Since managing a healthy cash flow is essential to businesses of all kinds, liquidity has become a matter of great concern during the period of COVID-19 pandemic. Governments around the globe are taking necessary measures to help businesses receive cash refunds or subsidies as early and easily as possible. The Tax Committee urges the Taiwan government to take similar measures to help speed up the tax refund process for all companies, including multinationals. Further, a more reasonable method for calculation of withholding tax due prior to the receipt of service payments would also be appreciated. To achieve that purpose, a more streamlined process and more convenient method of calculating Taiwan-sourced income would be worth considering.
Suggestion: Allow foreign profit-seeking enterprises without a fixed place of business (FPB) or business agent (BA) in Taiwan to use a presumed 50% contribution rate in calculating their taxable income if certain conditions are met.
On September 26, 2019, the Ministry of Finance (MOF) added Item 15-1 to its “Guideline for Determination of Taiwan Sourced Income under Article 8 of the Income Tax Act” (TSI Guideline). On the same date, it announced “Implementation Rules Governing Foreign Profit-seeking Enterprises Applying for Pre-approval of Profit Rate and Onshore Profit Contribution Rate for Determining Taiwan Sourced Income” (Implementation Rules). Item 15-1 of the TSI Guideline allows foreign profit-seeking enterprises without an FPB or BA in Taiwan (“foreign profit-seeking enterprises”) – before receiving service remuneration or business profit prescribed under subparagraphs 3 and 9 of Article 8 of the Income Tax Act (ITA) – to submit an application to the tax authority for pre-approval of the applicable profit rate and onshore contribution rate for determining taxable income. With such prior approval, the withholding tax is levied on the net profit, as opposed to gross payment, of foreign profit-seeking enterprises, and the reduced withholding tax can be withheld at source. Consequently, there is no need to go through a tax reclaim process to improve the foreign profit-seeking enterprises’ liquidity.
Before Item 15-1 was introduced in the TSI Guideline, alternatives for reducing Taiwan-sourced income (TSI) for foreign profit-seeking enterprises based on the TSI Guideline were limited to the following:
Item 15 of the TSI Guideline – foreign profit-seeking enterprises that receive certain categories of TSI, such as service remuneration or business profit, should have tax withheld from gross remuneration upon payment at prescribed withholding tax rates. Within five years of receiving said revenues, the foreign profit-seeking enterprises may apply to the district tax office where the tax withholder resides to recompute the taxable income by deducting costs and expenses associated with the above-mentioned revenues, and apply for a refund on the excess withholding tax paid.
Item 10 of TSI Guideline – for business profit derived from business activities conducted both onshore and offshore, if the profit-seeking enterprise can present evidentiary documents that accurately differentiate the relative contribution of onshore and offshore activities, the tax authority may assess the actual profits attributable to onshore activities accordingly.
MOF’s original intention in introducing Item 15-1 of the TSI Guideline and corresponding Implementation Rules was to reduce liquidity concerns for foreign profit-seeking enterprises in need of a tax refund, and to reduce the administrative burden for both foreign profit-seeking enterprises and the tax office when withholding tax is applied on cross-border transactions. As mentioned above, however, the provision states that foreign profit-seeking enterprises need to obtain “prior approval” in order to apply the profit rate and onshore contribution rate at the time of tax filing or withholding.
In practice, the level of scrutiny exercised by the tax authority during the assessment phase varies depending on the nature of the income and the underlying amounts involved. Moreover, past experience shows that preparation of documents and communication with the tax authority during the supplemental explanation phase can be time-consuming and costly. If foreign profit-seeking enterprises cannot obtain prior approval before revenues are received, Item 15-1 does not provide for an alternative means for tax refund.
Consequently, foreign profit-seeking enterprises needing to apply for a tax refund after withholding tax has been applied can only adopt Item 15, by providing supporting documents to the tax authority for deducting relevant costs and expenses from revenues. Otherwise, Item 10 could be used to assess the actual onshore profit contribution rate (also after the transaction is completed), which undermines the original intent of the MOF to streamline the application process.
Furthermore, for the purpose of determining the onshore profit contribution rate, the approach prescribed under the Implementation Rules is more stringent than that of Tax Ruling No. 10604704390, “Regulation Governing Income Tax Assessment on Sales of Cross-Border Electronic Services by Foreign Profit Seeking Enterprise.” Tax Ruling No. 10604704390 states the following priority for determining the onshore contribution rate: 1) the actual rate if it can be accurately identified and supported; 2) 100% if the business activities are entirely conducted onshore, or the services are both performed and utilized onshore; or 3) 50% for all other circumstances, unless the actual rate assessed by the tax authority is higher based on relevant findings.
The Implementation Rules, however, state the following priority for determining the onshore profit contribution rate: 1) the actual rate if it can be accurately identified and supported; 2) the average of the assessed rate for the preceding three years, unless the actual rate assessed by the tax authority is higher based on relevant findings; or 3) 100% for all other circumstances. As a result, the onshore profit contribution rate can easily be assessed as 100% if the taxpayer and tax office cannot reach a consensus in terms of the actual rate or if the average of the prior three-year assessed rates is not available. Adoption of a 100% onshore contribution rate is unlikely to fairly represent the cross-border services rendered by foreign profit-seeking enterprises, since business activities and services are now rarely performed entirely onshore.
To alleviate pressure on foreign profit-seeking enterprises’ liquidity and establish a just and efficient tax environment for cross-border service transactions, we urge the MOF to revisit Item 15-1 and allow foreign profit-seeking enterprises to submit applications for determination of the profit rate and onshore profit contribution rate, regardless of whether revenues have already been received by the foreign profit-seeking enterprises.
With respect to determining the onshore profit contribution rate, the MOF could further consider adopting a deemed onshore profit contribution rate of 50%, similar to that prescribed in the “Regulation Governing Income Tax Assessment on Sales of Cross-Border Electronic Services by Foreign Profit Seeking Enterprise,” for revenues derived from business activities or services that are largely performed offshore, so as to simplify the application process and reflect the nature of cross-border transactions.