In this era of globalization, international trade and cross-border transactions continue to increase due to the global division of labor and the comparative advantages of different countries and regions. Taiwan, with its prime location at the nexus of trans-Pacific and Asia-Europe shipping routes, as well as its abundance of high-quality talent in the technology industry, plays a crucial role in the global economy. However, several tax rules in Taiwan create compliance hurdles, as well as tax and administrative burdens for multinational companies (MNC), running counter to the trend of global supply chain development. To maintain Taiwan’s competitive position in the Asia-Pacific, we urge the government to consider the following proposals.
Suggestion 1: Relax the supporting documents requirements under the Customs Administration’s guidelines on one-time transfer pricing adjustments.
In November 2019, the Ministry of Finance (MOF) issued Tax Ruling No.10804629000 (the Ruling), which allows certain companies conducting transactions with related parties to make a one-time transfer pricing (TP) adjustment before closing their books for the fiscal year. The following month, the Customs Administration issued the “Guidelines for Verifying the Customs Value under One-off Transfer Pricing Adjustments during the Fiscal Year” (the Guidelines), which clarify and align the corporate income tax (CIT) and Customs requirements that must be satisfied for taxpayers to make one-time TP adjustments to related-party transactions. The Ruling and the Guidelines help reduce the risk of a discrepancy occurring between direct and indirect taxes arising from the management of the cost of imported goods by multinational companies (MNCs).
However, under the Guidelines, the Taiwan importers of record (IOR) face the following difficulties when applying for the above guidelines for a one-time TP adjustment:
Difficulty providing the required supporting documents under the Guidelines.Due to the needs of companies’ internal accounting systems, corporate policies to avoid fraud or discrepancy between different invoices, and journal entries in accounting records, each company transaction can only have one corresponding invoice. As a result, Taiwan IORs are unable to comply with the Guidelines’ requirement to provide both a proforma commercial invoice upon importation of goods and a final commercial invoice when applying for the one-time TP adjustment. The Committee suggests relaxing this requirement to allow IORs to provide a commercial invoice upon importation and one invoice reflecting the total adjustment amount (i.e., a TP invoice on imported goods) that could be added to the original commercial invoice for the one-time TP adjustment application. Customs could then determine whether the costs of the imported goods are at an arm’s length level by reviewing transactions from a fiscal year perspective.
Difficulty with supplying documents that provide the rationale for the customs value of imported goods after the TP adjustment is made. For an MNC, the process for managing TP adjustments is lengthy due to the number of related parties involved, and because the TP adjustment for the fiscal year must be forwarded to headquarters for review and approval. Further, considering that in certain fiscal years, the amount of goods a company imports can be substantial, revising and reviewing each and every import declaration form would be extremely labor-intensive if the TP adjustment is applied to every item declared. Conversely, if the adjustment is applied to just a portion of the imported goods and leads to significant price fluctuations, the result would only moderately increase the risk to companies of being audited by Customs.
According to recent international interpretations (e.g., those issued by the World Customs Organization) and related case studies, TP documents are increasingly important around the world for conducting Customs audits. Under the Guidelines, MNCs would be able to use TP documentation (e.g., TP reports, benchmarking analyses, etc.) to support the rationale for the customs value of imported goods when undergoing a Customs audit or revising import declarations.
Further, TP documentation is objective. The CIT return for fiscal year 2020 includes a section on one-time TP adjustments, requiring taxpayers to disclose the details of applications submitted in accordance with the Guidelines, and indicating the importance of one-time TP adjustments to the tax authority. Therefore, we recommend that Customs accept TP documentation for assessing the rationale and arm’s length nature of the customs value of imported goods. Doing so could simplify compliance requirements for MNCs by providing the tax authority and Customs with a common reference, and would align the differing methods for valuing the costs of imported goods under CIT and Customs procedures.
Suggestion 2: Clarify the definition of “completion of sales” and reconsider taxing transactions involving drop shipping.
Many foreign businesses, attracted by Taiwan’s highly developed technology sector – especially the semiconductor industry – have contracted Taiwanese companies to provide IC fabrication, packaging, and testing services. As a result of globalization and the increased demand for semiconductors, MNCs find it ever more imperative to use drop shipping, wherein finished goods are shipped directly to the customers outside of Taiwan by the contract manufacturer, in order to reduce shipping costs and increase efficiency. However, Taiwan currently taxes such drop shipping arrangements, which may deter MNCs from continuing to do business with Taiwan’s semiconductor companies.
Under current tax rules, if a foreign company exports materials and semi-finished goods to Taiwan and contracts a Taiwan company to perform further processing and subsequently ship the finished goods back to the foreign company, the foreign company would not be deemed to have generated Taiwan-sourced income. In contrast, should the foreign company request that the Taiwan company ship the finished goods directly to the foreign company’s customers – albeit outside of Taiwan – the income derived from such transactions would be considered Taiwan-sourced and the company would be taxed for the value added in Taiwan. The only difference between the above two transaction models is that in the first one, an unnecessary step is inserted between the contract manufacturer and the end customers, which is not a commercially rational arrangement.
In domestic tax law, the MOF classifies the income generated from drop shipments as business profit earned in Taiwan on the basis that the sales are completed in Taiwan, but it does not clearly define the term “completion of sales.” In addition, any income that involves activities performed in Taiwan is considered Taiwan-sourced income. As the services provided by Taiwanese contract manufacturers in the drop shipment transactions of foreign companies are conducted in Taiwan, the income generated from such transactions is taxed accordingly. In addition, the Taiwanese contract manufacturers must also pay taxes on the compensation they receive from the foreign companies for their services, which is in effect double taxation of the same transaction.
In other countries, such as the U.S., the source of sales income is generally determined according to the location where the sale is made, and the conclusion of sales is defined as the transfer of rights, title, and interest in the goods. A similar method could be used in Taiwan, wherein the taxing right is objectively ascertained by examining the trade terms of each transaction. For example, according to Ex Works (EXW) shipping terms, if the title and risks are transferred to the buyer at the manufacturer’s factory or warehouse inside Taiwan, that is where the sale would be deemed to have been concluded. Conversely, under a Delivered Duty Paid (DDP) arrangement, the title and risks would not be transferred until the goods reach the buyer’s designated site outside of Taiwan. Therefore, the sale would not be considered to have been concluded in Taiwan and should not trigger Taiwan income tax.
Taiwan’s current tax rules on drop-shipment is discouraging for foreign companies and detrimental to the competitiveness of Taiwan’s business environment. As such, the Committee urges the MOF to refer to the example of other countries and adopt international tax principles to reduce uncertainty and increase foreign investors’ confidence in Taiwan.
Suggestion 3: Abolish the Stamp Duty Act.
In 2019, the Executive Yuan submitted a proposal to the Legislative Yuan to abolish the Stamp Duty Act. To industry’s disappointment, however, the proposal has not progressed past the first reading at the Legislative Yuan. The Committee thus calls on the Executive Yuan to continue to press for the Act’s termination, and on the Legislative Yuan to complete the process.
The stamp duty was introduced in China in 1911 and the dutiable scope has been amended or expanded several times. Under the old regime (prior to 1978), there were as many as five categories and 30 types of dutiable items. The categories were complex, and it was often difficult to discern the type/nature of the document in question. The most recent amendment was passed on May 15, 2002, by which time the dutiable scope had been gradually narrowed down. Currently, stamp tax is levied on “receipts for monetary payments,” “contracting agreements,” “real property transfer contracts,” and “contracts for sales of personal moveable property.” But despite the ever-changing commercial patterns in today’s world, the stamp act has not been updated in nearly two decades.
Today, digital communications are commonplace, with transactions concluded and documents drawn up electronically. However, the primary way in which the stamp duty is levied requires the taxpayer to purchase physical stamps, affix them to paper documents, and write them off after the duty is paid. Doing so requires taxpayers to convert electronic documents into paper form in order to be compliant, and is therefore a highly manual and resource-intensive process that is out of pace with the times.
Further, Taiwan’s stamp duty regime does not involve the input-output credit offset system of the value-added tax (VAT) mechanism. VAT is technically levied on all parties in the supply chain, but the final VAT burden is ultimately passed on to the consumer. In contrast, the stamp duty is levied on each document drawn up at each stage of the transaction, with every party liable for paying the stamp duty. For example, in the construction industry, the primary contracting agreement is subject to a 0.1% stamp tax on the consideration reached to perform the specific job or task provided for in the agreement. The subsequent subcontracting agreements are also all subject to a further 0.1% stamp duty. As a result, the stamp duty is applied repeatedly, which increases operational costs.
In addition, given the variety and complexity of business models that occupy legal gray areas in Taiwan, taxpayers frequently make mistakes in distinguishing document types and applying the correct duty rate, and in practice the proper document type is sometimes difficult to determine. The result is more time and work for the tax authorities, who must advise taxpayers or investigate stamp duty irregularities, as well as impose penalties for such mistakes or noncompliance.