Taiwan announces tax regulations on roaming service revenues of foreign telecommunication service providers
The Taiwan Ministry of Finance ("MOF") has issued a tax ruling No. 10000361990 to stipulate the tax treatment of roaming service revenues received by a foreign telecommunication company from a domestic telecommunication company.
The foregoing revenue would be eligible for income tax exemption if certain conditions are met.
Background and history
Before the release of the ruling, the roaming service income received by a foreign telecommunication service provider in Taiwan would be deemed as Taiwan sourced income and subject to withholding tax upon payment.
In consideration of the reciprocal principle under international practice and the International Telecommunication Regulations issued by International Telecommunication Union, the Taiwan MOF released the foregoing tax ruling to provide tax exemption to the foreign telecom service providers.
For those telecommunication companies defined in Article 11 of the Taiwanese Telecommunications Act who:
- Provide international communication services;
- Cooperate with a foreign telecommunication company
- Each party provides the international roaming service to their customers in its country; and
- Collects the roaming service fee from their customers in its country, and such service income is calculated according to International Common Rules and the service rate as agreed by both parties.
Based on reciprocity to both sides, if the foreign telecommunication company or the country it is based in follows the International Telecommunication Regulations and does not withhold nor impose tax on such income, the international communication service income received by the foreign telecommunication company should likewise be exempted from corporate income tax in Taiwan.
In other words, aside from those service fees which qualify for the tax exemption, other service fees would be deemed as Taiwan sourced income and the Taiwan service provider would have the obligation to withhold the withholding tax when making the payment.
Otherwise, a penalty for failing to withhold will be levied.
A. Foreign Telecommunication Companies located in jurisdictions with reciprocity agreement
Foreign telecommunication companies who receive international communication service income from a domestic telecommunication company can engage the domestic telecommunication company and CPA firms to submit an application to the tax authorities with supporting documents for the adoption of the ruling.
Subsequent to approval being granted by the tax authorities, no Taiwan withholding tax would be applicable.
Based on the Tax Collection Act and Income Tax Law, overpaid withholding tax could be refunded within 5 years after the receipt of such income. Although the tax authorities' attitude toward the retroactive effect of the ruling is still unclear, the refund application with tax authorities is still worth trying if the withholding tax is significant.
B. Foreign Telecommunication Companies located in jurisdictions without reciprocity agreement
For those telecommunication companies located in jurisdictions without reciprocity agreement, there are still some other alternatives to mitigate the withholding tax as follows:
- Adoption of the Business Profits Article in a Double Taxation Agreement (DTA)
As long as the telecommunication companies are located in jurisdictions that have signed DTA with Taiwan, with certain conditions met, the service fee could be deemed as business profit and be exempted from Taiwan income tax. However, an advanced application with tax authorities would be required.
- Adoption of Deemed Profit Rate Method under Article 25 of Income Tax Law
Under Article 25 of Income Tax Law, a foreign profit-seeking enterprise having its head office located outside Taiwan and meeting the following criteria would be eligible for the adoption of the deemed profit rate method.
- The foreign enterprise is engaged in international transport, construction contracting, providing technical services, or machinery and equipment leasing in Taiwan;
- The cost and expenses of the foreign enterprise incurred overseas to carry these services are difficult to calculate.
With the advanced approval granted by tax authorities, only 15% of the service fee would be deemed as taxable income and subject to 20% withholding tax. In this regard, the effective tax rate could be reduced from 20% to 3% (that is, 15% the deemed profit rate multiplied by 20% the statutory withholding tax rate). However, detailed review of the scope of service and the agreement would be required to assess the likelihood of obtaining the relevant approval.
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