Taiwan tax: MOF clarifies scope of Taiwan-source income
The Taiwan Ministry of Finance (MOF) issued final rules on 3 September 2021 to clarify the scope of Taiwan-source income and resolve an ongoing dispute regarding the determination of such income under article 8 of the Income Tax Law. The rules should provide some clarity, particularly with respect to services income, for multinationals doing business in the country. The rules are effective as from the date of issuance.
Until these rules, the scope of Taiwan-source income under article 8 has been interpreted broadly. Payments made to offshore entities were classified as Taiwan-source "other income" and the Taiwan payor was required to withhold tax (at 20 percent) even if the payments were related to services carried out entirely offshore. The same rule was applied when services are rendered partially onshore and partially offshore. This broad interpretation of the rules gave rise to many disagreements between taxpayers and the tax authorities.
The new rules issued by the MOF modify the scope of Taiwan-source income as follows:
- Place of performance is the place where income should be recognized: Service fees received by a foreign entity will not be considered Taiwan-source income if the foreign entity only provides services outside Taiwan. If the services have to be carried out both onshore and offshore, the foreign entity may allocate its profits into Taiwan-source and non-Taiwan-source income according to where the services are performed and the assistance of Taiwan entities, if any.
- Allocation of business profits: If a foreign entity that renders onshore and offshore services can provide documentation to specifically identify which services are provided onshore and which are offshore, the Taiwan tax authorities may only calculate and assess reasonable profits attributable to the Taiwan portion of the profits.
- Multiple categories of income: If a foreign entity provides comprehensive services in Taiwan and the nature of the business transactions include multiple categories of income, the Taiwan tax authorities must classify the income in the appropriate category rather than classify the lump-sum amount as "other income."
- Deduction of costs and expenses of relevant income: A foreign entity with no fixed place of business or business agent in Taiwan must pay withholding tax on Taiwan-source income. However, the foreign entity may appoint a Taiwan tax filing agent and apply for a refund of withholding tax from the tax authorities by deducting costs and expenses related to the income. The foreign entity must submit the refund application within five years from the date it receives the relevant payment and the foreign entity bears the burden of proving that the costs and expenses are justified.
All multinationals should review their tax status in Taiwan to determine how to maximize their tax savings or to determine how to best mitigate any tax burden.