Among Taiwan’s trade rivals, Korea and China provide more flexible tax treatment for drop shipment transactions. Since Taiwan’s tax rules on this kind of transaction decrease Taiwan’s business competitiveness, the Committee strongly urges the MOF to reevaluate the definition of “conclusion of sales” and issue a new ruling. Such an initiative would increase foreign investors’ confidence in Taiwan.

The Committee raised this issue in its 2021 White Paper, but was repeatedly told by the authorities to refer to existing laws and regulations, a response that does not adequately address our concerns. We will continue underscoring the importance of this issue to the government and hope to engage in productive dialogue in the year ahead.

Suggestion 3: Review applications for tax rulings at the ministry level.

Taxpayers seeking clarification regarding the taxation of certain transactions can apply for a tax ruling from the MOF as a way to comply with tax regulations and avoid future disputes. Based on our observation, however, applications received by the MOF are often first transferred to the National Taxation Bureau, which then passes them on to the local tax office for its opinion. This practice results in a very lengthy review process before the MOF finally provides its interpretation.

The MOF’s responsibilities include promulgation, amendment, and interpretation of tax laws and regulations, while local tax authorities are responsible for enforcing tax laws and regulations and performing tax audits within their jurisdiction. We understand that the MOF may require clarification of the details of the transaction at issue in a tax ruling application; however, it can do so by requesting supporting information directly from the taxpayer, rather than passing on the application to local tax authorities or collection offices to handle. Reviewing applications at the ministry level would improve the efficiency of the interpretation application procedure.

Suggestion 4: Include payments for computer software within the scope of income qualified for preferential withholding treatment.

Under Article 15-1 of the “Guidelines for the Determination of Income from Sources in the Republic of China in Accordance with Article 8 of the Income Tax Act” (the Guidelines), foreign companies may apply for a pre-approved net profit ratio (i.e., costs and expenses are deductible) and an onshore contribution ratio in order to reduce the amount of their withholding. However, such tax relief does not currently apply to foreign companies’ income derived from the sale of computer software, which creates difficulties for both the foreign companies and the withholding entities.

We note the following issues faced by foreign companies selling software:

Designation of income from software sales as passive income.

Article 15-1 pertains only to “remuneration for services” and “business profits,” as these are considered active forms of income, while current tax regulations classify income received from the sale of computer software (except for standardized software) as royalties, which are considered passive income. Such royalties are subject to 20% withholding on the total payment amount, with no deductible costs or expenses.

Domestic software companies, on the other hand, are allowed to claim costs and expenses. To further explain, the deemed profit rates of domestic software companies are about 8~16% (referring to industry codes 4641-12, 4831-12, 5820-99). As such, domestic software companies’ income is recognized by the tax authorities as active income, and costs and expenses can thus be deducted to determine the taxable amount.

Such differential treatment of foreign and domestic software companies’ income constitutes discrimination and violates the principle of equity in taxation.

Differential treatment of software transactions conducted as cross-border e-commerce business.

Taiwan tax regulations classify foreign companies that provide services (such as games or software) via a website as “cross-border e-commerce businesses” (CBEB). According to a tax ruling, such companies are eligible to apply for a preferential withholding rate of about 3-6%. Although the e-services provided by a CBEB also contain computer software, a CBEB which sells products via a website can enjoy a reduced withholding tax rate while other non-CBEB foreign software companies cannot.

On the other hand, the tax burden of a foreign company selling software other than through a website is more than three times that of its CBEB counterpart (20% vs. 6%), even though there is no major difference in the nature of the product, its authorized content, or other transaction terms. We believe that this differentiation was not intended by the Guidelines’ authors and therefore recommend amending the scope of Article 15-1 of the Guidelines to include sales of computer software.