APAC Tax Matters: November 2012
At a glance
The Taiwan tax authority issued a tax ruling (Tax Ruling) on 9 August 2012, clarifying the character of a payment made to a foreign entity for the provision of specific online database services to Taiwanese customers as business profits rather than royalty payments.
If the foreign service provider has no fixed place of business or business agent in Taiwan, the payment would not be subject to a 20% withholding tax.
Prior to the Tax Ruling, there was no clear guideline under Article 8 of the Income Tax Act on whether online database service income received by a foreign company should be characterized as royalties or business profits. The relevant Tax Ruling states that service fee income would be characterized as business profits if the following conditions are met:
- A foreign company’s core business is the rendition of online database services;
- The online database provides electronic transcripts of full texts; references, tables of contents, abstracts, and statistical data of periodicals, books and dissertations, and enables users to search for and extract specific information for self-use purposes;
- Pursuant to the agreement, the users can only download, save and print the data from the online database to a reasonable extent; and,
- The users do not have rights to reproduction, distribution, editing, change and other commercial use of the copyrighted materials.
The Tax Ruling further confirms that, in accordance with paragraph 2, Artcle10 of the Guidelines for Determination of Taiwan Source Income under Article 8 of the Income Tax Act (the “Guidelines”), if the foreign company does not have a fixed place of business or a business agent in Taiwan and the online database service activities are entirely performed and completed outside Taiwan, such income should not be Taiwan sourced income, and therefore would not be subject to Taiwan’s 20% withholding tax.
If, however, activities are partly performed within Taiwan or the provision of the online database services requires assistance or support from persons in Taiwan, e.g., providing equipment, manpower, know-how or technical resources, excluding a mere use of the online database, the resultant income should be treated as Taiwan sourced and be subject to the 20% withholding tax.
If the foreign company is able to provide documents to clearly support a contribution margin for services provided onshore versus offshore under paragraph 2, Article 10 of the Guidelines, the tax authority will apply a contribution margin analysis to the actual onshore services in determining the Taiwan source business profits.
The Tax Ruling clarifies the tax treatment of online database services as business profits where specific conditions are met. When activities are partly performed in Taiwan, either through a fixed place of business, a business agent in Taiwan or assistance/support from Taiwan, detailed documentation will be required to clearly distinguish the services provided in Taiwan to minimize the risk of having the entire service fee subjected to the 20% withholding tax.
On 25 July 2012, Taiwan’s Legislative Yuan approved an amendment to the Income Tax Act to reinstate capital gains tax on Taiwan securities trading and a change to the applicable rates under the alternative minimum tax contained in the Base Income Tax Act (the AMT amendment).
The amendments apply to both resident and non-resident individual investors and business entities but exclude foreign entities that have no fixed place of business or business agent. Under the AMT amendment, AMT rates for business entities, i.e., domestic and foreign entities with a fixed place of business or business agent, are increased from 10%~12% to 12%~15% and the annual exclusion amount is reduced from NT$2 million (USD 67,000) to NT$500,000 (USD 17,000).
To minimize the impact on individual taxpayers, the Ministry of Finance has set 2013 and 2014 as transition periods in which capital gains may be calculated on either imputed income or actual profit base where the actual profit method adopted is notified to securities brokers before 15 December 2012. Post-transition period capital gains must be calculated on the actual profit base.
For business entities, the AMT amendment will become effective on or after 1 January 2013.
The following table summarizes the capital gains tax levied on individuals and enterprises.
Capital Gains Tax for individuals
|Period|| 1 January 2013 to 31 December 2014 |
|After 1 January 2015|
|Tax rate|| Imputed income : 20% |
Actual profit base: 15%
|Taxation Scope||Listed and unlisted stocks, associated certificates or rights|| |
Resident: Taxed on capital gain on disposition of listed and unlisted stocks, subject to meeting certain conditions.
Non-resident: Taxed on capital gains generated from disposal of Taiwan stocks or associated certificates or rights (including listed and unlisted).
|Tax incentives for long-term investment|| |
Capital Gains Tax for Enterprises
|Year||Effective 1 January 2013|
|Taxation scope and tax rate|| |
Capital gains from disposition of listed and unlisted Taiwan securities (including Taiwan stocks, associated certificates or rights)
The reinstatement of the capital gains tax does not have any impact on foreign- based business entities, provided that they have no fixed place of business or business agency in Taiwan.