Taxing authority and tax law

Tax authority: National Tax Administration (NTA)

Tax law:

• Articles 43-1 of the Income Tax Law (ITL)
• Article 50 of the Financial Holding Company Law
• Article 42 of the Business Mergers and Acquisitions Law

Relevant regulations and rulings

The Taiwan Transfer Pricing Examination Guidelines (TP guidelines) were put into effect on 30 December 2004.

OECD guidelines treatment

The tax authority recognizes the OECD guidelines.

Priorities/pricing methods

In accordance with the TP guidelines, the pricing methods are as follows: CUP, Resale Price, Cost Plus, Profit Split, Comparable Profit method (or TNMM) and other methods prescribed by the Ministry of Finance (MOF).

Transfer pricing penalties

Pursuant to the TP guidelines, under certain circumstances, a maximum of 200% of the tax shortfall could be imposed if assessed by the tax authority.

Penalty relief

There is currently no penalty relief regime in place.

Documentation requirements

Except for immaterial related-party transactions, extensive contemporaneous documentation is required. According to the TP guidelines, upon filing of the annual income tax return, an enterprise must have the transfer pricing report and relevant documentation prepared.

In December 2005, the tax authority issued a safe harbor rule for transfer pricing reports in Tax Letter Ruling No. 09404587590. The ruling provides that an enterprise is not required to prepare a transfer pricing report (other supporting documents are allowed) if any of the following criteria is met:

• The total annual revenue (including operating and non-operating) of the enterprise does not exceed TWD100m
• The total annual revenue (including operating and non-operating) of the enterprise exceeds TWD100m but does not exceed TWD300m
  • The enterprise does not utilize tax credits for more than TWD1m or loss carry forwards for more than TWD4m to reduce the income tax or undistributed earnings surplus tax
  • An enterprise under the Financial Holding Company Law or Mergers and Acquisitions Law has no overseas related parties (whether a company or an individual), or an enterprise has no overseas affiliated companies
• The total annual controlled transactions amount is less than TWD100m

If the Taiwan enterprise meets the safe harbor threshold and does not prepare a transfer pricing report, the tax authority still may request “other supporting documents” as evidence of the arm’s length nature of the intercompany transactions. One example of an “other supporting document” as stated under the ruling is the parent or headquarters’ transfer pricing report, as long as it does not significantly vary from the concepts presented in the Taiwan TP guidelines.

In November 2008, the tax authority released a new letter ruling (No.09704555160) to further loosen the safe harbor criteria. The new rule is applicable for fiscal years ending in December 2008 and onwards. The ruling states that an enterprise is not required to prepare a transfer pricing report if any of the following three criteria are met:

• The total annual revenue (including operating and non-operating) of the enterprise does not exceed TWD300m
• The total annual revenue (including operating and non-operating) of the enterprise exceeds TWD300m but does not exceed TWD500m and
  • The enterprise does not utilize tax credits for more than TWD2m in a particular year or a loss carry forward for more than TWD8m for the preceding five tax years to reduce the income tax or undistributed earnings surplus tax
  • An enterprise under Financial Holding Company Law or Mergers and Acquisitions Law has no transactions with any overseas related parties (whether a company or an individual), or an enterprise has no transactions with overseas affiliated companies; or
• The total annual controlled transactions amount is less than TWD200m

The categories of documentation required are:

• Business overview
• Organizational structure
• Description of controlled transactions
• Transfer pricing report, including:
  • Industry and economic analysis
  • Functions and risks analysis
  • Application of the arm’s length principle
  • Selection of comparables and related information
  • Comparability analysis
  • Transfer pricing methods selected by the enterprises
  • Transfer pricing methods selected by related parties under the same control
  • Result of comparables search under the best method of transfer pricing
• Report of affiliated enterprises under Article 369 of the Republic of China (ROC) Company Law
• Any other documents that have significant influence over pricing between the related parties

Documentation deadlines

According to the TP guidelines, upon filing the annual income tax return, the taxpayer must have the transfer pricing report and relevant documents prepared. If the tax return meets the requirement for certification, the Tax CPA has to note on the return whether the enterprise has prepared a transfer pricing report in accordance with the TP guidelines. No attachment of the report to the return is required upon filing.

In accordance with the TP guidelines, upon audit, the enterprise has to provide the tax authority with the report within one month. With the approval of the tax authority, the submission could be extended for one month under special circumstances.

Statute of limitations on transfer pricing assessments

The statute of limitations is five years if the tax return was timely filed and seven years if not.

Return disclosures/related-party disclosures

Beginning in 2004, a taxpayer must disclose related-party transactions and include the disclosure under the annual income tax return pursuant to the TP guidelines. The disclosure generally includes:

• The investing structure
• Identification of related parties
• The related-party transaction amounts by type
• The related-party transaction balances
• The related parties’ financial information, including total revenues, gross margins, operating margins and net margins
• Whether the enterprise has prepared transfer pricing documentation for that fiscal year

The tax authority issued safe harbor rules for related-party transaction disclosures in Tax Letter Ruling No. 09404587580 for tax year 2005 and in Tax Letter Ruling No. 09604503530 for tax year 2006 and onwards. Both Rulings provide that an enterprise must disclose related-party transactions on its income tax return if the sum of its annual operating and non-operating revenue (total annual revenue amount) exceeds TWD30m and also meets one of the following:

• Has related parties outside the territory of the ROC (including the headquarters and branches)
• Utilizes tax credits for more than TWD500,000, or utilizes loss carry forwards for more than TWD2m to reduce the income tax or undistributed earnings surplus tax
• Exceeds total annual revenue of TWD300m

Audit risk/transfer pricing scrutiny

On 2 August 2005, the MOF issued a Tax Letter Ruling No. 9404540920 that set forth the circumstances for a transfer pricing audit as follows:

• The gross profit ratio, operating profit ratio and net income before tax ratio are below the industry average
• The parent or headquarters reports profit on the global consolidation level, but the local affiliate reports loss or much less profit than the industry average
• An enterprise reports significant fluctuations of profit over the transaction year and the two years preceding
• An enterprise fails to disclose related-party transactions in accordance with the related-party transaction disclosure requirements
• An enterprise fails to determine whether its related-party transactions are within an arm’s length range and fails to prepare documents in accordance with the TP guidelines
• An enterprise fails to charge related parties in accordance with the TP guidelines or charges an abnormal amount
• An enterprise fails to provide the transfer pricing report upon a tax audit
• The transfer pricing of the enterprise has been adjusted by the tax authority, in which case, the tax years preceding and subsequent to the year of a transfer pricing audit are likely to be selected for audit
• An enterprise has significant or frequent controlled transactions with related parties in tax havens or low tax jurisdictions
• An enterprise has significant or frequent controlled transactions with related parties entitled to tax incentives
• Any other transaction fails to meet the arm’s length requirements in accordance with the TP guidelines

In general, the level of audit risk is high. In the past year, there has been increased activity from Taiwan’s tax authority especially with respect to requests to see documentation reports. These requests seem to be made irrespective of the revenue, the existence of cross border transactions or relative size of the company. In particular, companies conducting business through tax havens have attracted more scrutiny along with those making losses.

APA opportunity

APAs are available under articles 23 through 32 of the TP guidelines. According to Tax Letter Ruling No. 9404540920, under an APA, a tax return is not subject to a transfer pricing audit except for the following circumstances:

• The enterprise fails to provide the tax authority with the annual report regarding the implementation of the APA
• The enterprise fails to keep the relevant documents in accordance with TP guidelines
• The enterprise fails to follow the provisions of the APA
• The enterprise conceals material facts, provides false information or conducts wrongful acts

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