems for taxpayers in Taiwan
The Taiwan Ministry of Finance recently introduced guidelines for the determination of Taiwan source income.
The release seeks to clarify the position for taxpayers and tax authorities on whether service remuneration received in connection with services rendered outside of Taiwan, but utilised by a Taiwan entity, is Taiwan source income.
There is no cost sharing in Taiwan, which results in a payment of 20% withholding tax for taxpayers. For instance, if a payment is paid by a Taiwan entity to a foreign entity there is a 20% withholding tax.
“The rules have been changed so that if there is evidence that the service is performed outside of Taiwan and the Taiwanese entity has no involvement there is no withholding tax,” said Wendy Chiu, transfer pricing partner at PricewaterhouseCoopers in Taiwan.
“The taxpayer will need to prepare evidence that the service is performed outside Taiwan,” she added.
The guidance clarifies which services will constitute Taiwan source income and allow the deduction of related costs and expenses. This could reduce the tax burden on some intercompany transactions.
“If a license is granted to a Taiwan entity, local regulations under article 4 of the Income Tax law states that this is free from withholding tax depending on the type of license. Taiwan likes to encourage high tech investment so this type of investment is free from withholding tax,” said George Chou, transfer pricing partner at Ernst & Young in Taiwan.
However, withholding tax is due for other types of licenses. “If a Taiwan entity gets a license from a third party, the entity has to pay for intangibles even if the Taiwan entity doesn’t use them but the branch does,” said Chiu.
“The tax authorities have said that no matter who benefits there is a 20% withholding tax due which includes related party transactions,” she added.
However, if a foreign entity engages a Taiwan entity for performance of services such as manufacturing, the Taiwan entity does not have to pay withholding tax.
Manager’s fees from headquarters to branches are only tax free if paid to a Taiwan entity. There is a 20% withholding tax if the fee is paid to a non-Taiwan entity.
The OECD guidelines state that payment is due where services are provided however in Taiwan the rule had been that payment is due where the services are received.
“The tax authority’s position has changed due to pressure from the taxpayer and now the rules follow the OECD guidelines so that payment is due where the services are provided,” said Chou.