Taxation of Taiwan Sourced Income Earned by Foreign Enterprises Providing Cross Border Electronic Services

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1 Taxation of Taiwan Sourced Income Earned by Foreign Enterprises Providing Cross Border Electronic Services January 2018 On January 2, 2018, the Ministry of Finance issued Tax Ruling (the Ruling ) to address income tax treatment of remuneration derived by foreign enterprises from provision of cross border electronic services to Taiwanese consumers (including individuals, profit-seeking enterprises and organizations). The Ruling is retroactively effective from 2017 onwards, with salient points summarized as follows: I. Determination of Taiwan Sourced Revenues Non-Taiwan sourced revenues Taiwan sourced revenues 1. Remuneration received by foreign enterprise from Taiwan consumers, as a result of products (e.g. standalone software, e-books, etc.) manufactured offshore, altered only in the form of their presentation, i.e. downloaded from the internet or via other electronic means of transmission for storage into computers or mobile devices, and transformed into electronic services, without the assistance and participation of Taiwan entities or individuals. 2. Remuneration received by foreign enterprise from provision of services via the internet or other electronic means, regardless whether a foreign platform service provider is used, which involves a physical place of consumption (e.g. accommodation service, car rental service, etc.), and where relevant services are rendered offshore, or business is conducted offshore. 1. Remuneration received by foreign enterprise from Taiwan consumers, for provision of electronic services via the internet or other electronic means, that are instantaneous, interactive, convenient, and continuous (e.g. online games, online movies or videos, online music, online webcast, and online advertisements, etc.). 2. Remuneration received by foreign platform service provider from both buyers and sellers for provision of 1

2 online platform, through which onshore/offshore buyers and sellers can transact, and where both parties or one of the transacting parties is an onshore individual, profitseeking enterprise or organization. II. Calculation of Taxable Income General Formula: (Taiwan sourced revenues Costs and expenses) x Onshore profit contribution ratio = Taxable Income; or Simplified Formula: Taiwan sourced revenues x Industry standard profit rate x Onshore profit contribution ratio = Taxable Income Taiwan sourced revenues Remuneration received by foreign enterprises as determined in Section I. Costs and expenses / Criteria Industry standard profit rate a) Actual costs and expenses; or Costs and expenses are supported by accounting books and records. b) Industry standard profit rate (if Unable to provide accounting assessed as foreign platform books and records to support service provider, industry actual costs and expenses; and standard profit rate is 30%); or Information such as contracts, principal activities performed, activities performed onshore/offshore, and other evidentiary documents can be submitted to the tax authority for assessment of industry standard profit rate. c) Default profit rate of 30%; or If neither a) nor b) applies. d) Assessed profit rate > b) or c). If, based on available evidence, the tax authority assesses the profit rate to be higher than that determined in b) or c). Onshore profit contribution Criteria ratio a) Actual onshore profit Determination of contribution of contribution ratio; or onshore and offshore activities to total profits as supported by 2

3 evidentiary documents, such as CPA audit report, TP report, and work plan record or report. b) 100%; or If transactions take place entirely onshore, or if services are both provided and utilized onshore, e.g. Taiwan advertisers only targeting Taiwan audience. c) 50%; or If neither a) nor b) applies. d) Assessed onshore profit If, based on available evidence, the contribution ratio > 50%. tax authority assesses the onshore profit contribution ratio to be higher than 50%. III. Methods of Taxation Where foreign enterprise does not have a fixed place of business or business agent in Taiwan Where foreign enterprise is a platform service provider 1. If income is subject to withholding under Article 88 of the Income Tax Act: i. Withhold income tax from gross remuneration at payment using prescribed withholding tax rate (standard withholding tax rate is 20%); or ii. Subject to prior approval from the tax authority, withhold income tax from taxable income at payment, by applying the approved industry standard profit rate and onshore profit contribution ratio described in Section II, using prescribed withholding tax rate of 20%. 2. If income is not subject to withholding under Article 88 of the Income Tax Act, the foreign enterprise shall, by itself or appoint a tax agent, file income tax return and pay taxes due (standard tax rate is 20% absent any tax treaty) before the stipulated deadline. 1. Gross remuneration received by foreign platform service provider shall be taxed in accordance with guidance provided above under this Section; or 2. If a portion of gross remuneration received is subsequently remitted to a foreign non-platform electronic service provider, the foreign platform service 3

4 provider may apply with the tax authority to be taxed based on the difference between gross remuneration received from consumers and amount remitted to foreign non-platform electronic service provider. Relevant contracts and proof of outward remittance needs to be provided to be eligible for taxation based on net platform service fee received following guidance provided above under this Section. Additionally, where remittance to foreign non-platform electronic service provider qualify as Taiwan sourced income, the foreign platform service provider shall provide proof that the foreign non-platform electronic service provider has paid Taiwan income taxes due (e.g. via withholding tax statements issued). Foreign non-platform electronic service provider may be withheld based on taxable income by applying the approved industry standard profit rate and onshore profit contribution ratio described in Section II. Taxes withheld shall be remitted to the National Treasury before the 10 th day of the following month after withholding is performed, and information related to taxes withheld from remittance to foreign non-platform electronic service providers shall be submitted to the tax authority. IV. Other issues 1. Effective January 1, 2017, where the amount of income tax withheld in connection with a foreign enterprise s provision of cross border electronic services exceed that determined under Sections I to III above, the foreign enterprise may, by itself or appoint a tax agent, apply with the tax authority for a refund of income tax overpaid within 5 years of receiving said income. 2. The Ruling is also applicable to individuals and profit-seeking enterprises of Mainland China receiving Taiwan sourced revenues from the provision of cross border electronic services. 3. If a profit-seeking enterprise or organization headquartered in Taiwan engages in an artificial arrangement via legal form to apply the rules set forth in this Ruling, which is only eligible for foreign enterprises engaged in provision of cross border electronic services, to avoid or reduce taxes, the tax authority shall assess taxes based on underlying facts and actual substance. 4

5 PwC Observation: The release of the Ruling formalizes the income tax liability of foreign enterprises engaged in provision of cross border electronic services to Taiwan consumers. Affected parties include, but are not limited to, the following: 1. Foreign enterprises which are already tax registered in Taiwan for VAT purposes in relation to B2C cross border electronic services since May 1, 2017; 2. Foreign enterprises which are not tax registered in Taiwan for VAT purposes in relation to B2C cross border electronic services, since they fall under safe harbour threshold where annual sales is smaller than NTD 480,000; 3. Foreign APP developers using foreign platform service providers to sell cross border electronic services to Taiwan consumers directly; 4. Foreign enterprises engaged in B2B cross border electronic services previously subject to 20% withholding tax on gross remuneration; 5. Taiwanese enterprises engaged in B2B cross border electronic services who bear 20% withholding tax on gross remuneration. Affected parties who have not been subject to income tax assessment in the past on Taiwan sourced income received should explore which alternatives can result in a lower effective tax rate, e.g. usage of business profit tax exemption clause under existing tax treaties, guidance in this Ruling to adopt industry standard profit rate and onshore profit contribution ratio, or identification of non-taiwan sourced income components, etc. Whereas, affected parties which have previously been subject to 20% standard withholding tax on gross remuneration should explore whether it is worthwhile to apply for tax refund using guidance provided in this Ruling, treaty benefits available in tax treaties, or whether there is room to argue non-taiwan sourced income. While the details of the application process to determine industry standard profit rate and onshore profit contribution ratio have not yet been released, foreign enterprises providing cross border electronic services are advised to evaluate their business models to determine how best to comply with or make use of the guidance provided in this Ruling. Affected parties are also recommended to contact individual advisors to explore different alternatives available, since additional guidance is expected to be released in due course in the form of individual tax rulings or Q&As. 5

6 PwC Contacts: Corporate Income Tax and Indirect Tax Services Jason Hsu (Leader) Howard Kuo Pei-Hsuan Lee Ying-Hsun Liu International Tax Services Elaine Hsieh Paulson Tseng (EU Tax) Transfer Pricing & BEPS Services Lily Hsu Financial Services Tax Richard Watanabe Mergers & Acquisitions Tax Elaine Hsieh International Assignment Services Li-Li Chou Corporate Secretarial Services Jack Hwang Outsourcing and Accounting Services Rosamund Fan Li-Li Chou Sam Hung Alvis Lin Wilson Wang ext Wendy Chiu (US Tax) Patrick Tuan (China Tax) Elliot Liao Jessie Chen Alvis Lin Tony Lin Sam Hung Rosamund Fan Jack Hwang Tony Lin Peter Su (ASEAN Tax) The information contained in this publication is of a general nature only. It is not meant to be comprehensive and does not constitute legal or tax advice. PricewaterhouseCoopers ( PwC ) has no obligation to update the information as law and practice change. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC client service team or your other tax advisers. The materials contained in this publication were assembled in January 2018 based on the law enforceable and information available as of January 2, In the event of any discrepancy between the English information contained in this newsletter and the original Chinese version of the laws or rulings announced by the government, or any difference in the interpretation of the two versions, the Chinese version announced by the government shall prevail PricewaterhouseCoopers Taiwan. All rights reserved. PwC refers to the Taiwan member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 6