Taiwan e-tax Alert. Issue 37 April 7, 2014

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1 Taiwan e-tax Alert Issue 37 April 7, 2014 Views on possible applications of cross-strait taxation agreement from experience of tax treaties between Taiwan and other countries As the cross-strait taxation agreement is expected to be concluded soon, to grab the first opportunity, many enterprises are hoping to draw up the strategy as early as possible and evaluate how they can apply the cross-strait taxation agreement to bring in the anticipated effects as well as developing a comprehensive planning strategy from the angle of the whole group. Referring to practical experience learned from tax treaties between Taiwan and other countries, we share our observations from the perspectives of benefits which could be enjoyed and implications on companies once the agreement becomes effective. The benefits If the cross-strait taxation agreement could be signed, enterprises can cope with and actively manage tax risks through various kinds of mechanism to reduce double taxation. Please find discussions as below. tax benefits

2 When the cross-strait taxation agreement is signed, for the individuals with dual-residents status (e.g. a person who registered residence in Taiwan, but also is considered as a Chinese resident due to working in China for 5 years consecutively) or a company, the agreement would include the Tie- Breaker rule" to confirm the taxation rights of authority for imposing tax. In this case, the individual / company would not be subject to double taxation on the whole income by both the Taiwan and China tax authorities. Regarding the revenue derived by companies without creating or through a permanent establishment such as a Chinese company provides a Taiwanese company services (e.g. management, data processing, technical and RD services) the exemption on business profits can be applied to the revenue so received. This would also reduce the tax risks for Taiwanese employees to be considered as establishment in China and be subject to China tax. With regards to income earned from property (stocks) transaction, in principle, the source jurisdiction of the income would not have the taxing right. If a Taiwanese company indirectly disposes the stocks of Chinese company through disposing stocks of an offshore holding company, the tax treatment of the China ruling no. 698 issued in 2009 for income earned from property (stock) transactions would also be applicable. In addition, the cross-strait taxation agreement could reduce double taxation by lowering the upper limitation of tax rates on dividends, interests, and royalty income. It also extends the threshold of number of days where an individual resides in the source country where the source jurisdiction of the individual labour service income will not have the taxing right. Approaches to resolving transfer pricing disputes Corresponding adjustments According to Article 35 of the Assessment Rules Governing Non-Arm s-length transfer Pricing for Profit-seeking enterprises Income Tax of Taiwan, in the event that the controlled transactions conducted by a Company has been assessed and adjusted in accordance with arm s length by the tax authorities and the adjustments have been assessed and confirmed, the tax authorities shall make corresponding adjustments to the counter-party of the controlled transaction provided that it is a taxpayer under Taiwan tax jurisdiction. If the

3 counter-party of the aforementioned controlled transaction is a foreign company, the corresponding adjustments should be made in accordance with the tax treaty signed between the two countries. If necessary, the corresponding adjustments can be made under the mutual agreement procedures mechanism under the said treaty. For example, assuming Related Party A is a Taiwanese Company and Related Party B is a Chinese Company and they have intercompany transactions. After the cross-trait taxation agreement is signed, in the event that China tax authority increased Related Party B s taxable income due to transfer pricing assessment, Related Party A can request Taiwan tax authority to make a corresponding downward adjustment to its taxable income to eliminate double taxation. Nonetheless, Related Party A shall provide sufficient documents to prove that the transfer pricing result (after the assessment) is at arm s length. If Taiwan tax authority does not accept adjusting the full amount, Related Party A can further request for entering into Mutual Agreement Procedures. Mutual agreement procedures (MAP) Where a person considers that the actions of one or both of the Contracting States has resulted in or will result for him in taxation not in accordance with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident. The competent authority shall endeavor, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Agreement. Any agreement reached shall be implemented without any time limits in the domestic law of the Contracting States. The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention.

4 Once the cross-strait taxation agreement has been signed, if Related Party A in the aforementioned example considers the actions or assessments of Taiwan or China tax authorities not in accordance with the provisions of the cross-strait taxation agreement, Related Party A could apply for the MAP to the Taiwan tax authority, who will in turn negotiate with the China State Administration of Taxation to resolve the controversy. Bilateral advanced pricing agreements In comparison to corresponding adjustments and mutual agreement procedures which are classified as remedy reliefs for double taxation that has occurred the bilateral APAs are in nature a preemptive mechanism against double taxation. The results of the bilateral APAs are binding and therefore, provide a more comprehensive resolution for potential transfer pricing disputes than the unilateral APAs. Once the cross-strait taxation agreement has been signed, the aforementioned examples Related Party A and B may, before any transactions taking place, apply with the Taiwan and China tax authorities for an APA. If a consensus is reached, in addition to obtaining certainty on transfer pricing results during the effective period and avoiding double taxation, the companies can prevent the hassles of audit or adjustments afterwards. Implications The current draft version proposes that the cross-strait taxation agreement is applicable to offshore holding companies deemed as having place of effective management (PEM) in Taiwan under the indirect investment structure. Among which, the agreement is also applicable to enterprises which still invest in China via a third location after June 30, 2012 where the rules no longer restrict direct investment. As such, enterprises can make a comparison between direct and indirect investment structures from the perspectives of benefits of applying the cross-strait taxation agreement, tax impact of offshore holding company having PEM in Taiwan, applicability of China and Hong Kong taxation agreement and consideration after Taiwan implements anti-tax avoidance rules such as Controlled Foreign Corporation (CFC Rule) and PEM to facilitate the review and evaluation of the overall tax impact

5 and cost benefit arising from adjusting investment shareholding structure Our observations in this e-tax are based on Taiwan s experience in double taxation agreements with other countries and the current direction of the draft cross-strait taxation agreement. Thus, future implementation will depend on the actual content of the formal agreement after it becomes effective. By,Tax, Hazel Chen, Associate Director and Chris Lin, Associate Director

6 Contact us Head of Tax Jessie Ho E: Corporate Tax Advisory Services E: Global Transfer Pricing Services T: +882 (2) E: Indirect Taxation Services E: Tax Agent Services for Foreign Institutional Investor (FINIs) Jessie Ho E: Vivia Huang E: Family (Individual) Estate Tax Advisory Services E: International Executive Services Investment and Registration Services Rose Yang E: Vivian Ho Accounting, Tax and Payroll Outsourcing Services Eric Wu E: Vivia Huang E: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation KPMG, a Taiwan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.