New VAT regime for foreign e-service providers
Since the OECD announced the BEPS Action Plan in 2013, Taiwan has actively been monitoring global international tax developments. Although Taiwan is not an OECD member, the Ministry of Finance (MOF) took actions to address the urgency of the BEPS tax issues, and their impact on the Taiwan investment and tax environment.
Taiwan's first BEPS legislative change was the amendment to the Value-Added and Non-Value Added Business Tax Act (VAT Act) to bring foreign e-commerce service providers into the Taiwan VAT net, in line with the recommendations of the BEPS Action 1 report on digital economy taxation.
Expanding digital economy drives changes to VAT regime
Previously, when Taiwan recipients purchased goods or services from foreign enterprises (without a fixed place of business in Taiwan), the Taiwan recipients would be obliged to compute and pay VAT to the Taiwan tax authorities (as appropriate) under Article 36 of Taiwan VAT Act. As the Taiwan buyers were required by law to self-report and pay the VAT, compliance was low in practice. As a result, foreign enterprises generated significant revenue through online sales to Taiwan without a Taiwan VAT burden.
Given the continuous growth in e-commerce businesses, the MOF decided to shift the VAT burden to foreign e-commerce service providers. This was done with a view to simplifying the tax collection administration, as well as providing a level playing field for both domestic and foreign online service providers and traders.
In response to the OECD BEPS recommendations and recent observations to changes in taxing cross border e-commerce transactions in the EU, Japan and Korea, the MOF proposed that all foreign e-commerce service providers that sell to Taiwan individuals online must register for and remit VAT to the Taiwan tax authorities.
Amendments to the Taiwan VAT regime
The amendments to the VAT Act were promulgated by the President on December 28 2016 and came into force on May 1 2017. Under the amendments, foreign enterprises (without a fixed place of business in Taiwan) selling e-commerce services (including digital products) to Taiwanese individuals must register for VAT. The vendor must pay VAT directly or indirectly through an appointed tax-filing agent, where its Taiwan sales revenue exceeds the registration threshold.
The main foreign e-commerce-related changes to Taiwan's VAT law are summarised below.
VAT payer scope expanded to cover cross-border electronic services
The definition of 'business entity' is extended to include a foreign enterprise without a fixed place of business in Taiwan that sells electronic services to domestic individuals.
Further, where a foreign entity does not have a fixed place of business in Taiwan when selling electronics services to domestic individuals, the VAT payer will be the foreign entity itself or its agent. That is, the VAT taxpayer will no longer be the Taiwan individual purchaser.
Pursuant to the Directions on the Levying of Business Tax on Cross-Border Electronic Services Transactions (VAT Directions on Cross-Border E-Services Transactions), 'electronic services' are defined as:
- Services used for downloading via the internet or other electronic tools and saving onto computers or mobile devices (such as smartphones, tablet computers, etc.) for use;
- Services used online or via other electronic tools without downloading onto any devices, including services used in digital form, like online games, advertisements, audio-visual browsing, voice frequency broadcasting, information contents (such as movies, soap operas, music, etc.) and interactive communications; and
- Other services supplied through the internet or other electronic tools; for example, services supplied through online platforms set up by an offshore electronic business entity and used at a physical location in Taiwan (e.g. booking Taiwan hotels and tours).
As the VAT scope specifically covers the electronic service transactions concluded with domestic individuals, the VAT Directions on Cross-Border E-Services Transactions also provide a definition for 'domestic individuals' and distinguish between utilisation with or without a physical place of business in Taiwan.
Where services purchased are used without a physical location in Taiwan, a person will be considered to be a domestic individual if:
- The person has their domicile or residence in Taiwan;
- The person purchases services through electronic means via devices located or installed in Taiwan;
- The person uses mobile devices to purchase services where the mobile phone number has the country code of 886 (i.e. the Taiwan international dial code); or
- There are other items of transaction information relevant to the transaction that indicate the purchaser is a domestic individual, e.g. buyer's billing address, bank account information for the payment, IP address of the equipment or devices, SIM card, etc.
Where services purchased are used in connection with a physical location in Taiwan, including electronic services that are:
- Purchased in connection with real estate (e.g. hotel services or building construction/repair related services, etc.) and such real estate is situated in Taiwan;
- Purchased and relate to transportation used within Taiwan;
- Purchased and relate to various forms of performances, exhibitions, etc. within Taiwan; or
- For other services used in connection with a physical location in Taiwan.
VAT registration threshold set by the MOF
Foreign enterprises having no fixed places of business within Taiwan that sell electronic services to Taiwan individuals will have to perform tax registration or appoint a tax filing agent in Taiwan to handle the VAT compliance requirements, if their annual sales exceed the promulgated threshold of TWD 480,000 ($16,000). Therefore, foreign enterprises meeting the above requirements are obligated to apply for a taxpayer ID and file bi-monthly VAT returns.
Penalty for non-compliance
A penalty ranging from TWD 3,000 to TWD 30,000 will be imposed on foreign enterprises for non-compliance with the tax registration requirement. The penalties also extend to appointed tax agents.
Transitional period given for issuance of government uniform invoices (GUIs)
Generally, businesses are required to issue GUIs in Taiwan. However, given that the VAT invoicing system is not yet fully set up to cater to the new e-commerce rules, and the related detailed implementation rules are still under discussion, a tax ruling number (10604506690) has provided some relief. The ruling provides that foreign enterprises are not required to issue GUIs during the period from May 1 2017 to December 31 2018.
Potential CIT developments
Although not officially announced, it is anticipated that there will also be future income tax developments in the digital economy space. The MOF is contemplating imposing CIT on business-to-consumer (B2C) e-service income (i.e. non-tangible goods/services) derived by foreign e-service providers. The adoption of a deemed income taxation method is also being considered. It is expected that the draft income tax rules for e-services will be available before the end of this year, with discussion sessions to be held with the industry and professional advisers. Depending on when the relevant legislation is promulgated, the first CIT filing could be as early as May 2018 to retroactively cover the transaction period from May to December 2017.
Other key tax developments and potential tax reforms
Amended transfer pricing rules for country-by-country (CbC) reporting and master file effective for 2017
On July 27 2017, the MOF released draft amendments to the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's Length Transfer Pricing, (TP Assessment Rules). The amended TP Assessment Rules include the three-tier transfer pricing documentation as suggested by the OECD under the BEPS Action 13 report. It is expected that the amended rules will apply to fiscal years on or after January 1 2017. Most major Taiwanese businesses have been anticipating this, and making preparations.
The MOF has yet to announce the threshold for reporting. It is expected that the reporting threshold for CbC reporting will follow the OECD suggested €750 million ($888 million) and be translated into new Taiwan Dollars (TWD). The content and covered entities required are consistent with the OECD template.
In the future, the tax information of MNEs will be more transparent among tax authorities in different jurisdictions. Tax authorities, including in Taiwan, will be better able to understand and monitor a group's holding structure, profit allocation, operational substance and tax paid status. This will not only feed into the tax authorities' assessment of a given group's transfer pricing audit risk, but will also enhance tax officers' ability to implement other Taiwan anti-avoidance measures, such as controlled foreign companies (CFC) and place of effective management (POEM) rules. Companies should immediately assess the potential impact and form strategies to respond to potential challenges from the Taiwan tax authorities.
Proposed changes to the imputation tax system
Under Taiwan's existing income tax rules, there is much complexity surrounding the calculation of the tax credit, granted against tax imposed on dividends under individual income tax (IIT), in respect of Taiwan corporate income tax (CIT). There have also been concerns raised over the imposition of the top individual marginal tax rate of 45% on dividend income of domestic investors, compared to a final dividend withholding tax rate at 20% (subject to tax treaty reduction) for foreign investors.
As such, the MOF has proposed a reform and simplification of the existing rules. The IIT rate structure, and the CIT and 'surtax' imposed on the undistributed earnings of companies, will all be altered. Under prevailing rules, a 10% surtax is imposed on a company's undistributed profits if the company does not distribute its after-tax profits within a prescribed period. When the company subsequently distributes the earnings to its foreign shareholders, 50% of the paid surtax can be set off against the dividend withholding tax borne by a foreign investor.
The draft bill was raised to the Cabinet for approval on September 1 2017 and was expected to be submitted to the Legislature in mid-October. The key points of the tax reform are summarised below.
IIT on individual dividend income (domestic individual investors):
- Abolish the imputation tax regime where the individual has to gross up the dividend income received then is taxed at the relevant tax rate (where the highest top marginal tax rate is 45%) and reduce the tax payable via the imputation credits attached to the dividends.
- Two alternative methods, Plan A and Plan B, are proposed for taxing the dividends:
- Plan A will allow individual investors to be exempt from income tax on 37% of dividends they receive, with the remaining 63% to be included in their IIT return and taxed accordingly; and
- Plan B will allow the individual investors to choose between two options, Option 1 and Option 2, whichever gives the individual a more favourable outcome.
- Option 1 will tax all dividend income as part of the individual's income but they can then recognise 8.5% of the dividend income as a tax deductible amount, (up to TWD 80,000 as the maximum allowable deduction amount for each household); and
- Under Option 2, the dividend will be taxed separately and not included as part of the individual's income (which is subject to progressive rates). The individual investor will be taxed on a flat rate of 26%, rather than at the progressive individual income tax rates. Progressive rates range from 5% to 45% – the 45% applies for taxable income exceeding TWD 10 million.
Withholding tax (WHT) on dividends to non-residents (foreign investors):
- Surtax paid on undistributed earnings can no longer be used to offset and reduce the WHT imposed on dividends distributed to foreign investors; and
- WHT rate on dividend income is to increase from 20% to 21% for foreign investors.
Other proposed CIT changes
Other changes planned for the CIT regime include:
- Increasing the CIT rate from 17% to 20%;
- Decreasing the surtax rate from 10% to 5%;
- No longer requiring companies to maintain an imputation credits account (ICA) due to the abolition of the imputation tax regime; and
- Ensuring dividends received by a domestic corporate shareholder from their investment in other domestic companies remain exempt from CIT.
Other proposed IIT changes
Additional changes to the IIT include:
- Abolishing the 45% tax rate bracket for net consolidated income of more than TWD 10 million. The highest tax rate bracket will be restored to 40% (the highest marginal rate before 2014); and
- Introducing an upward adjustment of the following three deductions. The standard deduction will increase by TWD 20,000, being raised from TWD 90,000 to TWD 110,000. The amount will be doubled for taxpayers with a spouse. The special deduction for income from salaries/wages and the special deduction for disabled and handicapped persons will increase by TWD 52,000, both being raised from TWD 128,000 to TWD 180,000.
Given the bullish implementation dates on the proposed changes (e.g. the raised withholding tax rate for foreign investors is to take effect from January 1 2018), the tax reform is anticipated to be a priority bill.
In view of the various changes that have taken place in Taiwan in recent years as well as the proposed tax reform, we are expecting more changes to come. It is recommended that existing and potential investors closely monitor the development and implementation details of the upcoming and proposed changes to ensure that tax risks and obligations are appropriately managed and complied with. Overall, the changes are a big step forward for Taiwan's tax system to become more aligned with international trends and practice.
68F, Taipei 101 Tower, No. 7,
Stephen Hsu is head of the tax and investment department of KPMG in Taiwan. Before joining KPMG, Stephen was a tax officer of the Taipei National Tax Administration, within the Ministry of Finance.
Stephen specialises in the provision of financial services. He has assisted multinational enterprises in the tax evaluation of mergers and acquisitions (M&A), international tax planning and tax planning services for corporate investment and operation structures. He has also been actively providing global transfer pricing services to both foreign and domestic companies and assistance in tax appeal consultations and filings.
Stephen is an instructor, both internally at KPMG in Taiwan, and externally at the National Taiwan University's College of Management, and a lecturer at the training institute of the Ministry of Finance. Stephen serves as an adviser of the Taiwan Insurance Institute. He is also a member of the Taipei City CPA Association, a member of the Taxation Agency, Ministry of Finance, and a member of the Government Information Office.
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Hazel Chen joined the tax service department in Taiwan in 2006. Before her tax consulting career, Hazel was a former tax officer of the Taipei National Tax Administration, with more than four years of experience in the field of individual income tax and corporate income tax audit. Her experience has strengthened her understanding of the practices of the tax administration.
Hazel provides tax consulting services to both domestic and multinational groups in areas of transfer pricing, corporate investments and operational structuring, as well as tax audit assistance. She also assists multinational companies in handling global transfer pricing and tax compliance issues. Her specialisation is in the technology, media and telecommunications sectors in both industrial and consumer markets.
Hazel has been involved in numbers of tax field audit projects for merger transactions conducted by multinational and large local companies. She also has extensive experience in corporation with many foreign KPMG teams through co-execution of varies transfer pricing analyses.
Hazel is a frequent speaker at tax and transfer pricing seminars, and workshops for clients and the public.
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Ellen Ting joined KPMG Taiwan in 2004. Before joining the firm, she worked for three and a half years with the KPMG Vancouver office, in the international tax department, focusing on US corporate and state tax.
Ellen has assisted many multinational companies in providing tax advisory services in respect of their operations and transactions in Taiwan. Her areas of focus include income tax and withholding tax on cross-border transactions, surtax, tax risk analysis, tax incentive planning and indirect taxes. She has been involved in a broad array of projects, including restructuring, tax due diligence, and has experience advising clients from the financial services industry including banks, fund houses and securities houses.
Her areas of focus also include global transfer pricing and she has participated in many transfer pricing projects encompassing planning, compliance, contemporaneous documentation and audit defence for multinational corporations from various industries.
Other than client responsibilities, Ellen is a frequent guest speaker for various foreign trade organisations and at taxation seminars.
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Betty Lee is an international tax director at KPMG Taiwan and is based in Taipei. She has over 10 years of professional experience gained in a number of jurisdictions, namely Australia, Hong Kong and Taiwan. She joined KPMG Hong Kong in 2007 where she provided corporate tax advice and compliance services to Hong Kong as well as multinational companies.
Betty joined KPMG in Taiwan in 2011 where she specifically provides international tax and investment consulting services for both domestic and multinational groups. Betty has extensive exposure and specialises in numerous facets of taxation to a range of clients. She is also experienced in identifying the needs of clients and providing the required solutions, including investment holding structuring and tax planning, group restructuring and relevant tax implications, and general tax compliance and advisory support.
She is a member of the Institute of Chartered Accountants in Australia, a Chartered Tax Adviser of the Taxation Institute in Australia as well as an international affiliate member of the Hong Kong Institute of Certified Public Accountants.
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