Update on withholding tax saving
As of the March 2015, Taiwan had tax treaties with 28 countries, which allow tax savings on WHT, although at different rates, depending on the country. While authorities have signed a tax treaty with their counterparts in mainland China, it has yet to be ratified by the legislature. Many local companies are eagerly anticipating the ratification as, under the draft agreement, it would reduce WHT to 5% on dividends and to 7% on interest and royalties.
Any service provided in Taiwan is subject to WHT while services provided offshore are exempt. According to the Principle for Determining Taiwan Sourced Income (TSI principle), cross-border service charges (CSCs) are considered to be Taiwan sourced income if: the services are carried out and completed exclusively in Taiwan, the completion of services requires services both within and outside Taiwan or if the services are carried out outside Taiwan but the completion of the services requires the participation and assistance from the individuals or profit-seeking enterprises reside within Taiwan. However, authorities have strict criteria for determining whether there is participation or assistance by the local entity in providing the services. For example, even routine communication on the part of the local entity could be regarded as "participation" and result in a ruling that the services are not entirely provided offshore and therefore subject to WHT.
There are two avenues to claim reduction of WHT:
Article 25 of the Income Tax Act: This allows for technical services to be exempt from WHT. However, applicants have to provide evidence that the service is technical in nature. The following documents are required for the application: Signed copies of the agreement (and a Chinese translation) and a signed original authorization letter which appoints a CPA as the representative of the company. In addition, during the review process, authorities may request additional information such as a description of the services, evidence that the services have been performed, a description of the method for determining the service fees and an explanation why services are technical in nature.
Tax treaty: Provided Taiwan has a tax treaty with the respective country, business profits may be exempted from WHT. Similar supporting documents as for Article 25 applications are required. In addition, authorities may also request information on the activities performed by the employees, their arrival and departure dates and evidence that the income derived has been subject to tax in the treaty country.
In both cases, pre-approval from tax authorities is required and entities may seek refunds for WHT already paid.
Applications for WHT reductions under Article 25 tend to be straight-forward while applications under treaties are treated more strictly. Tax officers may be more stringent when conducting reviews of the applications where the service fee is significant (more than NT$10 million per year), the service provider and recipient are related parties, various types of services are involved (such as group management service) or there is a royalty component included in the IT service fee. It takes on average 6-12 months for an application process to be completed.
In a case study cited by Hsieh, a distribution company in Taiwan received various types of services including financial, controlling, IT and legal services from its regional office in Hong Kong. The tax officer in charge had concerns over whether the services in question could be regarded as technical in nature. Hence, the focal point of the supplemental explanations was to provide evidence to demonstrate that the services were technical and provided substantive benefits to the service recipient.
In another case study cited by Hsieh, the case failed because the agreement used by the company used the word "management" in the service agreement title and the tax treaty between Taiwan and Singapore excludes managerial services. Even though the services in this case could be regarded as technical, the application failed. Hsieh's advice is therefore to choose the wording of contracts carefully.
Lorene Chen made the point that companies should err on the side of caution. They should not assume an exemption or deduction will be granted before they have sought a ruling and received confirmation by tax authorities. Should authorities decide to reject the application, they will not only have to pay the tax but also penalties, which could be as high as 100% of the underpaid tax amount. Moreover, when applying for a ruling or WHT reduction, it is important to help the tax officers to fully understand the business and transaction background, and provide adequate supporting documents. She concluded that while WHT is an issue requiring proactive management and patience, the investment in time and costs will eventually pay off in terms of reduced risk and tax.