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Additional Tax Avoidance Rules will likely be Implemented in 2015
Li-Ting Chen/Josephine Peng
The Legislative Yuan in its first reading on 1 April 2013 passed two tax avoidance rules which were proposed by the Ministry of Finance (MOF) to be incorporated into the Income Tax Act (ITA). The key points of these two rules and our preliminary comments thereon are as follows:
1.
Controlled foreign company ("CFC") rule (Article 43-3 of the ITA)
Effective fiscal year 2015, a Taiwan company that controls (directly or indirectly) an offshore affiliate which was incorporated in a low tax rate jurisdiction (a jurisdiction in which the income tax rate is below 5.1%) will be required to recognize the portion of the offshore affiliate's income that belongs to the Taiwan company as the Taiwan company's investment income and include said portion in its annual income tax return. The definition of an affiliate under the CFC rule would likely be that prescribed under the Taiwan Company Act.
2.
Place of effective management ("PEM") rule (Article 43-4 of the ITA)
Effective fiscal year 2015, if a foreign company's PEM is in Taiwan, it will be deemed a business entity with its headquarters in Taiwan, and be subject to Taiwan income tax accordingly. PEM refers to the place where the foreign company's major and business decisions are made.
3.
Our preliminary comments
Regarding the CFC rule, under current tax regulations, a Taiwan company is required to include as part of its taxable income the dividends distributed by its offshore affiliates. Hence some Taiwan companies would keep their offshore income with the offshore affiliates so as to defer the income tax liability in Taiwan. With the implementation of the CFC rule, Taiwan companies will no longer be able to defer their Taiwan income tax liability on such offshore income; instead, they must include such offshore income in the year it is generated. As a result, the Taiwan companies' income tax liability will increase.
Regarding the PEM rule, currently, a foreign company is subject to Taiwan income tax only on its Taiwan-sourced income. With the implementation of the PEM Rule, if a foreign company is deemed to have its PEM in Taiwan, it will be subject to Taiwan income tax on its worldwide income; as a result, its after-tax net income will be reduced.
It requires three readings by the lawmakers to formally incorporate said two rules into the ITA. The first reading usually takes longer than the second and the third. We will watch the development closely and keep you posted.
