Proportional and Direct Deduction Method for Business Tax
Apart from the business of Taiwan company itself, the company which proceeds the investment concurrently and receives the dividends from the invested company is counted as dual-status business entity. The dividends received by the entity shall be combined into the last term of that year (which is the business tax return in November and December, the deadline is by the January 15th on the next year.) for coverage of the sales income for tax exemption, including dividends incurred from investment for Taiwan and foreign marketable securities and undistributed surplus earnings. Such income shall be declared with the net number of dividends in accordance with the Taiwan tax regulations.
The common false is the dividends received from domestic or foreign companies are not listed into the tax exemption sales income to proceed tax return at the last term of that year and failure to adjust the non-deductible ratio in accordance with Taiwan tax regulations at that year.
Upon computation of tax ratio, dual-status business entity can choose “Proportional Deduction Method” or “Direct Deduction Method” to proceed, but the method is not allowed to change once determined within the next 3 years.
The differences between “Proportional Deduction Method” or “Direct Deduction Method” as below:
| Proportional Deduction Method | Direct Deduction Method | |
| Subject | Unclear of purpose of purchased freights, labour forces, imports (including taxation or tax exemption items.)
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Clear of purpose of purchased freights, labour forces, imports on taxation or tax exemption items
2. Non-investment directed companies (without the department of investment). The main business items are counted as taxable items. |
| Pro | Easy computation, certification by an accountant is not required, low costs. | By classifying the uses of various costs, it is possible to more accurately identify whether the cost is taxable, tax-exempt, or zero-tax applicable, thereby avoiding certain costs that are misclassified and overtaxed when using the ratio deduction method.
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| Cons | When the dividend income of the company allocated to the investment enterprise is large and the directly attributable input tax amount is small, this method will erode the input tax amount that can be deducted from the taxable sales. | 1. The cost of voucher and account book management is relatively high.
2. In accordance with the statutory conditions, the last period of business tax in the year of adjustment and payment should be checked and certified by an accountant, and the operation cost is relatively high. 3. Once selected, it cannot be changed within three years. |
| Limitation | No limitation. | 1. When the company meets one of the following circumstances, it should be verified and certified by an accountant or a tax agent when it adjusts and pays the last instalment of business tax of the year:
(1) Operating the manufacturing industry (2) Total sales of the current year exceed NT$1 billion (3) The total amount of input tax deducted and deducted in the current year exceeds TWD20,000,000. 2. The purpose of purchasing goods, labour services or imported goods, and foreign labour services should be divided into the following three types: exclusive tax (including zero tax rate) business use, exclusive tax-exempt business use, taxable and tax-exempt business use, and clearly recorded in the account book. 3. Once selected, it cannot be changed within 3 years. |
For example, Company A, which is concurrently engaged in investment business, obtained dividend income TWD18,960,000 in 2021 (the same below), and failed to declare the last tax-exempt sales amount of the year in accordance with the regulations, and did not calculate the non-deductible proportional adjustment tax amount for the year in accordance with the regulations and pay at the same time, the tax bureau seized the evaded business tax amount of TWD829,000, and imposed a fine of 0.5 times the amount of the evaded tax. Afterwards, although company A made up its own declaration of tax-free sales of 18.96 million yuan from November to December 2021 and paid taxes, it was discovered after an investigation by the National Taxation Bureau that company A did not comply with Article 48-1 of the Tax Collection Law. Company A was still punished for reporting the situation of supplementary payment.