Newsletter
AMENDMENTS TO ENFORCE-MENT RULES OF THE INCOME TAX ACT
The 30 May 2006 amendments to the Income Tax Act (ITA) include features to (i) simplify the tax treatment of undistributed earnings by adopting an after-tax net profit basis as per the Business Entity Accounting Act (BEAA); (ii) impose separate tax at source on dividends and net earnings received by enterprises of which their head-quarters are located outside of Taiwan; and (iii) empower the Ministry of Finance (MOF) to establish regulations on the allocation of an enterprise's costs, expenditures, and/or losses between taxable and tax-exempt income (more details please see separate article). Hence the MOF announced amendments to the ITA En-forcement Rules on 5 March 2007.
The ITA provides that from May 2007, when a profit-seeking enterprise declares its undistrib-uted earnings for fiscal year 2005 onwards, it should adopt "the after-tax net profit as deter-mined in accordance with BEAA" as the basis for computing its undistributed earnings, instead of "the amount of taxable income as assessed by the tax collection authorities" before the 30 May 2006 amendment. This eliminates not only the previous complicated calculation of undistrib-uted earnings, but also the temporary and per-manent differences between the results of finan-cial accounting and tax accounting.
In line with the above, the ITA Enforcement Rules provide that when a profit-seeking enter-prise makes up losses from previous years, it must use undistributed earnings from the then current year for which it is filing, to genuinely make up cumulative losses that was incurred prior to the closing date of the preceding fiscal year, as calculated according to the BEAA. In addition, the Enforcement Rules define "losses from the following year as audited and certified by a certified public accountant" as after-tax net losses audited and certified by a CPA, as re-flected in the financial statements for the fiscal year following the fiscal year under considera-tion. In other words, when an enterprise declares in year 2007 its undistributed earnings for year 2005, it may not only use those earnings to offset its losses carried over from previous years up till and including year 2004, but also use said earn-ings to offset the loss for year 2006 if its audited financial statements show a net loss for year 2006.
The Enforcement Rules also provide that if in fiscal year 2005 or any subsequent year, a profit-seeking enterprise has retained earnings that are subject to restrictions on appropriation as referred to in Subparagraphs 5 and 7, Paragraph 2, Article 66-9 of the ITA, and that the grounds for such restrictions subsequently cease to exist, then before the close of the fiscal year following the year in which such grounds cease to exist, the enterprise should include any amount of such retained earnings that remain undistributed as a part of its undistributed earnings arising in the year in which the restrictions cease to apply, in calculating its liability for the 10% additional tax on undistributed earnings. As a result, if an en-terprise has retained earnings that were barred from distribution prior to fiscal year 2005, then even if the restriction later ceases to apply, such earnings would not be retroactively subject to undistributed earnings tax. In other words, only those earnings that were subject to the restric-tions on appropriation arose in or after fiscal year 2005 would potentially become taxable if the restriction ceases to apply.
Paragraph 3, Article 24 of the ITA provides that if a foreign profit-seeking enterprise invests in another profit-seeking enterprise within Taiwan, the dividends or net earnings that it receives are subject to withholding tax at source, regardless of whether or not the foreign enterprise has a fixed place of business in Taiwan. Article 70 of the ITA Enforcement Rules has been amended accordingly to explicitly provide that regardless of whether such a foreign enterprise has a fixed place of business in Taiwan, Article 73-2 of the ITA regarding the offset of 10% undistributed earnings tax against the amount of income tax withheld from such dividends or net earnings, should apply.