Advantageous geographic location
Taiwan offers investors a unique opportunity to invest in a modern economy and benefit from its strategic proximity to China and Southeast Asia. Its location makes it a perfect place for international corporations to establish their headquarters in the Asia Pacific region. Together with Hong Kong and Singapore, Taiwan is also one of the low tax rate jurisdictions in Asia.
Located in the heart of the Asia-Pacific region, Taiwan is in an advantageous position to capitalise on the centrality of Asia-Pacific to global value chains and serve the global marketplace. This geographic location enables Taiwan to be a premier hub for Asian transportation and a key logistics centre for the East-Asian region.
Global operations headquarters and global innovation centre
Taiwan's location makes it a perfect place for international corporations to establish their headquarters in the Asia Pacific region. As the hub that connects Europe, the US, Japan and the emerging Asian markets, Taiwan is very crucial in terms of its high economic and strategic value. Aspiring to integrate manufacturing and service industries, Taiwanese enterprises have successfully fostered good collaborative relationships with several well-known and well-respected European and American enterprises.
A superior innovator with an impressive R&D base, Taiwan is very active in the global R&D and product innovation scene. Not only is it a key centre for product R&D, it has also become an important centre for high-tech original equipment manufacturing (OEM)/ODM. Taiwan provides quality products and services, which in turn, enables the development of international brands. Moreover, Taiwan's easy access to mainland China's production resources allows for mass production. Its wealth of production experience, capability to commercialise innovative products rapidly, and global deployment are factors that help Taiwan contribute value-add to global production chains.
According to the world competitiveness reports released in recent years, Taiwan is highly competitive and has great potential for even further development. The high competitiveness and innovation ability stem from the excellent technological infrastructure and talented human resources.
Technological products throughout the world
Taiwan has consistently been the top global market for semiconductor manufacturing equipment in recent years, representing more than 25% of the total worldwide market.
Taiwan has competitive advantages in the IT manufacturing industry; Taiwan's semiconductor, optoelectronic, information, and communication products account for more than 70% of global production. The production value of silicon wafer OEM remains as the largest at around 70% of the world total.
These sectors and the assembly and testing sector are all ranked number one in the world. The production value of Taiwan's integrated circuit (IC) design accounts for 22.2% of the world total, and that of thin-film transistor-liquid-crystal display (TFT-LCD) is in second place. Its light-emitting diode (LED) production value is third.
International ranking reports demonstrate that Taiwan's business environment will remain as excellent as it is now. According to the 2015 Index of Economic Freedom published by the Heritage Foundation (a US think tank) and the Wall Street Journal, Taiwan was ranked 14th among the 186 countries/jurisdictions, up three places from last year's ranking at 17th in the world. This ranking was Taiwan's best performance in the index to date. Taiwan was ranked 5th in the Asia-Pacific region, only behind Hong Kong, Singapore, Australia, and New Zealand, ahead of Japan (20th) and South Korea (29th) (Source: http://investtaiwan.nat.gov.tw/eng/show.jsp?ID=413).
Low taxation investment environment
Taiwan provides a low taxation investment environment. The ratio of government tax revenue to GNP is lower than 13%, which is lower than in Japan, South Korea, and most of the developed countries in Europe and the Americas. In recent years, Taiwan has launched taxation reforms to lower domestic tax rates and to simplify the taxation system. Beginning from 2010, the tax rate for profit-seeking enterprise income has been reduced to 17% from 25%, making Taiwan, together with Hong Kong and Singapore, one of the lowest tax rate jurisdictions in Asia (Table 1).
|Table 1: Comparison with neighbouring countries/jurisdictions|
|Item||Taiwan||China||Hong Kong||Singapore||South Korea|
|Corporate income tax||17%||25%||16.50%||17%||22%|
|Individual income tax||5% - 40%||3% - 45%||15%||2% - 20%||8% - 35%|
|Value-added business tax||5%||17%||0%||7%||10%|
|Tax incentive policy||R&D investment||R&D investment, high & new technology||-||R&D investment, emerging industries, operations headquarters||R&D investment, foreign investment|
|Source: Department of Investment Services, Ministry of Economic Affairs, Republic of China (ROC)|
The R&D tax incentive regime allows up to 15% of the R&D expenditure incurred by a company in a specific tax year to be claimed by the company as a tax credit. The amount of the tax credit is limited to 30% of the income tax payable for the current year. There are various R&D tax incentives applicable to specific industries.
Furthermore, there are also special regimes for specific industries or sectors, such as:
- The biotechnology and new pharmaceuticals industry.
- Private participation in Transportation and Communication Infrastructure Projects.
- Foreign profit-seeking enterprises conducting goods storage in the Taiwan Free Trade Zone.
- Simple processing operations in the Taiwan Free Trade Zone.
As of March 31 2015, Taiwan has signed tax treaties with 28 countries including Germany, France, and Luxembourg, as well as 14 treaties on air and sea transportation income tax exemption.
New double tax agreement between Taiwan and China expected to promote trade and direct investments
After several years of negotiation and discussions, the Cross-straits Agreement for the Avoidance of Double Taxation and the Cooperation of Tax Matters (the Agreement) between Taiwan and the People's Republic of China (PRC) was signed on August 25 2015. The Agreement will officially take effect from January 1 of the year after the year of approval and ratification process from both jurisdictions.
Both the OECD's Model Tax Convention and the UN's Model Double Tax Convention served as blueprints for the Agreement. The domestic tax regulations, economic and trade conditions, various income-generating cross-border activities and existing double taxation eliminating relief measures for each jurisdiction were taken into consideration in finalising the Agreement, which also seeks to protect Taiwanese investors' right to fair taxation and competition. The Agreement addresses methods to resolve tax disputes and enhance bilateral economic and investment relations. A few key features of the Agreement are as follows:
Permanent establishment and business profits
Typical to treaties, there is a provision within the Agreement governing PE profit attribution which draws on the UN Model in providing that, profits from an enterprise of one jurisdiction will not be taxed by the other jurisdiction if the enterprise does not carry on business through a permanent establishment (PE) in that other jurisdiction. In addition to the general definitions of a PE, the Agreement also stipulates that companies providing services, including consultancy services, will create a PE in the other jurisdiction only if the enterprise, through employees or other personnel engaged for the same or a connected project, provide services for a period or periods of more than six months in the aggregate within any 12-month period. This services PE article provides an opportunity for companies in either jurisdiction to benefit from the exemption under the business profits article.
Reduced withholding tax rates
- Dividends: this is reduced to 5% where the beneficial owner is a company directly owning at least 25% of the capital of the company which pays the dividends, otherwise 10% of the gross amount of the dividend.
- Interest: if the beneficial owner of the interest is a resident of one state, the tax charged in the other state shall not be more than 7% of the gross amount of the interest.
- Royalties: if the beneficial owner of the royalty is a resident of one other state, the tax charged in the other state shall not be more than 7% of the gross amount of the royalty.
- Capital Gains: The capital gains article within the Agreement includes a special feature for share disposal gains not typically found in the agreements or treaties signed with other nations. Source jurisdiction taxing rights are preserved for gains derived from the disposal of 1) PE assets; 2) immovable property; 3) equity in land rich companies; and 4) equity in non-land rich companies in which the transferor holds at least 25% of the shares (but only where the other jurisdiction exempts such gains). In view of the latter, as Taiwan generally taxes share disposal gains, effectively, all non-land-rich share disposal gains would be tax exempt in the PRC. The same would also apply in the reverse for a Chinese investor investing in Taiwan. This treatment makes the PRC-Taiwan Agreement one of the best for capital gains of any tax agreement signed by either side. Other gains are exclusively taxable in the residence jurisdiction, saving the disposer WHT of 10% in the PRC and 20% in Taiwan.
|Table 2: Applicable WHT rates under the Agreement|
|PRC domestic||Taiwan domestic||Rates under the agreement|
|Capital gains||10%||20%||03 /10%|
|15% dividend rate applies where the shareholding exceeds 25% of equity capital |
20% rate for leasing dependant on precise interpretation of the tax agreement
30% capital gains rate applied for non-land rich shareholdings of less than 25% of capital
Exchange of information
Any information received by one jurisdiction shall be treated as confidential and shall be disclosed only to persons or authorities concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by this Agreement. Such persons or authorities shall use the information only for prior mentioned purposes and shall not use the information on any criminal cases.
Other notable features of the new DTA
- Specific measures on treatment of third-jurisdiction intermediate holdings – To address Taiwanese companies' concerns on their existing indirect investment structures into the PRC, there are specific measures addressing the treatment of third-jurisdiction intermediate holding companies as tax residents of one of either the mainland China or Taiwan.
- Shipping and air transport – There are mutual tax exemption stipulations of relevant businesses operating out of each jurisdiction.
- Individual services – There are articles covering personal tax matters such as employment income that are in line with the OECD Model which should benefit many Taiwanese nationals working in the PRC.
Lowering the risks of double taxation
Taiwan's Ministry of Finance (MOF) has been studying the relevant deliverables under OECD's base erosion and profit shifting (BEPS) actions and devising possible implementing measures. It may be anticipated that the increased transparency and reporting of tax structures and transfer pricing practices of multinational enterprises (MNEs) in each tax jurisdiction will better equip the Taiwan tax authority for future audits. The following two provisions in the Agreement will certainly help mitigate future potential double taxation issues.
Mutual agreement procedures
Under the Agreement, should the conduct of businesses between a Taiwanese company and a related Chinese company lead to issues with respect to transfer pricing adjustments in the PRC which increase the Chinese company's taxable income, the companies are entitled to access a tax dispute resolution mechanism. They may request the initiation of a mutual agreement procedure with the Taiwanese tax authorities concerning the right of taxation, effectively eliminating double taxation.
Bilateral advanced pricing agreement
Apart from the mutual agreement procedure, the Taiwanese company and Chinese company may approach the respective tax authorities to apply for a bilateral advanced pricing agreement. Once a consensus is reached and approved, this will not only comprehensively address and resolve any potential transfer pricing disputes for the relevant years, but also minimise scrutiny from the tax authorities from either contracting jurisdictions in reviewing or making post-transactional adjustments.
Opening doors for potential tax efficiencies
Overall, the Agreement is a very positive development, providing more attractive investment options in terms of taxation and opening doors for potential tax efficiencies. Moreover, it eliminates investors' tax concerns about the uncertainty of the cross-strait relationship. Investors can now enjoy lower withholding taxes on dividends, interests, and royalties; and gains from property transactions may be taxed in one jurisdiction only (subject to certain conditions). The Agreement also provides a clearer definition for determining what constitutes a PE. In the case where a corporation is not considered to have a PE in one jurisdiction, such as a Taiwanese company providing services (for example, management, data processing, technology, and R&D services) to a Chinese company outside of China, the profit or income received may be exempt from China's corporate income tax.
More opportunities are also offered to shipping and air transport businesses under the Agreement to enhance their operational efficiency. Dual-resident individuals (such as individuals with a household registered in Taiwan under the Household Registration Act, but who have worked in the PRC for more than five years consecutively and have become a Chinese tax resident), and corporations will be taxed based on a tie-breaker that allocates taxing rights to one jurisdiction, and effectively prevents taxation in both jurisdictions. This is especially favourable to the large number of Taiwanese nationals working in the PRC.
An opportunity to invest in a modern economy
All in all, this landmark Agreement further strengthens Taiwan's attractiveness. Taiwan offers investors a unique opportunity to invest in a modern economy and benefit from its strategic proximity to China and Southeast Asia. Multinational companies may now consider Taiwan as an alternative holding company jurisdiction for China. Taiwanese companies are recommended to evaluate their investment structures and to consider ways to improve tax efficiencies. Companies should consider the benefits that may arise from direct investment after the implementation of the signed Cross Straits Agreement, particularly where offshore holding companies that have their effective management located in Taiwan have been used, given the consequent potential tax risks. Companies are also encouraged to consider the PRC and Hong Kong tax agreement (Hong Kong being the holding company location of choice for many existing Taiwanese indirect holding structures into China) and Taiwan's potential implementation of controlled foreign corporation (CFC) rules and other related tax-avoidance provisions. In cases where Taiwanese companies has no substance in their Hong Kong holding companies then indirect structures may not have worked given China's tighter treaty relief criteria. Consequently, moving to a direct Taiwan-China holding arrangement may be beneficial from the perspective of securing treaty benefits. In general, MNEs should measure the overall impact of tax after adjusting the investment and operational structures.
68F, Taipei 101 Tower, No. 7
Based in Taiwan, Jessie Ho is the head of the tax & investment department of KPMG in Taiwan and is an executive committee member. Before those roles, she was the partner-in-charge of the markets group, group head of the audit department of KPMG in Taiwan, and the committee and supervisor of the Taipei CPA Association. She was also responsible for the Knowledge Management and Learning & Development Centre of KPMG in Taiwan as the partner-in-charge and published articles on investment in Taiwan for foreign financial institutions and for China's financial institutions.
Jessie has been providing tax consultation services and tax compliance services such as the provision of corporate income tax return certifications for multinational clients. Jessie also provides tax advisory and compliance services to foreign institutional investors and qualified domestic institutional investors (FINIs & QDIIs).
68F, Taipei 101 Tower, No. 7,
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.
68F, Taipei 101 Tower, No. 7
Betty is an international tax director in KPMG Taiwan in Taipei. She has more than 10 years of professional experience gained in a number of jurisdictions, that is, 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 outbound tax and investment consulting services for both domestic and multinational groups in Taiwan and the Asia Pacific region. Betty has extensive exposure and specialises in numerous facets of taxation for a range of clients as well as identifying the needs and provisions of required solutions, including investment holding structuring and tax planning, group restructuring and relevant tax implications, 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.
68F, Taipei 101 Tower, No. 7,
Stephen Hsu is the partner-in-charge of the tax and investment department and the supervising senior in tax department of KPMG in Taiwan. Before joining KPMG, Stephen was a tax officer of the Taipei National Tax Administration, Ministry of Finance.
Stephen specialises in the provision of financial services. He has assisted multinational companies in the tax evaluation of 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 consultation and filings.
Stephen is an instructor both internally at KPMG in Taiwan, and externally at National Taiwan University's College of Management, and a lecturer at the training institute of the Ministry of Finance, ROC. 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, ROC, and a member of the Government Information Office, ROC.
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