Guide to Taiwan Anti-Tax Avoidance Measures
In view of many anti-tax avoidance measures have already been placed in the United States, EU countries and many other countries, Taiwan has set anti-tax avoidance measures such as transfer pricing and anti-thin-capitalization in accordance with international regulations. At the same time, the Income Tax Act regarding the addition of “controlled foreign companies” and “actual management offices” has also been passed, and the implementation date is yet to be announced.
Taiwan referred to the transfer pricing guidelines and related measures of the OECD and the United States and European countries. Formulated and issued “Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm’s-Length Transfer Pricing” (hereinafter referred to as the “TPAS”) as the tax authority to investigate the result of transactions between the parties, whether there is an irregular basis.
(1) Legal Basis
According to the Article 43-1 of the Income Tax Act, A profit-seeking enterprise which has an affiliated relationship with, or is directly or indirectly owned or controlled by another enterprise within or without the territory of the Republic of China, whereof, if it is found that arrangement of their mutual income, cost, expense, profit or loss distribution does not conform with the regular business practice, hence, results in a tax evasion or reduction, the collection authority-in-charge for the purpose of computing the accurate income of the enterprise may report it to the Ministry of Finance for approval in effecting an adjustment in accordance with the regular business practice.
(2) Definition of Related Parties
The transfer pricing rules include a specific definition of affiliated enterprises and related parties. For instance, an individual or organization may be considered a related party if a taxpayer owns directly or indirectly 20% or more of the total number of issued shares or total amount of the capital stock of another profit-seeking enterprise.
An individual or organization may be considered a related party in specific circumstances; for example, a foundation and a donor that is a profit-seeking enterprise are considered related parties when the donations received by the foundation from the profit-seeking enterprise amount to one-third of its funds. Further, when the chairperson or general manager of a profit-seeking enterprise, or an individual that holds an equivalent or a higher position, is identical to that of the other profit-seeking enterprise or to the spouse, brother, sister, or lineal descendant of that other profit-seeking enterprise, the individual may be considered a related party.
According to the Article 21 of the TPAS, the Profit-seeking enterprise income taxpayers must disclose information on related parties and related party transactions in their tax returns. The responsible person and the chief financial officer of the entity must sign off on the disclosure to ensure the completeness and accuracy of the information disclosed.
(4) Documentation Requirements
A profit-seeking enterprise undertaking controlled transactions is required to maintain documentation on related party transactions to determine whether the results of the controlled transactions are at arm’s length. The documentation must be submitted at the time the enterprise files its current year income tax return and must include the following:
(a) Industry and economic circumstance analysis;
(b) Functional and risk analysis of all parties;
(c) Comparability analysis;
(d) Description of comparable and relevant data selected;
(e) Description of the selected best method and rationale and explanation of why alternative methods were not selected;
(f) Transfer pricing method of related parties for conducting controlled transactions and relevant data;
(g) Whether the controlled transaction is within the arm’s length range, and data on relevant comparable and any adjustments made to eliminate differences; and
(h) Completed checklist that the company is in compliance with the transfer pricing rules.
The profit-seeking enterprises shall fie the required documentation within one month after receipt of a notice of investigation sent by the tax collection authorities. The profit-seeking enterprises should apply for an extension prior to the deadline if the required documentation cannot be provided within the prescribed time limit. The extension can only be granted once and cannot exceed one month. The profit-seeking enterprises should, within one month, provide additional supporting documents as deemed necessary by the tax authorities after reviewing the documentation provided.
(5) Safe Harbor
To ease the administrative burden on taxpayers, an enterprise may prepare alternative documents (i.e. instead of transfer pricing reports) if any of the following three criteria are met:
(a) The total annual amount of controlled transactions is less than NTD200 million.
(b) The total annual revenue (including operating and non-operating) of the enterprise does not exceed NTD 300 million.
(c) The total annual revenue (including operating and non-operating) of the enterprise exceeds NTD 300 million, but does not exceed NTD 500 million, and either:
(i) The enterprise does not enjoy tax exemption benefits or does not utilize more than NTD 2 million in tax credits for a particular year; or
(ii) The enterprise does not have more than NTD 8 million in loss carry forwards for the preceding 10 tax years to reduce income tax or retained earnings tax; or
(iii) The enterprise does not have transactions with overseas related parties (whether companies or individuals) or transactions with overseas affiliated companies.
(6) Individual Analysis
According to the item 3 of Article 7 of the TPAS, if separate transactions are linked or continuous, such transactions should be evaluated together using the most appropriate Arm’s-length Method to determine the Arm’s-length transaction result.
(7) Transfer Pricing Methods
The transfer pricing methods that can be used for controlled transactions are follows:
and Use of
and Use of
|Services||Use of Funds|
|Comparable Uncontrolled Price Method||√||√||√|
|Comparable Uncontrolled Transaction Method||√|
|Resale Price Method||√|
|Cost Plus Method||√||√||√|
|Comparable Profit Method||√||√||√|
|Profit Split Method||√||√||√|
|Other Methods approved by the MOF||√||√||√||√|
The transfer pricing regulations do not require any order of priority for the above
methodologies; instead, there are a range of methodologies for each type of transaction.
Unless a specific method provides otherwise, the transfer pricing methods apply on a transaction-by-transaction basis. However, if separate transactions are linked or continuous, they should be evaluated together using the most appropriate method to determine the arm’s length result.
(1) Use of Arm’s Length Range
The term “arm’s length range” refers to a range of arm’s length results of two or more comparable uncontrolled transactions when applying the same transfer pricing method. If there is insufficient data for a comparable uncontrolled transaction to determine the differences between the uncontrolled transaction and the controlled transaction, or for making adjustments to eliminate the impact on the transaction result caused by such differences, the range will be between the 25th percentile and 75th percentile of the arm’s length result.
If the result of a controlled transaction falls within the arm’s length range, the transaction will be deemed to be made on an arm’s length basis and no adjustment will be required. However, if the result falls outside the arm’s length range, the tax authorities can adjust the result to the median of the results of all comparable uncontrolled transactions. If the adjustment would decrease tax liability within Taiwan, no adjustment will be made.
(2) Profit Standard of the Same Trade Concerned
If a profit-seeking enterprise does not submit transfer pricing documentation, the tax authorities can make an assessment in light of available data. If no data is available and the documentation the taxpayer failed to submit is relevant to the costs or expenses, the authorities can compute taxable income according to the profit standard of the same trade under the ITA, ITA Enforcement Rules, 26 and the Tax Collection Act.
(8) Advance Pricing Arrangements (APAs)
A profit-seeking enterprise may file an application for an APA to avoid disputes on transfer pricing issues. An application may be submitted if the transactions undertaken by the enterprise with related parties satisfy the following criteria:
(a) The total amount of transactions to be covered by the APA is not less than NTD 1 billion or the annual amount of such transactions is not less than NTD 500 million;
(b) The taxpayer did not engage in any significant tax evasion activities within the past three years;
(c) The taxpayer submits all relevant documentation (including a transfer pricing report); and
(d) The taxpayer satisfies other criteria set by the MOF.
An APA will apply from three to five years from the year in which the application is filed or the duration of the covered transactions, whichever is shorter.
If a taxpayer has fully complied with all of the terms and conditions of an APA, it can submit data showing that there have not been any substantial changes to the relevant facts or circumstances that would affect the APA and request an extension of the APA before the expiration of the initial APA. The APA can be re-signed subject to the review and approval of the competent authorities, provided the extension period does not exceed five years.
The taxpayer must submit an annual report on the execution of the APA within the tax return filing period for the applicable fiscal year for which the APA becomes effective, and retain the documents and reports in accordance with the transfer pricing regulations.
Excess interest is not a deductible expense or loss if the proportion of related party debt to equity of a profit-seeking enterprise exceeds a ratio of 3:1. The definition of related party is the same as that under the transfer pricing regulations.
The main points of the anti-avoidance expected to take effect in 2021 are as follow:
(1) Controlled Foreign Corporation Rules
Under existing rules, Taiwan profit-seeking enterprises are taxed only when they receive dividends from their offshore subsidiaries, i.e. earnings derived from foreign subsidiaries are not required to be included in Taiwan income until dividends are received by the Taiwan parent company. As a result, it is common for Taiwan businesses to “park” earnings in tax haven jurisdictions to defer their Taiwan income tax liability.
The proposed CFC rules would require a Taiwan company to include currently in its taxable income its pro rata share of the taxable profits of its CFC. A CFC for these purposes would be defied as a corporation not domiciled in Taiwan that is more than 50% owned (directly or indirectly) or controlled by a Taiwan business entity. The proposed rules would eliminate the deferral of taxation and would discourage businesses from leaving earnings in foreign jurisdictions.
(2) Place of Effective Management Rules
Under the proposed POEM rules, a foreign enterprise that has its POEM in Taiwan would be deemed to be a resident in Taiwan and, thus, subject to tax on worldwide income. In other words, a foreign company that carries out all of its management functions in Taiwan would be required to pay tax as a domestic business entity