October 9, 2019
Taiwan amends Taiwan-source income recognition regulations
The Taiwan Ministry of Finance (the MOF) amended the Taiwan-source income recognition regulations of Article 8 of the Income Tax Act (the Amendment) on 26 September 2019 to provide foreign companies with an option to calculate Taiwan-source income tax liabilities using deemed profit and onshore contribution ratios.
This Alert summarizes the key aspects of the Amendment.
A foreign company with no fixed place of business or business agent in Taiwan is required to pay withholding tax of 20% on Taiwan-source service income or business profits. Withholding agents have routinely withheld the 20% tax on the gross payment, even though the foreign company can technically claim a deduction for expenses incurred in providing the services or generating business profits. To be eligible to claim a deduction, however, the foreign company must file a refund claim for overwithheld tax, resulting in significant administrative burdens and taxpayer uncertainty.
A withholding tax liability may also be eliminated or reduced under a treaty’s business profits article or Article 25 of the Income Tax Act,1 although not all types of remuneration qualify.
The Amendment provides an alternative for foreign companies to calculate Taiwan-source income tax liabilities based on both a deemed profit and an onshore contribution ratio.2 Pre-approval by the tax authority of the ratios is required.
Deemed profit ratio
The deemed profit ratio is determined under one of the following methods:
Onshore contribution ratio
The onshore contribution ratio is determined under one of the following methods:
1. Article 25 applies a reduced withholding rate of 10% for international transportation and 15% for rental, construction and technical services. General marketing services, administration support and administration management fees do not qualify for Article 25 treatment.
2. Tax liability = income x deemed profit ratio x contribution ratio x 20% tax rate.
3. Every year the MOF will announce a standardized deemed profit ratio for different industries.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Taiwan), Taipei
Ernst & Young LLP (United States), Taiwan Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York