09 May 2018 Taiwan issues ruling on reduced contribution ratio in computing foreign enterprise's taxable income On 17 April 2018, Taiwan's Ministry of Finance (the MOF) issued a tax ruling, No. 10600664060 (the Ruling), which provides a reduced contribution ratio when computing the Taiwan income base associated with Taiwan-source income generated by foreign enterprises that conduct importation, storage, processing, delivery, and sales of self-produced or procured goods within or without Taiwan. This Alert summarizes the key issues. The Ruling reduces tax burdens imposed on foreign companies engaged in importation, storage, manufacturing and delivery of goods to customers located in and outside of Taiwan. The Ruling is in response to foreign taxpayers' concerns when determining their tax liabilities pursuant to the prior tax ruling and also to encourage the foreign companies using Taiwan as a hub to transit the goods. The following table summarizes the key changes. | | Before | | After | Scope of application | Foreign enterprises engaged in the following activities in Taiwan: importation, processing, storage, delivery and sales of goods | Classifying business activities of the foreign enterprises into four categories as stated below | Income base calculation | Has separate books and records as defined in the Income Tax Act | Actual profit method to determine the income base | Actual profit method to determine the income base | No separate accounting books and records available | Income base = Taiwan-source revenue x industry deemed profit rate x contribution ratio. Income base x 20% corporate income tax rate = Taiwan income tax liability | Contribution ratio calculation method | No manufacturing processing within Taiwan | 12% contribution ratio | 3% contribution ratio (Method A) | Conduct manufacturing processing within Taiwan | 12% contribution ratio plus the ratio of additional onshore manufacturing/processing cost over total cost. The onshore cost includes onshore procurement. | 3% onshore contribution ratio plus the ratio of additional onshore manufacturing/processing cost over total cost. The onshore cost excludes onshore procurement (Method B) | Under the Ruling, if a foreign enterprise has a fixed place of business or business agent in Taiwan and is engaged in business activities with a relatively low onshore contribution ratio, these business activities are categorized as follows and are assigned either Method A or Method B: - Importation and onshore storage of offshore self-produced goods (including finished goods, work-in-progress, raw materials hereinafter). After the sales/contracts are concluded, these goods are delivered to onshore or offshore customers.
- Importation and onshore storage of offshore self-produced goods. Additional manufacturing or processing activities (including procurement activities) are performed in Taiwan, before the sales/contracts are concluded and the processed goods are delivered to onshore or offshore customers.
- Importation and onshore storage of goods procured offshore. After the sales/contracts are concluded but all sales activities are performed overseas, these goods are delivered to onshore or offshore customers.
- Importation and onshore storage of offshore self-produced goods. Additional manufacturing or processing activities (including procurement activities) are performed in Taiwan, before the sales/contracts are concluded but all sales actives are conducted overseas and the processed goods are delivered to onshore or offshore customers.
Categories 1 and 3 should use Method A to calculate the contribution ratio; while Categories 2 and 4 are required to use Method B. It is important to note; however, that if there are some sales activities performed in Taiwan, both Categories 3 and 4 must use the actual profit method to determine Taiwan income tax liability. The Ruling enables foreign enterprises with a fixed place of business or business agent in Taiwan to calculate corporate income tax liability with a clear and simplified formula based on the four categories of transactions, which results in controlling related costs. The Ruling decreases the contribution ratio from 12% to 3% and removes the procurement of raw materials or work-in-progress related costs when calculating the onshore costs; consequently, it lowers the onshore costs over total costs ratio and tax costs. For additional information with respect to this Alert, please contact the following: Ernst & Young (Taiwan), Taipei - Sophie Chou
sophie.chou@tw.ey.com - Anna Tsai
anna.tsai@tw.ey.com - ChienHua Yang
chienhua.yang@tw.ey.com - Vivian Wu
vivian.wu@tw.ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York - Chris Finnerty
chris.finnerty@ey.com - Kaz Parsch
kazuyo.parsch@ey.com - Bee-Khun Yap
bee-khun.yap@ey.com
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ATTACHMENT PDF version of this Tax Alert Document ID: 2018-5619 | 
