Taiwan

Frank Lin and Josephine Peng
Lee and Li
Taiwan

Frank Lin and Josephine Peng of Lee and Li explain that over the past year, the Taiwanese government has introduced various tax law changes to improve the country's business environment and competitiveness as a global innovation hub.

Among the changes, the most significant ones are the lowering of corporate income tax rate from 25% to 17% (compared to Hong Kong (16.5%) and Singapore (17%), the two most competitive economies in the region), the implementation of the Statute for Industrial Innovation, and the signing of the Cross-strait Economic Cooperation Framework Agreement.

Luxury tax on selective goods and services

In response to growing public discontent over soaring real estate prices and widening income disparities, the Taiwanese government enacted the Specifically Selected Goods and Services Act (also known as the Luxury Tax Act) to achieve fair taxation and to deter speculative transactions.

Effective on June 1 2011, the Act requires sellers of certain luxury goods or services to pay a sales tax if the transaction is made within a short period of time of purchase. For example, if a piece of real estate is sold within one year of purchase, the seller will have to pay a luxury tax calculated at 15% of the transaction price; if the real estate is sold in the second year of purchase, the luxury tax payable will be reduced to 10% of the transaction price.

Under the Act, luxury goods include (a) sedan, yacht, airplane, helicopter, super-light carrier with a value of NT$3 million ($103,000) or more; and (b) furniture or turtle shell, tortoise, coral, ivory, fur, and products made from them with a value of NT$0.5 million or more.

As for luxury services, they refer to non-refundable memberships with a value of NT$0.5 million or more, such as golf club memberships, recreational club memberships, and dining club memberships. All these goods and services are subject to a 10% luxury tax.

Higher tax bases for calculating real-estate taxes

The tax base for calculating the capital gains, generated from real-estate transactions and the annual land tax and housing tax, is the assessed land value or assessed housing value, both of which are often lower than the market value. Such low tax burdens encourage speculative investment in the real-estate market, further widening income disparities and make it more difficult for the public to purchase homes for personal use. Hence, the government is planning to make an overhaul of the real estate tax system.

Two of the proposed changes use the actual transaction price as the tax base for levying taxes on land and housing, and adjusting tax rates according to the length of time of possession and number of properties owned.

Incorporation of the thin capitalisation rule into the Income Tax Act

The thin capitalisation rule was included in the Income Tax Act at the beginning of 2011. Starting from January 1 2011, if the ratio of a company's debts (to its related party) to its equity exceeds 3:1, the interest expense arising out of the portion of the debts exceeding that ratio will not be tax deductible. However, banks, cooperatives, financial holding companies, bills finance companies, insurance companies, and securities firms are not subject to this rule due to the special nature of their operations.

As to other details, such as the definition of related party and scope of debt, they can be found in the rules governing the thin capitalisation rule, promulgated by the Ministry of Finance (MOF).

R&D expenditure as tax credits

To encourage companies to invest in R&D and upgrade their technological capabilities, the Taiwanese government has introduced a new set of rules governing the application of tax offsets for corporate R&D expenditures. The rules apply to companies that use scientific methods to carry out their own innovation activities. Any qualified company may apply to offset up to 15% of its R&D spending from its income tax payable. However, the total amount that can be offset cannot exceed 30% of the income tax payable for that year, and unused tax credits cannot be carried over. Also, to prevent any abuse of this privilege, the government adopts very strict criteria for recognising payments as R&D expenses.

Better tax holidays for private participants in infrastructure projects

Article 36 of the Act for the Promotion of Private Participation in Infrastructure Projects provides a five-year tax holiday for companies participating in public infrastructure projects. Under the old rules, the five-year holiday period started to run from the year in which the relevant company was incorporated.

Given that start-up companies have limited operations and income, the MOF has amended relevant regulations to the effect that the five-year tax holiday period now begins to run from the time the relevant company's revenue or investment has reached the prescribed threshold. This new regulation allows companies participating in public infrastructure projects to fully enjoy the tax privilege.

Mutual tax exemption on cross-strait sea and air transport

To promote cross-strait trade and strengthen commercial ties, Taiwan and China have signed the Agreement on Cross-Strait Sea Transport and the Supplemental Agreement on Cross-Strait Air Transport. Furthermore, to solve the double taxation issues faced by sea and air transport operators, present in the two territories, the two governments have agreed that air and sea operators' income from either territory is not subject to the business tax or income tax levied by the other territory.

The above agreements have been reflected in the Regulations Governing Mutual Tax Exemption on Cross-Strait Sea and Air Transport, promulgated on July 1 2010.

According to the regulations, there is no business tax or income tax on the revenue generated from transporting passengers and cargos from Taiwan to China by sea or air. The regulations apply to the income earned by Chinese sea transport operators after December 14 2008 and that earned by Chinese air transport operators after June 24 2009.

For those Chinese air and sea transport operators that have paid taxes on their income generated from transporting passengers and cargos from Taiwan to China after the said two dates, they may apply for a tax refund within five years of the tax payment.

No business tax on sales of electronic magazines

In Taiwan, registered publishers' sales of magazines are exempt from business taxes. However, the official definition of magazines does not cover electronic magazines. To fill the gap, the MOF announced, in February 2011, that for electronic magazines that mirror the contents of their printed counterparts, and whose contents covers are sufficient to resemble their printed counterparts, their sales by registered publishers are exempt from business tax.

More double taxation agreements

Since 2010, Taiwan has signed double taxation agreements with Hungary, France, and India based on the OECD guidelines. The tax benefits available under the agreements are:

No income tax will be levied if a company has no permanent establishment in Taiwan or the permanent establishment does not conduct any profit-generating activity.
The withholding tax (from 20% to 12.5% or 10%) on income including interest, dividends, and royalty is reduced from 20% to 12.5% or 10%, depending on the type of income involved.
Salaries and wages are taxed by either the home country or the source country based on the source of the income or the period of residence of the service provider.

So far, Taiwan has signed double taxation agreements with 21 jurisdictions, including the UK, the Netherlands, Denmark and Singapore.

Tax benefits for corporate sponsorship of sports events

To encourage the private sector to participate in sports activities and to get involved in the development of sports-related industries, the Taiwanese government passed the Statute for Sports Industries Development on July 6 2011. The Statute offers the following tax benefits:

Companies that support the training of athletes, sponsor sports groups, donate sports gear, venues, or equipment, or donate tickets to sports events or competitions to schools or disadvantaged groups may deduct relevant expenses from their taxable income, and there is no upper limit on the deductible amount.
The ticket income generated from sports events and activities is not taxable.
The R&D expenses incurred by a company on sports products or services may be credited against its taxable income.

Detailed regulations are still under discussion by the government and are expected to be announced soon.

Lower fine for non-payment of securities transaction tax

The Securities Transaction Tax Act was amended on December 29 2010. Among the amendments, the fine for a tax collecting agent's failure to collect securities transaction tax is reduced from between 10 and30 times the unpaid tax to between one and 10 times the unpaid tax. The same amendment applies to a securities broker's failure to pay securities transaction tax.

No tariff for cultural and creative arts equipment

To promote the development of Taiwan's cultural and creative arts industries and to provide equitable tariff treatment to domestic and overseas video production organisations and individuals, the MOF amended the Enforcement Rules of the Customs Act, to grant tariff exemption to imported cultural and creative arts equipment that are exported within six months or within a different period approved by the MOF.

Introduction of a tonnage tax regime for shipping industry

The Income Tax Act was amended on January 1 2011 to allow shippers to choose between a tonnage tax or a regular corporate tax when calculating shipping income. Election into either regime is valid for 10 years at a time and shipping companies electing the tonnage tax regime are not eligible for loss carry-forward or other tax incentives. This new system is highly beneficial to large shippers and is expected to prompt ships to return to the Taiwan registry, stimulating the development of the domestic maintenance and other peripheral industries.

Before the amendment, shipping companies were taxed on their actual operating income. Under the new tax regime, they are taxed on their deemed profits. For ships with a net tonnage of 1000 tons or less, the deemed profit is NT$67 per 100 tons a day; for ships with a net tonnage of over 1000 tons but less than 10,000 tons, the deemed profit is NT$49 per 100 tons a day; for ships with a net tonnage of over 10,000 tons but less than 25,000 tons, the deemed profit is NT$32 per 100 tons a day; for ships with a net tonnage of over 25,000 tons, the deemed profit is NT$14 per 100 tons a day.

A 17% corporate income tax rate versus a 20% withholding income tax rate

While the corporate income tax rate has been reduced to 17% of net income, the withholding income tax rate, for most types of income of foreign companies, remains at 20% of gross income. Both the American Chamber of Commerce Taipei and European Chamber of Commerce Taipei have urged the Taiwanese government to adjust the withholding tax rate in order to provide equal treatment to local and foreign companies. However, the MOF has no plan to amend the regulations.

A 3% business tax on onshore services purchased from offshore enterprises for financial companies' core business

The Business Tax Act was amended on January 26 2011 to reduce the business tax on onshore financial companies' purchase of services from offshore companies for core businesses from 5% to 3%. For offshore services purchased for non-core businesses, the 5% business tax rate remains unchanged.

No income tax on capital gains from structured products sold by offshore banking units

Capital gains from structured products are categorised as other income and from January 1 2010, a 15% withholding tax is levied on such income if the income recipient is a foreign entity. As neighbouring territories, such as Hong Kong and Singapore, do not tax capital gains derived from structured products, the Taiwanese government has amended the Offshore Banking Act, to exclude capital gains derived from structured products offered by offshore banking units from the definition of other income. In other words, this kind of capital gains is no longer subject to withholding tax. The tax exemption was retroactively effective from January 1 2010.

Frank Lin (franklin@leeandli.com) and

Josephine Peng (jopeng@leeandli.com) of Lee and Li, Taipei