The new amendments apply to the fiscal years of 2017 onwards. In line with BEPS Action 13, the three-tiered transfer pricing (TP) documentation is composed of a TP report (local file), which had already been implemented under existing TP assessment regulations since 2005, and two new additions – country-by-country reporting (CbCR) and the master file (MF).
Threshold and content
A Taiwanese constituent entity of a multinational profit-seeking enterprise (MNE) with preceding annual consolidated group revenue of more than NT$27 billion ($879 million) is required to submit a country-by-country (CbC) report no later than 12 months after the last day of the reporting fiscal year. The CbCR must be carried out in both Chinese and English. In relation to annual consolidated group revenue, the consolidated financial statements of the ultimate parent company (UPE) of the group must be used.
The CbC report should disclose aggregate information relating to the amount of revenue, profit (loss) before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash or cash equivalents, with regard to each jurisdiction in which the MNE group operates. The reporting MNE should determine the nature of the main business activity carried out by the constituent entity in the relevant tax jurisdictions. The disclosure information is not substantially different from that mentioned in the guidelines recommended in BEPS Action 13.
Notification and submission requirements
When filing the income tax return, a Taiwanese constituent entity of an MNE must disclose relevant information, such as details of the UPE or the surrogate entity (SPE) appointed by the MNE that is responsible for carrying out CbCR in Taiwan. Furthermore, if a Taiwanese entity of an MNE is not required to carry out CbCR in Taiwan, it will be obliged to disclose whether the MNE is subject to CbCR in other jurisdictions.
Where an entity in Taiwan is the UPE of an MNE with a preceding annual consolidated group revenue of more than NT$27 billion, it is compulsory for that entity to prepare a CbC report for the reporting fiscal year and submit the CbC report to the Taiwan tax authority. However, where an MNE's UPE is located outside of Taiwan, its Taiwanese constituent entities must submit the CbC report to the Taiwan tax authority if one of the following conditions apply:
- The UPE of the MNE is not obliged to file a CbC report in its jurisdiction;
- The UPE has filed a CbC report in its jurisdiction, but that jurisdiction does not have an agreement to exchange CbC reports with Taiwan by the time of the CbCR deadline in Taiwan; or
- The UPE has filed a CbC report in its jurisdiction and that jurisdiction has an agreement to exchange CbC reports with Taiwan, but the Taiwan tax authority is unable to effectively obtain the CbC report in accordance with the agreement.
According to an announcement regarding the list of exchange countries issued by the MoF on April 27 2018, the Taiwan tax authority so far can only obtain CbC reports through a related agreement from New Zealand. The list will be updated from time to time.
Threshold and content
Under the legislation amendment, if a Taiwanese entity of an MNE meets either one of the following conditions, it will be exempted from filing an MF in Taiwan:
1) The Taiwanese entity's total annual turnover of the present year (include operating and non-operating) does not exceed NT$3 billion; or
2) The total amount of all cross-border controlled transactions for the present year do not exceed NT$1.5 billion.
The MF must contain details of the group organisational structure, the group business, group intangibles, group inter-company financial transactions and group financial and tax positions. This is similar to the guidelines recommended by the OECD in BEPS Action 13.
Notification and submission requirements
When filing annual income tax returns, it is mandatory for a Taiwanese constituent entity of an MNE to disclose relevant information, such as, whether the Taiwanese entity of the MNE meets the relevant threshold and whether any other entities of the MNE are required to file an MF in their jurisdictions. If there are more than two entities in Taiwan, the MNE can designate one of the Taiwanese entities to file the MF. In addition, the MF must be filed in Chinese and submitted to the tax authority within 12 months after the last day of the reporting fiscal year. If an MF is submitted in a foreign language, a Chinese translation must also be attached. If an Ms is submitted in English, the taxpayer may submit a Chinese translation within one month upon receiving a written request to do so from the Taiwan tax authority (this extension can only be granted once and cannot exceed one month).
New income tax guidelines on cross-border electronic services
Due to the rapid development of the internet and the increase in electronic commerce, on January 2 2018, the MoF issued a new ruling with respect to the income derived by foreign profit-seeking enterprises (PSEs) from the cross-border sales of electronic services to domestic buyers in Taiwan (including individuals, profit-seeking enterprises, organisations and entities). The ruling applies retroactively from January 1 2017.
Definition of electronic services
Under Article 4-1 of the Enforcement Rules of Value-added and Non-value-added Business Tax Act, the term 'electronic services' is defined as services that are provided by being downloaded through the internet and stored on computers or mobile devices for use; or that are provided online without being downloaded and stored in devices. It also applies to other services are provided through the internet or through other electronic tools.
Models and types of cross-border electronic services
There are two major business models for cross-border electronic services under the new ruling. One business model refers to cross-border electronic services conducted with an online platform similar to foreign PSEs, such as Amazon, Apple, Google, etc., which establish online platforms on the internet. These would include online virtual stores for both domestic and overseas buyers and for sellers to conduct service transactions by means of the internet or other electronic means.
The other business model is for those conducting services other than through an online platform, in other words foreign PSEs rendering cross-border electronic services to buyers through websites established by foreign PSEs, such as online games, e-books, online music, online advertising or cloud storage and computing, and so on.
Determination of Taiwan-sourced income
In accordance with the amended principle for determining Taiwan-sourced income under Article 8 of the Taiwan Income Tax Act, income from cross-border electronic services would be deemed Taiwan-sourced if there was a substantial economic connection to Taiwan. Hence, the following examples demonstrate how remuneration received by a foreign PSE may or may not be deemed Taiwan-sourced income:
- Digital products produced in totality outside of Taiwan by means of the internet or other electronic means, for domestic buyers to download and store on computers or mobile devices, and with only their display being different. These might include standalone software or e-books, and therefore, remuneration for this service would not be recognised as Taiwan-sourced income. Nevertheless, if such cross-border electronic services were carried out with the assistance or participation of domestic individuals or corporations, they would be deemed as generating Taiwan-sourced income;
- Services provided via the internet or through other electronic means which are instantaneous, interactive, convenient, and continuous. These might include, for example, online games, online drama, online music, online videos, or internet advertising. In this case, remuneration received from aforesaid services rendered to domestic buyers would be considered Taiwan-sourced income;
- Services provided through the internet or other electronic means by an enterprise with a physical place of business, whether or not via foreign online platform operators. If those services were rendered outside of Taiwan or the business was being operated outside of Taiwan, the service charges would be deemed non-Taiwan-sourced income; and
- Services provided through an online platform where sellers and buyers conduct transactions and where one of the transacting parties was a domestic individual, PSE or organisation – remuneration received via these kinds of services would be considered Taiwan-sourced income.
Computation of taxable income
Once remuneration is determined as Taiwan-sourced income, the taxable income would be calculated by deduction of relevant costs and expenses and application of the relevant domestic profit contribution ratio as described below.
Deduction of relevant costs and expenses
If supporting accounting books or relevant documents can be provided, foreign cross-border electronic service providers can claim actual costs and expenses incurred for the calculation of taxable income. If accounting books and relevant documents are unavailable, foreign PSEs can apply for a pre-approval for the deemed net profit ratio, which is 30%.
Applicable domestic profit contribution ratio
For cross-border electronic services that are carried out both within and outside of Taiwan, only the income attributed to the profits within Taiwan is considered as Taiwan-sourced income. Hence, foreign PSEs could apply for a pre-approval for the applicable domestic profit contribution ratio.
Payment of income tax and obligations
Foreign PSEs having neither a fixed place of business nor business agents in Taiwan, who provide cross-border electronic services to domestic individual buyers and obtain non-withholding income in accordance with Article 88 of the Income Tax Act, must file tax returns during the income tax declaration period as stipulated in the Income Tax Act, or engage a business agent to do so on their behalf.
However, if foreign PSEs with no fixed place of business or business agent within Taiwan derive Taiwan-sourced income from selling electronic services to domestic business buyers, the domestic business buyers within Taiwan must withhold the taxes from each gross payment to foreign enterprises and pay the taxes to the tax authorities in accordance with Articles 88 and 92 of the Income Tax Act.
Foreign PSEs deriving Taiwan-sourced income from selling electronic services to domestic business buyers, who have obtained advance approval for the applicable net profit ratio and the onshore profit contribution ratio from the Taiwan Tax authorities, may calculate their income based on the applicable net profit ratio and the onshore profit contribution ratio within Taiwan, and the net income will be subject to a 20% withholding rate at the date of payment. Where a 20% withholding tax is imposed on gross revenue, foreign PSEs may apply (or engage an agent to apply on their behalf) to the Taiwan tax authorities for approval to re-calculate income via the applicable profit ratio and the onshore profit contribution ratio. They must apply within five years from the withholding tax payment date for a refund of overpaid tax. Meanwhile, Taiwan has signed comprehensive double taxation agreements with 32 countries. Foreign PSEs that are selling electronic services to domestic business buyers may be eligible for tax relief under one of these tax treaties, if applicable. In such cases, the foreign PSE or the tax withholder in Taiwan may claim a refund of tax overpaid to the tax authority within five years from the withholding tax payment date.
Recent tax reform in Taiwan
Amendments to the Income Tax Act were passed on January 18 2018 and became effective from January 1 2018. The amendments aim to close the gap of the income tax burden, and achieve a competitive and fair income tax system.
Under the amendments to the Income Tax Act, the corporation income tax rate has increased from 17% to 20%, and the surtax rate on undistributed profits has been reduced from 10% to 5%. Meanwhile, in order to address the complexities resulting from the existing imputation tax system, the imputation system was officially abolished from January 1 2018.
For non-resident shareholders, including individuals and corporations, tax is withheld at source on dividends distributed by a resident company in Taiwan and the withholding tax rate on dividend income has increased from 20% to 21%. However, this might be reduced under relevant tax treaties. As for individual residents, individual investors can choose to combine or separate dividend income from other individual income, using whichever of the following options that provides a more beneficial outcome for them when receiving dividend income. Meanwhile, the highest rate of individual income tax will be reduced from 45% to 40%:
- Option 1: Tax the dividend income combined with other individual income – 8.5% of the dividend income can be deductible and the maximum allowable deductible amount is NT$80,000 per taxpayer; or
- Option 2: Dividend income is taxed separately from any other individual income, with the dividend income being taxed at a flat rate of 28% instead of at the individual income tax rate.
Head of tax, global transfer pricing (TP) services
101 Tower, No 7, Sec 5, Xinyi Road, Taipei, 11049
Sherry Chang is a senior partner in the tax and investment department, and the country leader of KPMG's TP practice in Taiwan. She had more than nine years of experience with the Taiwan tax authority before she joined KPMG in 2000.
Sherry has extensive experience in providing general tax advisory services to multinational enterprises (MNEs); in particular, she specialises in assisting MNEs in resolving tax (including TP) disputes with the Taiwan tax authority. Her areas of industrial specialisation include electronics, petrochemicals, construction, telecommunication, automotives, media, consumption products, and financial services.
Sherry holds a bachelor's degree in accounting from the National Chung-Hsing University (now known as National Taipei University). She is an accredited member of the Association of Certified Public Accountants in Taiwan, and is a frequent speaker at industry conferences on various tax topics.
101 Tower, No 7, Sec 5, Xinyi Road, Taipei, 11049
Karl Chan is a director with the global transfer pricing (TP) services team of KPMG in Taiwan.
He has extensive experience advising clients on TP and cross-border tax issues. His areas of focus include TP documentation, dispute resolution, planning and cross-border business structuring.
Karl's client portfolio covers multinational enterprises (MNEs) involved in electronics, petrochemicals, construction, telecommunication, automotives, marine transportation, apparel, cosmetics, etc.
He has also participated as a speaker at TP seminars hosted by KPMG in Taiwan, the Taiwan tax authorities, and various foreign trade organisations.
101 Tower, No 7, Sec 5, Xinyi Road, Taipei, 11049
Anita Lin is a director of KPMG's global transfer pricing (TP) service practice in Taiwan. Before joining the TP practice at KPMG in Taiwan in 2006, Lin worked in the assurance and corporate tax practice for three years also at KPMG in Taiwan.
Lin has a wide range of TP experience, having been involved in advising on TP planning, preparing contemporaneous documentation and assisting in tax audits for multinational corporations operating in the information, communication and financial services sectors. In addition, Lin spent a secondment in KPMG in Singapore's TP practice where she engaged in a variety of international TP projects.
Lin is a US certified public accountant and holds an MSc in international business and a management degree from the UK and a BA in accounting administration from Taiwan.
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