Problems relating to Trade and Investment on Taiwan
14. Taxation Systems |
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Issue |
Issue details |
Requests |
Reference |
| (1) Difficulties Emanating from Unexecuted Bilateral Tax Treaty | - As of today, Japan-ROC comprehensive tax treaty remains unconcluded. International transportation income tax agreement limited only on International transportation is the only bilateral treaty that has been brought into force to this date. (Example) While 20% withholding tax is levied on dividends, interests and licensing fees between Japan and Taiwan, the less heavy withholding tax rate in the range of 5 to 15% is levied as regards countries where tax treaty with Japan is concluded. - Due to the absence of tax treaty between Taiwan and Japan, tax payable by Member Firm's Subsidiary (MFS) is high at 20%. Consequently, where a member firm makes direct investment into a Taiwanese corporation to secure more than 25% share ownership, on the Japan side, the member firm sustains demerit on tax liability for the distributed dividend. (In substance, where withholding tax rate (WHR) is zero, tax levy is 1.8%. However, 21.8% WHR applies where WHR is 20%. This can be a factor that discourages the desire to invest from Japan to Taiwan. - A member firm now providing training to Taiwanese staff for certain period in Japan faces double taxation problems, where the member firm pays wages payable in Japan as well as absorbing personal expenses incurred in Taiwan pro-rata to the personnel expenses. - As it stands, if a member firm of JBCTIF accepts an employee despatched to Japan from its subsidiary in Taiwan (MFS) for a fixed period, while member firm pays his/her wages in Japan, and MFS absorbs the personnel expenses in Taiwan, in addition to accrual of tax paid in Japan, the personnel expenses assumed by MFS are taxable in Taiwan, resulting in double taxation. It results in curbing the efforts for technological and human resources developments by induction, on-the-job training, etc. and interchange of human resources between ROC and Japan. - A member firm as a group company is under the double taxation risk, especially under the TPTS as the rules vary from one nation to another and so do the interpretation on the rules between the countries. |
- Move toward holding G-to-G negotiations on conclution of Japan-Taiwan Tax Treaty. - It is requested that GOT and GOJ conclude Japan-Taiwan tax treaty to dissolve the demerits arising from the tax demerits. - It is requested that GOT and GOJ ratify the bilateral tax treaty for application of reduced tax rate (10%). - It is requested that GOT and GOJ conclude the Income Tax Treaty between Japan and Taiwan to eliminate the double taxation problems. - It is requested that GOK: -- overhauls TPTS guidelines, etc. of the world standard, -- embellishes advance pricing agreement system. |
- Income Tax Act, etc. - Withholding Tax: The Income Tax Act - Income Tax Act, Section 4 Withholding of Tax, Article 88 and 89. - Standards of Withholding Rates for Various Incomes, Article 3. |
| (Action) - In January 2004, under Article 114 of Examination Rules for Profit-seeking Enterprise Income Tax, Ministry of Finance (MOF) set forth among others the calculation method for the transfer pricing taxation system between independent enterprises and the advance pricing agreement system. Beginning 2004, Profit-seeking Enterprise Income Tax Return, enterprises are obligated to attach the particulars for the transactions between the related parties and to prepare the detailed explanation concerning the related party transactions (such as Report on Transfer Pricing) as from the Income Tax Return for the TY 2005. - As of February 2008, GOT ratified the bilateral tax treaties with 16 countries (including the 6 OECD Member States)(already enforced). The withholding tax rates on the Taiwan side are: 5-15% (20-30% against non-ratified country) on dividends, 10-15% (20% against non-ratified country) on interests, and 10-15% (20% against non-ratified country) on royalty. - Withholding tax rates differ between the Ratified and Non-Ratified Countries as regards the Bilateral Tax Treaty as follows: -------------- Ratified Countries ------ Non-Ratified Countries Dividends ---------- 5%-15% ---------------- 20%,25%,30% Interests ---------- 10%, 15% -------------------- 20% Royalties ------ 10%, 12.5%, 15% --------------- 20% - Since 1 January 2010, GOT has reduced profit-seeking-enterprise income tax rate from 25% to 20%, while reducing deemed profit tax rate to 3.0% (15% x 20%). - In January 2011, bilateral Japan-Taiwan Investment Treaty signed between Interchange Association (Japan) and East Asia Relations Commission (Taiwan) entered into force. |
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| (Improvement) - Beginning FY 2011, due to the Amendment of Tax Act in Japan, GOJ will not tax, in principle, on the parent in Japan of dividends received from its overseas' subsidiary (non-inclusion into taxable income profits in the form of dividends received from its overseas subsidiary), from the fiscal year beginning on 1 April 2009, by shifting to "The Computation System of Excluding from Taxable Amount External Income received as Dividends from Overseas' subsidiary". - On 26 November 2015, interchange association of Japan and East Asia relations commission of Taiwan signed "Agreement on Avoidance of Double Taxation and on Prevention of Income Tax Evasion (ADT-PITE Agreement)," setting forth: (1) Withholding tax rates on dividends at 10%, interest at 10%, and rental fees at 10%, and (2) creation of the framework for problem solving and exchange of information between the taxation authorities of both countries. - On 5 February 2016, deliberation began at regular session of the national diet on amendment bill for "2016 fiscal year tax scheme reform," including "implementing measures by the private sectors". "ADT-PITE Agreement" has been made into law by the provisions in Article 2, Paragraph 3 of "the law concerning income tax exemption upon foreign residents, et al", by "the law based on the reciprocity principle", without expressly identifying the subject country, which, however, will be incorporated into the governmental decree. |
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| (2) Inadequate Nomenclature of Evidential Document for Tax Deductions | - National Tax Administration (NTA) requires Invoice instead of Debit Note as evidential document for tax deductions on expenses accrued outside Taiwan. However, the nomenclature of the evidential document does not match the actual accounting document used by a member firm of JBCTIF, impeding its accounting work. (NTA's requirement does not come to grip with the international commercial practice of using the term "Debit Note", unless transactions accompany customs clearance, in which case the term "Invoice" applies.) |
- While Member Firm now settle all its account by Invoice, pursuant to the ROC laws, it is requested that in accordance with the long-established business practices, GOT accepts Debit Note as evidential document for tax deductions. | - Taiwan National Tax Administration Interpretative Circular No. 0990245351 of 30 August 2010 |
| (3) Irrational Imposition of 10% Corporate Income Tax on Undistributed Dividend | - Article 66(9) of income tax act provides for "imposition of 10% tax upon undistributed profit", aimed at complementing the tax revenue shortage arising from enterprises' willful reduction of revenue as undistributed profit. First of all, the effect is slight upon Foreign Funded Enterprises (FFEs) of the GOT's intended purpose mentioned above. Moreover, this provision of the Income tax act is unreasonable to FFEs in Taiwan, desiring to continue developing their business and to re-invest the income gained from their operation in Taiwan into their business in Taiwan. - A Member Firm's Subsidiary (MFS) experienced a difficult time from GOT's income tax levy on undistributed profit, due to the short grace period granted from promulgation to implementation of the amended income tax act. |
- It is requested that GOT repeals 10% tax levy on undistributed profits of FFEs in ROC. (e.g.) income tax on undistributed profit no longer exists in leading Asian countries, such as Hong Kong, Singapore, ROK, and Japan. - To begin with tax levy on the undistributed profit is the scheme that freezes reinvestment into Taiwan. It is requested that GOT reconsiders its repeal. |
- Income Tax Act, Article 66(9) |
| (4) Halved Amount of Withholding Tax Deduction on 10% Additional Tax for Undistributed Profit | - After the income tax amendment, the deduction amount has been "halved" on the net business income tax, received by non-resident shareholders (individuals and commercial enterprises), whereas the full amount deduction had been authorised prior to the income tax act amendment. | - It is requested that GOT takes step to enable deduction of the "full amount" of the 10% additional commercial business tax levy paid by foreign funded enterprises on the undistributed profit. | - Income Tax Act, Article 73-(2) |
| (5) Taxation Authority's Tightening of Tax Investigation | - The taxation reform, such as reduction in corporate income tax implemented to correct the prolonged Taiwanese economic recession, and the decline in the Taiwanese working population by aging, it is considered, have been the major reasons that have prompted the current serious deficit in tax revenue. As a means to supplement the tax revenue deficits, the taxation authority has tightened its tax investigation upon enterprises in recent years. | - It is requested that GOT will resolve the fundamental tax revenue deficits by preparing the environment for attracting the domestic investment in Taiwan, steering the industrial policy toward domestic consumption, etc. | |
| (6) Expansion of Non-Taxable Items on Income Tax Levied upon Expatriates | - Taxable income of foreign expatriates working in ROC includes medical expenses and matching income tax, payable by enterprises employing such expatriates. | - It is requested that GOT also excludes from the taxable income, medical expenses and matching income tax, in addition to moving cost, fuel and light expenses, housing expenses, etc. | - Finance/Tax No. 09804119810 "The Scope of Application for Tax Preferences Provided to Foreign Professionals" (2010.03.12) |
| (7) Vexatiously Complex Application Procedures in Taiwan on Request for Deduction of Foreign Tax Amount | - Withholding Tax (20.42%) is levied and collected in Japan on remittance of interest, dividend, etc. from Japan to Taiwan, pursuant to the Japanese laws. To file application for foreign tax deduction in Taiwan, aside from the Certificate of Tax Payment (CTP) issued by tax office, so- called "visa", issued by Taipei Economic and Cultural Representative Office in Japan, Republic of China (TECRO) becomes necessary, as proof of payment of the Japanese withholding tax. For the headquarter of a trading firm that makes multiple external remittances, visa acquisition is quite a costly chore, including person-hours and related costs necessary. Countries that require visa other than CTP are not found elsewhere. Change in rules on tax certificate appears necessary. Within the OECD signatories of the 34-countries, it has been confirmed that at least 13-countries (the U.S., U.K., Italy, Australia, Canada, ROK, Chile, Germany, Turkey, France, Belgium, Mexico, and Japan) do not require visa acquisition. As of now, no practical administrative change has taken place. |
- It is requested that got takes step to obviate the need for visa acquisition at TECO to enable FFEs to obtain foreign tax reduction only by CTP. | - Proviso of Article 3(2) of Income Tax Act |
| (8) Inadequate Business Tax Levied upon Profit from Resale Made by Nominal Trade Firm | - According to Ministry of Finance Notice (TaiCaiSuiZi No. 09804119810) of 29 October 2008, in the case where "A" (Domestic Merchandiser) places an order with "C" (Overseas' Manufacturer) based on the order received from "B" (Domestic Purchaser) and imports the goods in concern under the B's name, "A" must issue uniform invoice (Note) in "duplicate" (in which "A" is responsible as the final business tax payor), regarding the differences between the purchase and resale prices as commission revenue. However, in light of the fact that payment and receipt of sales/purchase prices actually take place in this transaction, it is unjustifiable to regard the profit from resale as commission revenue. On 25 December 2012, the Chief Justice of the Supreme Yuan, in the Liaison Conference, with reference to a case closely resembling the foregoing, stated: Since A (MFS) receives the payable amounts directly from B, it represents a single transaction between A and B. In this transaction, under the definition for "Sales of Goods domestically in Taiwan" and of "Import of Cargo" in Article 1 of Business Tax Law, based on the Tax Law Principles, assumption of two business taxes is established, payees, being the seller of goods A, and purchaser B, being recipient of the purchased goods. Therefore, it is incumbent upon A to issue uniform invoice in triplicate. (A does not function as payee of business tax, as A merely pays business tax deposit. It gives no impact upon A's profit and loss.) The Chief Justice additionally ruled, purchaser B, having paid business tax upon import customs clearance, it has resulted in double payment of business tax on the same cargo, it will result in B's filing request to Ministry of Finance for special refund for business tax. As it stands, no change has taken place as stated in the MOF notice above. (Note) Official invoice, the use of which is compulsory to ensure business tax payment. In addition to the registered marking to Taiwan MOF, and the prescribed description, in the case of the duplicate format, one copy will be held in A's file, while another copy will be held in B's file, In the case of the triplicate format, one copy will be for A's file, while A will issue to Purchaser two copies, out of which purchaser will issue one copy to the tax office. |
- It is requested that GOT takes step to: -- repeals Ministry of Finance Notice No. 09804119810 of 29 October 2008 -- follow the conclusions drawn by the chief justice of the Supreme Yuan, in the liaison conference of 25 December 2012. |
- Ministry of Finance Notice (TaiCaiSuiZi No. 09804119810) of 29 October 2008 |
| (9) Insufficiency in Tax System Operation | - At supermarkets all around the town, almost without exception, question is raised if they have a uniform invoice. This shows the absence of willingness to pay tax among small-to-medium business operators. | - It is requested that GOT improves tax collection operation under the existing tax system to assure collection without fail. | |
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