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Global transfer pricing guide

Transfer pricing - Taiwan

30 Sep 2022

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Introduction to transfer pricing in Taiwan
Transfer pricing rules
  • Transfer pricing in Taiwan is regulated by the Regulations Governing Assessment of Profit-seeking Enterprise Income Tax on Non-Arm’s Length Transfer Pricing (TP Audit Regulations). The Ministry of Finance (MOF) has also issued several transfer pricing-related tax rulings over the years.
  • Taiwan’s TP Audit Regulations came into effect 28 December 2004. The regulations were enacted pursuant to the provisions set out in Paragraph 5, Article 80 of the Income Tax Act.
OECD guidance
  • The MOF published the TP Audit Regulations in 2004, taking into consideration OECD transfer pricing guidelines and related legislation in other major countries.
Transfer pricing methods
  • Acceptable TP methods include the comparable uncontrolled price (CUP), resale price, cost plus, comparable profit, profit split, comparable uncontrolled transaction, and other arm’s length methods approved by the Ministry of Finance (MOF). However, some methods may not be accepted for certain types of transactions.
Self-assessment
  • Business entities must check a box on their corporate income tax return to indicate whether or not they need to prepare a full transfer pricing report. If a full report is required, then the business will need to check a second box to indicate whether the transfer pricing report is complete and ready for presentation at the time of filing the corporate income tax return.
  • When a business entity is required to prepare a transfer pricing report, the CPA appointed to conduct the entity’s tax compliance audit must state in the tax audit report whether the transfer pricing report has been prepared in compliance with Taiwan’s Transfer Pricing Audit Regulations and whether any tax adjustment is needed.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • Effective from 2017, taxpayers meeting the following criteria need to prepare three layers of transfer pricing documentation:
  • Master File: Annual revenue plus non-operating income for the Taiwan entity exceeds NTD 3 billion, and carried out related-party transactions in excess of NTD 1.5 billion per annum.
  • Country by Country report (CbCR): Consolidated total group revenue for the prior year is in excess of NTD 27 billion (this requirement can be waived if the ultimate parent company is abroad and the Taiwan entity does not meet requirements for filing Master File in Taiwan).
  • Master File or Country by Country report (CbCR) needs to be ready before the corporate income tax return is filed. The filing deadline is the end of the subsequent year. For 2019, the filing deadline is 31 December 2020.
Local file
  • A TP report should include the following contents: background information and industry overview, functional and risk analysis of all transacting parties, evaluation of each controlled transaction based on prescribed rules, selection of comparable parties based on certain criteria, analysis of degrees of comparability, selection of the most appropriate method, disclosure of pricing strategy and other relevant information regarding other participants in the controlled transactions, and determination of whether the controlled transactions are within arm’s length range.
  • Transfer pricing documentation should be kept for at least seven years (the statute of limitations in Taiwan).
Some risk factors for challenge
  • Taiwan tax officers generally focus on low-profit margin transactions, transactions carried out that are not in line with ordinary business arrangements, cross-border transactions, surety and loans granted to related parties.
Penalties
  • Per Article 21 of the Tax Collection Act, the general statute of limitations is five years if a return is filed on time, the tax due is paid in full, and no intent to defraud the tax authorities was identified. If the return is not filed on time or there appears to be intent to defraud the tax authorities, then the statute of limitations extends to seven years.
  • If the required TP documentation is not presented when requested by a tax officer, a fine ranging from NTD 3,000 to NTD 30,000 will be assessed. In addition, Article 34 of the TP Audit Regulations asserts that an additional transfer pricing penalty will be assessed if a taxpayer misreports their income tax as a result of not following the transfer pricing rules when filing their tax return. The penalty will be assessed and calculated based on Article 110 of the Income Tax Act which allows a maximum penalty of twice the resulting underpayment of income tax liabilities.
Economic analysis and how to demonstrate an arm’s length result
  • Taiwan applies the best method approach to transfer pricing analysis. There is no priority among the acceptable methods as long as the method used is the most appropriate arm’s length method for the given controlled transaction. In most cases, Taiwan’s tax authorities prefer traditional transaction methods over transactional profit methods.
Advance Pricing Agreements (APAs), dispute avoidance and resolution

  • APA options are available in Taiwan. A profit-seeking enterprise meeting all of the following criteria may apply for an APA before the end of the accounting period in which the transactions occur:

    • The applicant’s aggregate controlled transaction amount has exceeded NTD 1 billion or its controlled transaction amount for the current tax year exceeds NTD 500 million.

    • No significant tax evasion was committed by the applicant in the past three years.

    • The applicant properly prepares and submits all documentation required under Article 24 of the TP Audit Regulations, including a TP report.

    • The applicant meets all other criteria approved by the MOF.

  • Generally, within one month, applicants should receive written feedback from the Taxation Administration. If the Taxation Administration accepts the application, the applicant must present the required documentation within one month of receipt of the written notice. Applicants unable to present the documentation within one month can file for a maximum one-month extension. Once granted, an APA is effective for three to five years from the year of application.

Exemptions

  • A business entity meeting one of the following criteria does not have to disclose related-party transactions on its corporate income tax return, and hence does not need to prepare a TP report:

    • Combined operating revenue and non-operating income are less than TWD 30 million for the filing year.

    • The business has no related entities outside of Taiwan and has not claimed tax credits in excess of TWD 500,000 per annum, has not offset net operating losses aggregated from the past ten years in excess of TWD two million per annum, and has generated total combined operating revenue and non-operating income of less than TWD 300 million per annum.

  • In addition to the disclosure exemption above, MOF tax ruling number 09704555180 stipulates that in the event that a nonexempt business entity carries out transactions with a state-run enterprise, an agent or a distributor, or a monopolistic enterprise as defined under the Fair Trade Act and the non-exempt business entity and the counterparty are not in a controlling and subordinate relationship then there is no need to prepare transfer pricing documentation.

Related developments
Tax trends
  • Taiwan’s tax office has just expanded TP audit regulations to require companies to provide detailed analysis for intangible assets similar to BEPS 8~10. In addition, the tax office will put tax haven companies under close scrutiny and check for substance. If controlled transactions are not shown on the corporate income tax filing report, this will be seen as tax evasion and will be subject to further tax and penalties.
Digital services tax
  • Effective from 1 May 2017, foreign e-commerce operators having no fixed place of business in Taiwan but who provide services to individuals in Taiwan via the internet must register for VAT if their annual Taiwan sales exceed TWD 480,000 (Approximately USD 15,500). Affected e-commerce operators should register for VAT either by themselves or through a tax agent.
MOF and taxpayer behaviour
  • Currently transfer pricing audits conducted by Taiwan’s tax authorities usually focus on normal operations, and mostly focus on large corporate groups. TP related tax disputes usually get settled via negotiations, and only a very small number of cases will proceed with administrative relief.
COVID-19
  • If a company's responsible person or chief accountant is placed under quarantine during the tax filing period, then the tax filing deadline can be extended by one month. If the person is still put under quarantine after the one-month extension then the deadline can be further extended to 20 days after the end of the quarantine period.
  • Companies can apply to the tax office for permission to extend payment deadlines or apply for permission to pay tax by instalments on the grounds of the business being affected by COVID-19.
  • If an employee is placed under quarantine but the employer continues to pay the employee salary in full, then the employer can claim double the salary expense amount for the employee as a tax-deductible item for tax purposes.

For further information on transfer pricing in Taiwan please contact:

Jay Lo
T +886 2 2789-0887 ext 314
E [email protected]

 

 

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