Josephine Peng
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In view of the increasing international transactions and to clarify the criteria for determining the income sourced from the Republic of China (ROC or Taiwan) ("ROC-sourced Income"), the Ministry of Finance (MOF) promulgated the "Guidelines for Determining the ROC-sourced Income under Article 8 of the Income Tax Act" on 3 September 2009, which were based on the suggestions provided by the National ChengChi University in a research project commissioned by the MOF, and were reviewed by the CPA Association, the American Chamber of Commerce in Taipei, the European Chamber of Commerce in Taipei, and National Tax Administrations. The key points of the Guidelines that are of most interest to foreign enterprises can be summarized as follows:
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The place where services are rendered is the source of the remuneration received.
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The remuneration received by a foreign enterprise for providing services outside Taiwan is not ROC-sourced income. However, if the services are performed both within and outside Taiwan or require the participation or assistance of Taiwan individuals or companies, the remuneration shall be deemed ROC-sourced income. Under such circumstances, the foreign enterprise may apply to the competent tax authorities for calculation of its ROC-sourced income based on the contribution of services provided in Taiwan.
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Business profits can be divided based on the contribution attributable to functions performed within and outside Taiwan.
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For a foreign enterprise that conducts business activities in Taiwan in accordance with its ordinary business scope and can provide documentation evidencing the contribution attributable to the functions provided within or outside of Taiwan, it may apply to the competent tax authorities for calculation of its ROC-sourced income based on the contribution attributable to the functions provided in Taiwan.
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Income from composite services shall be classified into different income categories for taxation purposes.
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As composite services are services that involve different types of transactions, such as licensing of patent, provision of labor, and lease of equipment, and so on, the income generated from such services shall be classified into different income categories for taxation purposes.
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Tax returns can be filed by agents and relevant costs and expenses may be claimed as tax deductible.
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For a foreign enterprise that has no fixed place of business or business agent in Taiwan and that generates service fees, rental, profit, awards, or other income from Taiwan, it may, after income tax is withheld by the payer upon making the payment, engage a tax agent to file an income tax return with the tax authorities to claim costs and expenses relevant to earning the income as tax deductibles and to apply for a refund of any over-withheld taxes within five years of the income tax being withheld. Moreover, the income tax return may be filed either per each transaction, or filed on an annual basis under each category of income.
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On the whole, the Guidelines seem to provide clear instructions on how Taiwan-sourced income should be determined. Nonetheless, given that the fine for failing to withhold income tax is up to one time the withholding tax payable, a concern remains that a Taiwan payer might insist on withholding income tax when making the payment unless the recipient can provide evidence proving that the services concerned are all performed outside of Taiwan and the tax authorities would unlikely dispute the non-ROC sourced income. However, it is unclear as to the extent of documentation that the tax authorities may require in determining the contribution that is attributable to the services or functions performed in Taiwan in their examination of an application for a refund of overpaid tax.
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