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April 27, 2022
Taiwan amends documentation requirements for amortization of goodwill
Taiwan’s Ministry of Finance (MOF) issued a new tax ruling on 30 March 2022 with respect to the documentation requirements for goodwill amortization. Although this ruling increases the taxpayers’ burden of proof, it provides a consistent approach for the tax authority to review and assess the goodwill and thus, may enhance the tax certainty for mergers and acquisitions (M&A) transactions in Taiwan.
This Alert summarizes the key features of the new ruling.
Amortization of goodwill has been a long-lasting controversial issue between the tax authorities and taxpayers in Taiwan. Although Article 96 of the Assessment Rule for Income Tax Return of a Profit-seeking Enterprise and Article 40 of the Merger and Acquisition Act provide the basis for taxpayers to amortize goodwill arising from M&A transactions, taxpayers often face challenges in successfully reporting and claiming the amortization of goodwill. The reason behind such challenge is that there is no guidance for tax officers on what needs to be reviewed to confirm the goodwill amortization claimed by the taxpayers. Protracted controversy on this matter led the MOF to issue tax ruling No. 10604699410 in 2018 (the old ruling) as guidance on the documentation required for goodwill amortization. On 30 March 2022, the MOF issued tax ruling No. 11004029020 (the new ruling) to amend these documentation requirements and withdraw the old ruling. The documentation requirements announced in the form of checklists will be the standard to be observed by both tax authorities and taxpayers for goodwill amortization for all the open cases.
The first checklist under the new ruling includes the documentation requirements for the business rationale of the transaction and the elements (i.e., purchase cost and fair market value (FMV) of identifiable net assets) for the calculation of goodwill. The second checklist is specifically for intangibles (other than goodwill) identified in the transaction and the summary of parameters used to evaluate those intangibles.
According to the first checklist, taxpayers should provide a synergy analysis report, documents supporting the decision-making process, the acquisition step-plan, and government approval (where applicable) to support the business rationale behind the transaction. Based on the same checklist, the taxpayers should prepare an appraisal report, due diligence report, and fairness opinion to prove the reasonableness of the purchase price. For the value of the net identifiable assets, the taxpayers should provide a purchase price allocation report (PPA report) to support the value assigned to each acquired asset and liability. The checklist specifically requests the PPA report to contain certain information, like valuation purpose, assumptions, valuation process, valuation methods, source of information, parameters used for valuation (e.g., internal return rates, the average cost of capital, average return rates of assets) so the tax authority can determine if the PPA report is reliable.
In the second checklist, the list for identifiable intangibles, taxpayers should state the base of each asset for financial and tax purposes, the methods used to evaluate each asset, the recognition conditions of each asset, and the reasonableness test and sensitivity test performed on each asset. It is noted that except for patents, trademarks, software, and certain permits granted by law, the other intangible assets listed in the second checklist may not be tax amortizable. Hence, the purpose of this checklist is to help the tax authority assess the reasonableness of the value allocated between goodwill and other intangibles.
In addition to these checklists, the new ruling also suggests that goodwill is usually generated from economic scale created by a business combination, the opportunity to step into a new market, future economic benefits brought by the acquired new client base or new technology, or simply a margin from the combination of operating assets.
The new ruling provides guidance for taxpayers and the tax authorities relating to the documentation requirements for recognition of goodwill. Companies that wish to conduct M&A transactions in Taiwan and recognize goodwill for tax deduction purposes should work closely with their tax professionals to ensure all the information stated in the checklists is available.
In addition to goodwill, the amortization of other intangibles is another challenging issue in Taiwan. The Ministry of Economic Affairs proposed a draft amendment to Article 40-1 of the Mergers and Acquisitions Act to allow trade secrets and software to be amortizable, but the amendment is still waiting for approval from the Legislative Yuan. It is notable that the definition of a trade secret is governed by the Trade Secret Act, and it is subject to further analysis as to how the identifiable intangible assets recognized under accounting principles can qualify for the definition of trade secret and enjoy the tax benefit introduced by the amended Mergers and Acquisitions Act.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Taiwan), Taipei
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago