Taiwan

CV Chen and Josephine Peng
Lee and Li
Taiwan

Fifteen tax-reform bills passed into law is a sign of the government's commitment to help the economy, explain CV Chen and Josephine Peng of Lee and Li

Since the administration came to power in May 2008, it has taken considerable initiatives to reform Taiwan's tax regime. The government formed a tax reform committee in June 2008 to identify effective tax reforms that would encourage an overhaul of the existing tax system, economic development, the safeguarding of social justice and international competitiveness, and the promotion of environmental sustainability.

As scheduled, the tax-reform committee has finalised 17 proposals since its formation. Five proposals were produced by October 2008:

1 to 3: the simplification of the administrative process of levying corporate income tax, individual income tax, and business tax,
4: the reduction of the number of tax disputes, and
5: the revocation of tax exemption privilege for teachers and military personnel.
The ten proposals finalised by February 2009 covered:
6: a review of the tax regime,
7: a study of the income tax regime in anticipation of the scheduled abolition of the Statute for Upgrading Industries on December 31 2009;
8: a review of the individual income tax allowances and itemised deductions;
9: the reduction of tonnage and energy tax rates;
10: the enactment of further regulations on tax evasion;
11: the tax treatment of financial products;
12: a study of business tax issues;
13: the reduction of land and housing tax rates, and
14: the establishment of a mechanism for protecting taxpayers' rights.

The last three proposals, which were finalised by June 2009 covered:

15: a study of green taxation;
16: the establishment of a mechanism for granting income tax rebates to low income-earners, and
17: the taxation on industries in special economic districts.

In line with the 17 proposals and recommendations of the tax-reform committee, the Taiwan government has passed 15 tax-reform bills since July 2008. These new tax laws and regulations are aimed at improving fairness and administrative efficiency and broadening the tax base, with due consideration given to overall economic development and fiscal stability.

Flat rate for corporate income tax

Corporate income tax is levied at progressive rates from 0% to the maximum 25%, which applies to net income over NT$100,000 ($3,300). As a part of the effort to elevate Taiwan's competitiveness within the region, from January 1 2010, corporate income tax will be exempt for taxable income under NT$120,000 and levied at a flat rate of 20% for taxable income more than NT$120,000.

Extension of period of tax loss carry forwards

Before the recent amendment to article 39 of the Income Tax Act, the period for tax loss carry forwards for companies was five years. For a long time, some industries, such as biotechnology and insurance that require long periods of R&D and generally need more than five years to turn a profit, as well as various chambers of commerce in Taiwan, have lobbied for an extension. The amendment bill to extend the period of tax loss carry forwards to 10 years was passed into law and took effect from January 1 2009, though loss cannot be carried back under the amended article 39. This brings Taiwan closer to the international norm, and should benefit more than 60,000 companies.

Abolition of statute of limitations for pursuing refund of wrongly-levied tax

Before the recent amendment to article 28 of the Tax Collection Act, taxpayers could apply for a refund of tax overpaid owing to misapplication of laws or regulations or miscalculation of tax payable within five years of the tax payment date. On December 6 2006, the Ministry of Finance stated in a ruling that applications for refunds of overpaid tax resulting from reasons other than those stipulated under article 28 should also be subject to the five-year time limit. However, where the overpaid tax was erroneously assessed due to an internal administrative error by the tax authorities', such five-year limitation could constitute a violation of article 117 of the Administrative Procedures Act, which requires administrative agencies to correct erroneous administrative decisions in line with the principle of lawful administration. After a challenge from a taxpayer attracted considerable public attention, article 28-1 of the Tax Collection Act was enacted on 21 January 2009.

Pursuant to the amendment, applications for refunds of tax overpaid owing to misapplication of laws or regulations or miscalculation of tax payable are still subject to the five-year time limit. However, where a taxpayer overpays tax because of a tax-collection agency's incorrect application of laws or regulations or miscalculation of the tax payable, or other error attributable to any government agency, applications for a refund of the overpaid tax will not be subject to the five-year time limit. In addition, the tax-collection agency should conduct an investigation and refund the overpaid tax within two years of the date on which it becomes aware of such error. The amendment also applies to the overpaid tax attributable to a government agency and paid before the effective date of the amendment. Furthermore, interest on the overpaid tax calculated on a daily basis should be refunded along with the overpaid tax.

Substance-over-formality

The substance-over-formality principle directs the tax authorities to rely on the economic facts rather than the legal formality of a transaction when reviewing taxation. Before the substance-over-formality principle became a law, the definition and scope of the principle were ambiguous. Hence the increase in disputes in court over the misapplication of the substance-over-formality principle by the tax authorities. To resolve these, the substance-over-formality principle became law in May 2009 as a new provision under the Tax Collection Act. This new provision states that the basis of the tax authorities' assessments should be the "substantive economic relationship and the actual beneficial owner of economic benefits". Furthermore, the tax authorities must prove taxpayers' obligation to pay tax, while taxpayers must assist the tax authorities.

Unpaid expenses as "Other Income" and deemed interest income as interest-free loans

Under the income tax regulations, a company must re-classify expenses overdue for two years as other income. In addition, if a company grants an interest-free loan to another company, deemed interest income should be booked and be subject to income tax. The Grand Justices, however, issued interpretations in April 2009 and October 2008 declaring such requirements unconstitutional because they lacked clear and specific legal grounds under the Income Tax Act. So, as the interpretation says, these requirements will become null and void within one year from the issuing date of the interpretation concerned.

Immediate entry of investment losses

According to the income tax return audit rules, a company may not recognise any loss that it sustained from investing in another company unless the latter reduces its capital or is liquidated. However, considering that an investor in a financial institution that has been taken into receivership by the Resolution Trust Corporation of the Finance Supervisory Commission should be deemed to have already incurred investment loss, the Ministry of Finance issued a tax ruling in August 2009 whereby corporate investors can book their losses immediately and deduct them against their income if the invested company is a financial institution and is taken into receivership by the Resolution Trust Corporation of the Finance Supervisory Commission.

Offshore income in calculation of alternative minimum tax

To ensure fairness in taxation, the Alternative Minimum Tax Act came into effect on January 1 2006. The alternative minimum tax (AMT) prescribed under this Act is a basic income tax and applies to all Taiwan tax residents and companies, as well as foreign companies with a fixed place of business or a business agent in Taiwan. The tax rate of AMT is 10% for companies and 20% for individuals on the amount of net basic income after the deduction of an allowance of NT$2 million ($67,000) and NT$6 million for companies and individuals, respectively. If the amount of AMT calculated under this Act is more than the income tax payable under the Income Tax Act, the difference will become AMT payable.

Tax holiday for investing in manufacturing

The Statute for Upgrading Industries, while scheduled to be abolished onDecember 31 2009, was amended in January 2009 to grant a five-year tax holiday for investing in any manufacturing or related technical services companies between July 1 2008 and December 31 2009. This tax incentive is expected to generate NT$500 billion ($1.6 billion) in investment, create employment opportunities and accelerate economic growth.

Tax incentives for industries in free trade zones

The April 2009 amendment to the Act for the Establishment and Management of Free Trade Zones reduces the business tax rate for the sale of goods and services by or to companies in free trade zones with those in tax zones and bonded areas to zero, and stipulates that the importation of raw materials by companies in free trade zones is eligible for customs duties and commodity tax rebates. In addition, goods exported from free trade zones to abroad or bonded areas and vice versa are exempt from any trade promotion fee. Furthermore, goods shipped by companies in free trade zones from tax zones into these free trade zones for operations purposes, including machineries and equipment for own use, are considered goods exported, which are eligible for a tax reduction, exemption or rebate.

In addition, to eliminate the tax barriers for foreign companies to establish themselves in free trade zones for value-added operations, those that carry out warehousing and simple processing of goods within free trade zones, and then sell such goods to consumers in Taiwan or overseas, are exempt from income tax. However, if the amount of sales in Taiwan is more than 10% of total sales for any given year, income from such sales in Taiwan is not exempt from income tax.

Tax reductions

To stimulate the auto industry and to encourage customer spending, from January 2009, the commodity tax for automobiles up to 2,000 cc and motor scooters up to 150cc is reduced by NT$30,000 ($1,000) and NT$4,000, respectively until December 31 2009. To elevate the competiveness of the futures market on the global platform, the futures transaction tax was reduced from 0.01% to 0.0000125% on the transfer price. Furthermore, to stabilise prices of petroleum products, import duties on gasoline, aviation fuel, kerosene, and diesel fuel have been reduced from 5% and 10% to 0%.

Proposed tax rebates on exports

In response to the global recession, and to reduce the tax burden on exporters, thereby making them more competitive internationally, the Ministry of Finance is preparing a table of tax rebates on more than 3,000 export items. This will be the first time, since the government started a gradual cancellation of tax rebates in 1984, that imported agricultural and industrial raw materials are included in the scope of export tax rebates.

Under this proposed table of tax rebates, manufacturers with export orders may apply for tax rebates on imported goods that are re-exported within a year and a half, with out being subject to any threshold or restriction on value. The amount of tax rebate will depend on the amount of each exportation.

CV Chen (cvchen@leeandli.com), managing partner and Josephine Peng (jopeng@leeandli.com), senior counsellor of Lee & Li