Taiwan Ministry of Finance announces amendments to
Tax Insights from Transfer Pricing Taiwan Ministry of Finance announces amendments to transfer pricing assessment rules March 19, 2015 In brief On March 6, 2015, the Taiwan Ministry of Finance (MOF) announced the amendments to eight existing articles, and introduced one new article to the Regulations Governing Assessment of Profit-seeking Enterprise Income Tax on Non-Arm’s Length Transfer Pricing (TP Assessment Rules). Main points of the amendments: Introduction of the concepts in Chapter 9 of the OECD Transfer Pricing Guidelines concerning business restructuring. Companies engaged in business restructuring in FY2014 are required to disclose and document in their FY2014 transfer pricing reports whether the restructuring was conducted in compliance with the arm's length principle. This is expected to heavily increase the efforts required to prepare compliant transfer pricing documentation for applicable companies in Taiwan. Clarification that the profit split method may be considered if the relevant entities make unique and valuable contributions to the controlled transactions they are involved in. Requirement for companies being merged or dissolved to prepare transfer pricing reports along with their final income tax returns. Lowering of the advance pricing agreement (APA) application threshold and revising the APA application timeline. Introduction of the use of a company's costs and expenses to reversely calculate its revenue by applying the prescribed Profit Standard of the Same Trade (Profit Standard), in cases where the company cannot provide reliable revenue information. In detail In order to keep pace with the developments in international taxation, improve audit efficiency, streamline APA application procedure and reduce the risk associated with double taxation of multinational companies (MNC), the Taiwan MOF has announced proposed amendments to the TP Assessment Rules. The main points of the amendments and possible impacts are covered below. www.pwc.com Tax Insights 1. Introduce the factors to be considered in conducting business restructuring and profit allocation The Taiwan TP Assessment Rules provide that business restructuring includes (without being limited to): conversion from full-fledged distributors to limited risk distributors, from full-fledged manufacturers to contract manufacturers, the centralizing or decentralizing of ownership/ management of intangible properties across different entities within the group, the downsizing or winding-up of operations, as well as any other arrangements announced by the MOF. Where a Taiwan entity of an MNC group undergoes any business restructuring mentioned above, it should disclose and document in its transfer pricing report the assessments on whether the business restructuring is conducted at arm’s length, while addressing the following: Special considerations for risks The rights and obligations of the participants before and after the business restructuring. The appropriateness of the transfer of profit potential and reallocation of risk from the business restructuring. Proper consideration is accounted for in the transfer of (tangible and intangible) assets or activities which the business restructuring entails. Proper indemnification is provided to the restructured enterprise for the termination or substantial renegotiation of existing arrangements. Remuneration of post-restructuring controlled transactions The factors to be considered in this regard include: Selection and application of a transfer pricing method for the post-restructuring controlled transactions based on comparability analysis. Comparison of the indemnification from the business restructuring, and the pre and post restructuring profitability of the restructured enterprise. These include: Whether the conduct of the associated enterprise conforms to the contractual allocation of risk. Whether the attribution of profits among group enterprises before and after the restructuring complies with the arm’s length principle, considering the function and risk profiles of the enterprises involved. Whether the risk-bearers have the proper capability to control the risk, and financially assume the risk. Appropriate compensation in cases of business restructuring The factors to be considered in this regard include: 2 The business reasons for and the expected benefits of the business restructuring. The tax authorities are to properly recognize the actual transactions undertaken by the taxpayer in the business restructuring through the review of relevant documents and information provided. If the economic substance of the transaction deviates from its form, the tax authority should perform an adjustment based on the actual transaction recognized. 2. Broaden the scope of using profit split method Before the amendment, the Taiwan TP Assessment Rules only provided that the use of the profit split method in a transfer pricing analysis was suitable when activities carried out by the participants in a controlled transaction were highly integrated; in such cases separate evaluations of the results of the participants were difficult to perform. The amended TP Assessment Rules include the situation where each participant to the controlled transaction makes unique and valuable contributions to the controlled transaction, as another appropriate situation to which the profit split method may be applicable in the transfer pricing analysis. This brings the situation into alignment with the OECD TP Guidelines. 3. Require transfer pricing reports from companies to be merged or dissolved The proposed revision of the TP Assessment Rules requires that companies to be merged or dissolved prepare transfer pricing reports along with their final income tax returns, in addition to the requirement under the pre-amended TP Assessment Rules to prepare transfer pricing reports along with the preparation of their annual income tax returns. 4. Introduce various amendments to the existing APA application mechanism The threshold in the transaction amount for the application of an APA in Taiwan is lowered in the amended TP Assessment Rules. The amended TP assessment Rules also extend the duration for APA applicants to provide the required set of documents and information to 3 months, yet simultaneously removes the existing possibility of requesting a one month extension. Moreover, companies considering the application of an APA pwc Tax Insights can apply for a pre-filing meeting under the amended TP Assessment Rules. The tax authority should complete the pre-filing meeting within 3 months of the application date and notify the applicant through writing if a formal APA application can be accepted. 5. Introduce reverse calculation of revenue using Profit Standard of the Same Trade The Profit Standard contains prescribed gross margins and net margins announced by the Taiwan Ministry of Finance for different industries, and is generally used by Taiwan tax authority in the cases where a taxpayer has in its accounting book its revenue figure but not its cost and/or expense figure, or when the taxpayer's revenue is considered reliable (e.g. the revenue is derived externally and can be evidenced by contracts or invoices), but there is doubt on the costs or expenses (e.g. costs and/or expenses are booked by the taxpayer without any supporting documents). In such cases, the preamended Taiwan TP Assessment Rules allow the tax authority to apply the prescribed profit ratios in the said Profit Standard to the taxpayer's revenue to calculate the deemed profit of the taxpayer. However, the pre-amended TP Assessment Rules are silent in the reverse situation where the taxpayer can only provide its cost and expense figure. The amended TP rules provide for the tax authority to calculate the deemed profit of the taxpayer in the reverse situation, using the cost and expense figure as the starting point. The takeaway determine transfer pricing considerations when a business group underwent business restructuring. The newly released amendment by the MOF requests companies engaged in business restructuring to disclose and make assessments in their Taiwan transfer pricing reports regarding the arm’s length nature of the business restructuring. However, the extent of disclosure and the method of evaluation have yet to be clearly identified, which may create ambiguity for taxpayers in relation to tax compliance, and increase the possibility of dispute with the tax authority. Furthermore, if the tax authority identifies inconsistent business substance in the controlled transaction, the tax authority is entitled to make a transfer pricing adjustment. This may lead to controversy when determining the consistency of business substance in actual practice. The amendments described above do not contain the disclosure requirements for transfer pricing documentation and country-bycountry reports addressed in the revised Chapter 5 of the OECD Transfer Pricing Guidelines. As such, we are likely to see further amendments to the Taiwan TP Assessment Rules in this regard. Companies should pay close attention to the transition of the domestic and international tax environments, monitor their operations to improve tax compliance, and develop defence strategies against potential challenges on the result of their controlled transactions, including business restructuring. PwC’s perspective Before the amendment, the Taiwan TP Assessment Rules were in effect for ten years, and within this period the OECD added Chapter 9 of the Transfer Pricing Guidelines to 3 pwc Tax Insights Let’s talk For a deeper discussion of how this issue might affect your business, please contact your regular PwC contact or one of the individuals listed below: Transfer Pricing Lily Hsu, Taipei +886 2 2729 6207 [email protected] Elliot Liao, Taipei +886 2 2729 6217 [email protected] Simon Huang, Taipei +886 2 2729 6666, ext. 23927 [email protected] Meer Liu, Taipei +886 2 2729 6666, ext. 23665 [email protected] Transfer Pricing Global and US Leaders Isabel Verlinden, Brussels Global Transfer Pricing Leader +32 2 710 44 22 [email protected] Horacio Peña, New York US Transfer Pricing Leader +1 646 471 1957 [email protected] Stay current and connected. 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