The landscape of global tax is changing dynamically as the BEPS project is now entering its implementation phase, and more information reporting obligations are required to be followed in order to tackle tax evasion. Thus, the new global tax environment has triggered widespread pressure to reform tax enforcement in Taiwan. Taiwan's Minister of Finance (MOF) has been keeping up the pace to follow the global phenomenon of anti-tax avoidance. Consequently, there are a couple of key tax developments on the progress of giving statutory effect in Taiwan.
New VAT rules on foreign e-commerce
As the tax challenges of the digital economy evolve, Taiwan's tax system has been unable to collect a fair share of taxes from e-commerce transactions. When a foreign e-commerce enterprise, without establishing a fixed place of business in Taiwan, sells online services or intangibles to an individual customer in Taiwan, the individual customer would be required to compute and pay VAT to the tax authorities. However, due to the VAT collection mechanism and taxation compliance, the tax authority rarely collects such online service or intangibles transaction VAT from individuals. As a result, the tax authority is losing the tax base and Taiwan's e-commerce enterprises encounter unfair tax treatment.
In order to curb such tax evasion and present tax fairness, the MOF is adopting the recommendation from the OECD's BEPS Action 1, as well as referring the approach from EU members, Japan and Korea. Tax compliance obligation will be shifted to foreign e-commerce businesses located outside of Taiwan. Pursuant to the new VAT rules, foreign e-commerce businesses that meet the threshold requirements will be obliged to register with the tax authority and pay VAT in Taiwan.
New amendments on exchange of tax-related information
For the purpose of tax transparency, the OECD is adopting the global recommendations of the automatic exchange of information (AEOI). In addition, the OECD's multilateral competent authority agreement (MCAA) for the common reporting standard (CRS) is also widely implanted by more than 100 jurisdictions while the OECD determined that these implementations are objective criteria to be used to label countries as non-cooperative for transparency purposes. Due to its political status, Taiwan is unable to participate in the exchange of information mechanism so that the MOF amended the Article 5-1 of Tax Collection Law to accommodate exchange tax-related information in order to enhance tax transparency and also prevent from being labeled as a non-cooperative jurisdiction. New amendments include reciprocal information exchange agreements with other jurisdictions and scope of the information exchanged.
New anti-tax avoidance enforcement:
Taiwan's tax authority has been consistently moving toward combatting tax avoidance. In 2016, the revelations of the Panama Papers and the global trends of anti-tax avoidance stimulated actions to legislate two significant anti-tax avoidance instruments, controlled foreign company (CFC) rules and place of effective management (PEM) that specifically tackle the use of tax havens to avoid paying taxes. However, in order to alleviate the impact on Taiwanese companies, the MOF specified that the date of implementation of CFC and PEM rules will be conditional on 1) the effective date of a tax agreement between Taiwan and China 2) implantation status of international CRS 3) the enforcement rules of CFC and PEM are finalised and circulated in public.
CFC rules
Under current tax rules, there is the option to defer taxation as long as the overseas subsidiaries of Taiwanese companies do not repatriate earnings back to Taiwan. Therefore, some Taiwanese companies retain their overseas profit in offshore, especially through investment structure, most overseas profits are parking in low-tax jurisdictions. It raised significant tax base erosion due to the loophole under current tax rules in Taiwan.
With the effort to tackle tax avoidance, MOF is adopting recommendations from BEPS Action 3 and other jurisdictions' practices to stipulate CFC rules. According to new CFC rules passed in Taiwan's legislation, Taiwanese companies shall include their pro-rated share of those CFCs' profit as investment income in their taxable income. Once the overseas subsidiaries meet both of the following conditions, the subsidiary will be defined as a CFC under the new regulations:
more than 50% of the foreign company's capital directly or indirectly is owned by Taiwanese company
foreign company situated in a low-tax jurisdiction, the low-tax jurisdictions include those where the corporate income tax rate is lower than 11.9% or tax only imposed on domestic-source income under territorial tax system
The implementation of CFC rules is expected to prevent long-term deferral of taxation from Taiwan tax perspective. However, with reducing administrative and compliance burdens, the CFC rules are introducing de minimis thresholds and substance exemption. Meanwhile, prevention and elimination of double taxation are also designed in the new CFC rules.
PEM rules
When determining the residential status of a company in Taiwan, it depends on whether the company is incorporated in Taiwan. Once the company is incorporated in Taiwan is subject to taxation on their worldwide income pursuant of Article 3 of the Income Tax Act (ITA). Consequently, business enterprise manipulated the tax system to establish their business outside of Taiwan while executed operation in Taiwan in order to avoid taxation. To combat tax abuse, the MOF promulgated the PEM rules that if a company's place of effective management is Taiwan, it will be treated as a Taiwan resident company and its global income will be taxable as well as there are compulsory obligations to fulfill all tax compliance in Taiwan. Under the new PEM rules, once a business meets all of following criteria, a business enterprise regards the place of effective management in Taiwan, it will be treated as Taiwan resident company:
The person who executes major decision for significant operation, accounting and finance, or human resources resides in Taiwan, or the headquarters of the foreign company is situated in Taiwan, or major business decisions are made in Taiwan, and
Accounting books and records, or the shareholder or board meeting minutes are prepared or stored in Taiwan, and
Major business activities are operating in Taiwan.
Transfer pricing practice in Taiwan:
The latest status of implementation for BEPS Action 13
In respect of the implementation and application of BEPS Action 13, the MOF has indicated that it will amend domestic transfer pricing regulations in order to reflect BEPS Action 13 guidelines, especially including country-by-country reporting and master file. From the Taiwanese tax perspective, it is anticipated that the content of CbCR and master file will align with the OECD requirements. The timeframe for implementing CbCR and master file is to be announced later this year.
Key issues of transfer pricing audit
The tax authorities have been speeding up transfer pricing audits, particularly focusing on companies from different industries or foreign-owned companies in Taiwan. Regarding transfer pricing audits, the Taiwan tax authorities continually pay attention to whether there are any inappropriate approaches for applying transaction-by-transaction bases or selecting profit-level indicators when using the transactional profits method. Meanwhile, the tax authority is exploring the possibility of utilising the profit split method under value chain analysis while the transactional profits method is currently the most favourable method to be selected. In addition, the following issues will be a focused for tax authorities when TP audits come into place:
Transfer of tangible assets: business enterprise's profit are volatile or deficit over the years when the sales or cost involved enormous controlled transactions;
Transfer/use of intangible assets: business enterprises provide know-how and trademark to foreign subsidiaries without any consideration in return, or foreign-owned companies in Taiwan reimburse significant payment for using intangible assets to its overseas headquarters;
Rendering of services: business enterprises provide technical support to overseas affiliates without charging proper compensation; and
Use of funds: parent companies are exposed to financial risk when providing foreign subsidiaries guarantees for loans while parent companies do not charge guarantee fees.
Sherry Chang |
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Partner KPMG in Taiwan 68F, Taipei 101 Tower, No. 7, Sec. 5, Xinyi Rd., Taipei, 11049 Tel: +886(0)2 8101 6666 Sherry is a senior partner of tax & investment dept. and the country leader of KPMG's transfer pricing practice in Taiwan. She had over 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; particularly, she specialises in assisting multinational enterprises in resolving tax (including transfer pricing) disputes with the Taiwan tax authority. Her areas of industrial specialisation cover electronics, petrochemicals, construction, telecommunication, automotive, media, consumption products, and financial services, etc. 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 a frequent speaker for industry conferences on various tax topics. |
Karl Chan |
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Director KPMG in Taiwan 68F, Taipei 101 Tower, No. 7, Sec. 5, Xinyi Rd., Taipei, 11049 Tel: + 886-2-81016666 Karl is a director with the global transfer pricing services team of KPMG in Taiwan. He has extensive experience advising clients on transfer pricing and cross-border tax issues. His areas of focus include transfer pricing documentation, dispute resolution, planning and cross-border business structuring. Karl's client portfolio covers multinational enterprises involved in electronics, petrochemicals, construction, telecommunication, automotive, marine transportation, apparel, and cosmetics, etc. He has also participated as a speaker for transfer pricing seminars, Taiwan tax authorities, and various foreign trade organisations. |
Anita Lin |
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Director KPMG in Taiwan 68F, Taipei 101 Tower, No. 7, Sec. 5, Xinyi Rd., Taipei, 11049 Tel: +886 2 81016666 Anita Lin is a director of KPMG's global transfer pricing service practice in Taiwan. Prior to joining KPMG's transfer pricing practice in Taiwan in 2006, Anita worked for KPMG's assurance and corporate tax practice for three years. Anita has a wide range of transfer pricing experience, having been involved in advising transfer pricing planning, preparing contemporaneous documentation and assisting in tax audits for multinational corporations operating in information, communication and financial service. In addition, Anita was seconded to KPMG in Singapore's transfer pricing practice and engaged in a variety of international transfer pricing projects. Anita is a US certified public accountant, and holds an MSc degree in international business and management from the UK and a BA in accounting administration from Taiwan. |
