Tax Mitigation for Foreign Companies

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Upon the payment of service fees to foreign companies from Taiwan companies, it is common for the foreign company to apply for the avoidance of double taxation agreement, or the qualification of lower income in accordance with the article 25th in Income Tax Act. However, some foreign companies where the registered country doesn’t have an agreement with Taiwan, or the type of payment is not affiliated with “Any profit-seeking enterprise having its head office outside the territory of the Republic of China, and which is engaged in international transport, construction contracting, providing technical services, or machinery and equipment leasing, etc., in the territory of the Republic of China” one of the aforementioned categories would fail to be applicable to the lower tax payment rate. Despite of the application to “Taiwan income source recognition principle at the point 8th of article 8th in Income Tax Act” (referred to “recognition principle” hereafter), foreign company could apply for the deduction of expenditures, costs, and verification of income calculation, but it is still pretty difficult and challenging in practice. Only few of foreign companies are eligible to such qualification.

 

Therefore, the 15-1 was added into “recognition principle” in December 2021. Before foreign profit-seeking enterprises obtain the income from labour forces or business, it is required to apply for the verification of net ratio and contribution rate to lower the tax payment amount. The tax payment calculation formula: payment to foreign profit-seeking enterprise total amount x net ratio, profit contribution rate within the Taiwan x withholding tax rate 20%. Even, Due to the taxpayer being a Taiwan company which is always asked to absorb the tax payment itself, it is available for the taxpayer to apply for the qualification to absorb the loss of tax payment. The withholding tax rate calculation formula: payment to foreign profit-seeking enterprise total amount x net ratio, profit contribution rate within the Taiwan (fixed rate 100%) x withholding tax rate 20%.

 

The following precautions need to be reminded:

 

  1. Since the premise of this law is “application before obtaining income”, the withholding agent (Taiwan company) should pay attention to whether the payment has been approved? Is it possible to apply lower tax rate withholding? If the Taiwan company needs to pay in advance before obtaining the approval letter from the tax bureau, the Taiwan company, as the withholding agent, must first complete the withholding at 20%. As for the subsequent approval letter, you can discuss with the tax bureau personnel based on the individual case conditions, whether you can hold the same approval letter (the contract paid earlier and the contract applied for by the approval letter must be the same, and the period needs to be covered) to refund the tax; otherwise, the tax bureau staff may require another application (trial) for the earlier payment to obtain the same lower tax rate qualification, and then refund the overpaid tax based on this qualification.

 

  1. For the net interest rate, if it is difficult to present the account books and documents to the tax bureau for verification, you can apply for the net interest rate to be approved based on the inter-bank profit standard through contracts, transaction process descriptions and other supporting documents. In addition, if the payment amount stipulated in the contract is not a fixed amount, the tax bureau will further examine whether the service content is consistent with the contract terms, what are the relevant costs, and the specific pricing method of the payment, etc.

 

  1. The profit contribution part is judged by the transaction process or the situation of the place where the labor service is provided and used, not by the proportion of revenue from Taiwan in the global revenue of the foreign company. For example: FB is an online advertising service provider in Taiwan, and its entire transaction process or labor service is provided and used in Taiwan, so its domestic profit contribution is judged to be 100%. In addition to requiring the applicant to present proof documents clearly dividing the degree of profit contribution in Taiwan and overseas in accordance with relevant regulations, the tax bureau may still review and ask questions depending on the circumstances of the case.

 

For profit-making enterprises in mainland China that are not applicable to tax agreements, or administrative management service fees that do not fall within the scope of application of Article 25 of the Income Tax Law (commonly seen in the headquarters management service fees of multinational companies), applying for the verification of net interest rate and contribution can be a new channel for tax saving. Even if the tax bureau only approves the calculation of the net interest rate based on the interbank profit standard, it can still significantly reduce the withholding tax burden. For example, if the profit rate of the same industry is 30%, according to the above formula, the withholding tax will be reduced from 20% to 6% (30% x 100% x 20% = 6%). It is recommended that Taiwan companies discuss and evaluate the feasibility of this with foreign companies (foreign suppliers), and the foreign company itself or the foreign company entrusts an agent to apply. If the foreign company has no incentive to apply because it has transferred the tax to the Taiwan company, the Taiwan company can still file an application on its own to verify the net interest rate of the foreign company and reduce the withholding tax.

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