Yishian Lin, Wendy Chiu and Dave Barberi of PricewaterhouseCoopers outline those sections of the safe harbor rule which have been revised. For a complete review of the safe harbor rule, please see Tai-Tsai-Sui ruling number 09704555160 dated November 6 2008 of the assessment rules for non-arm's-length transfer pricing of profit-seeking enterprises, (Taiwan assessment rules).
Modifications to the safe harbour ruling
Profit seeking enterprises may be exempt from the preparation of contemporaneous transfer pricing documentation if one of the following conditions is met:
Operating revenues and non-operating revenues (total turnover) for a given taxable year does not exceed NT$300 million ($9.7 million) at a conversion rate of NT$/$ = 31 (the originally ruling was NT$100 million ($3.2 million). Total turnover is defined as both operating revenues, revenues incurred from the sale of goods and services during the normal course of business, as well as non-operating revenues, revenues incurred from, for example, interests or dividends.
The total turnover for a given taxable year exceeds NT$300 million but does not exceed NT$500 million (the original ruling was NT$100 million/$3.2 million and NT$300 million/$9.7 million respectively), and meets the following requirements:
a. Tax credits for a given taxable year do not exceed NT$2 million (the original ruling was NT$1 million) and unutilised loss carried forward for the preceding five year tax period do not exceed NT$8 million (the original ruling was NT$4 million);
b. There were no controlled transactions with a foreign entity in the given taxable year.
The total turnover from controlled transactions (in brief, a controlled transaction is determined by the revenue, cost, expenses, profit or loss allocation between or among an enterprise and other local and foreign enterprises with which it has an associated relationship, and those between or among such an enterprise and another enterprise by which it is directly or indirectly owned or controlled), in a given taxable year does not exceed NT$200 million (the originally ruling was NT$100 million).
In addition, profit seeking enterprises are not required to apply for contemporaneous transfer pricing documentation exemption if controlled transactions are entered into with a government agency, monopoly, oligopoly, and sales representatives or buy/sell distributor of a non-related party in a given taxable year.
Profit seeking enterprises with multiple controlled transactions in a given year must review each controlled transaction individually to confirm whether the safe harbour ruling applies. However, where one controlled transaction does not fall within the safe harbour ruling, the safe harbour ruling’s total turnover figures for additional controlled transactions are reduced to NT$10 million. The additional controlled transactions exceeding this lower safe harbour amount are required to be included in the transfer pricing contemporaneous documentation.
Required documentation
If a profit seeking enterprises’ total revenue, as outlined above, exceeds or equals the new safe harbur ruling are required to prepare a transfer pricing contemporaneous documentation. In contrast, should the engaged transaction fall within the safe harbour ruling, other supporting documentation should be prepared in lieu of a transfer pricing contemporaneous documentation. If the profit seeking enterprise’s total turnover falls within the NT$300 million but under NT$500 million, the determination of whether a transfer pricing contemporaneous documentation is necessary becomes much more complex. Some of the determining factors are whether or not there are tax incentives, if losses are carried forward and the existence of foreign related parties.
If the turnover is below NT$300 million, then a transfer pricing contemporaneous documentation is not required. However, companies are still expected and required to provide other documentation to support the arm’s length nature of the controlled transaction. Other supporting documentation is further clarified below. To facilitate a better understanding of the necessary transfer pricing documentation, please refer to the flowchart below.
Those profit seeking enterprises entering into controlled transactions which fall within the safe harbour ruling are required to prepare other documentation as defined under the safe harbour ruling article 4:
A. Publicly available documents or information regarding bids or tender offers by/to governmental agencies;
B. Publicly available documents or information which may be used as a comparable uncontrolled transaction;
C. Publicly available market prices as found listed in newspapers or magazines which contain selling prices within the same industry, county or city and within the same month;
D. An evaluation report completed by an independent appraiser or notarised evaluation report;
E. A transfer pricing report performed in accordance with local transfer pricing regulations of the foreign participant of the controlled transaction (this report will need to be revised to comply with the Taiwan assessment rules); and
F. Other supporting documents which support the controlled transaction meets the arm’s length principle as outlined in the Taiwan assessment rules.
Taxpayers’ affect
As the ruling has changed, there are several issues which will affect taxpayers. To ensure that profit seeking enterprises comply with the safe harbour ruling, profit seeking enterprises will need to focus on some areas as outlined below.
Profit seeking enterprises should pay extra attention to all controlled transactions that are at or near the newly modified safe harbour ruling amounts and be particularly vigilant when recording and reviewing these transactions. Furthermore, all controlled transactions and the functions of each party involved should be properly documented; moreover, intercompany agreements should be in place. The Taiwanese government has yet to provide a comprehensive listing of necessary items to be included in intercompany agreements, but it is crucial for profit seeking enterprises to have said agreements for all services and/or technology provided.
It is imperative for profit seeking enterprises to keep financial records as accurate and up-to-date as possible; these financial records should also be reviewed and analysed on a transaction-by-transaction basis. As stated above, it will need to be determined if a given controlled transaction needs to be covered in a transfer pricing contemporaneous documentation report.
As the safe harbour ruling partially alleviates the burden for profit seeking enterprises with smaller operations as well as for enterprises involved in operations entered into with non-related parties, enterprises should carefully review their controlled transactions and evaluate their transfer pricing documentation requirements under the new safe harbour ruling. To minimise the risk of violating the Taiwan assessment rules, taxpayers should consult their local tax consultants for guidance and assistance.
Yishian Lin (yishian.lin@tw.pwc.com), ( Wendy Chiu (wendy.chiu@tw.pwc.com) and Dave Barberi (dave.barberi@tw.pwc.com) PricewaterhouseCoopers, Taiwan
