Newsletter
Highlights of the Newly Amended Tax Return Assessment Rules
On 9 April 2014, the Ministry of Finance (MOF) announced the amendments to the Rules on the Assessment of Profit-seeking Enterprises' Income Tax Returns ("Tax Return Assessment Rules"). The reasons for these amendments to the Tax Return Assessment Rules ("Amendments") are to be consistent with the International Financial Reporting Standards (IFRS) adopted by the Financial Supervisory Commission in 2013 and the latest amendments to relevant laws and regulations, and to reduce the number of disputes between the tax authorities and taxpayers.
The Tax Return Assessment Rules serve as guidelines for business entities in filing their income tax returns and for the tax authorities in assessing such tax returns. A summary of the Amendments is as follows:
1. If a business entity, when selling goods or services, provides customers with coupons, reward points or warranties ("Sales Bonus"), the portion of sales proceeds attributable to the Sales Bonus should be recognized as sales revenue at the time of the sale transaction, rather than the time when a customer redeems the Sales Bonus. (Article 15-3 )
With respect to the Sales Bonus, the IFRS requires that a portion of the sales proceeds be allocated to the Sales Bonus and be recognized as sales revenue at the time when a customer redeems the Sales Bonus ("Deferred Revenue"). However, the Amendments require that the sale of goods or services and the Sales Bonus shall be jointly treated as one transaction for tax purposes, and report the portion of the sales proceeds attributable to the Sales Bonus as realized revenue at that time of the sale of goods or services. Subsequently when the customer redeems the Sales Bonus, the business entity should treat the redemption as a sales discount.
Accordingly, when filing an income tax return, a business entity should reclassify the Deferred Revenue as sales revenue.
2. The cost recovery method can be adopted for calculating the annual profit or loss of a construction project. (Article 24)
For a construction project which takes more than one year to complete, the calculation of profit or loss for each fiscal year should be based on the percentage-of-completion method. However, if the amount of profit or loss of a project cannot be forecast, the Tax Return Assessment Rules provided only the completed contract method for determining the profit or loss of the project (i.e., no profit or loss is declared until the completion of the project).
The International Accounting Standards (IAS) recognizes the cost recovery method for calculating the annual profit or loss of a construction project (IAS No. 11 – Construction Contracts). For compliance with the IAS, the Amendments state that a business entity which adopts the IFRS may adopt the cost-recovery method for calculating the profit or loss of a construction project for each fiscal year during the construction period. However, for those uncompleted construction projects that commenced on or before 31 December 2012, the business entity should continue to apply the method that it adopted prior to the Amendments in calculating the annual profit or loss.
3. The adoption of the definition of "financial lease" prescribed under the IFRS (Article 36-2)
Before the Amendments, the definition of "financial lease" under the Tax Return Assessment Rules was that prescribed under the ROC Statements of Financial Accounting Standards No. 2 - Accounting for Leases. For a lease to qualify as a financial lease for the lessor, (i) the collectability of the lease payments can be reasonably assured; (ii) there is no significant uncertainty regarding the lessor's future cost relating to the leased property; and (iii) one of the four criteria must be met:
(1) the unconditional transfer of ownership to the lessee upon the expiry of the lease;
(2) the lessee enjoys a preferential acquisition right;
(3) the lease term is equal to three quarters or more of the total estimated economic life of the leased property; or
(4) the current value of the lease payments plus the preferential acquisition price at the beginning of the lease account for 90% or more of the book value of the leased property.
The definition of "finance lease" under IAS No 17 does not include criterion (3) or (4) above. Instead, if the lease term covers the majority of the leased property's economic life, or, if the current value of the lease payments is almost equivalent to the fair value of the leased property, the lease will be deemed a financial lease. Accordingly, the Amendments require those business entities that adopt the IFRS to follow the definition of a financial lease prescribed under the IFRS.
4. If a business entity fails to obtain the documents required to prove the cost of a transaction such as a government uniform invoice ("Transaction Cost"), but (i) truthfully records the transaction and (ii) provides other transaction-related documents and proof of payment to show that the transaction is necessary for its business operation, the Transaction Cost will be tax deductible. However, the business entity will still incur a fine for failing to obtain the required documents, unless it voluntarily discloses such failure in its income tax return. (Articles 38 and 67)
Prior to the Amendments, if a business entity failed to obtain the documents required to prove Transaction Cost, it had to provide transaction-related documents and proof of payment and voluntarily disclose such failure in its income tax return in order for the Transaction Cost to be tax deductible. In practice, business entities usually do not disclose such failure voluntarily, even though the Transaction Cost had actually been paid and was necessary for business operations. The Amendments are more in line with the reality.
5. Any loss incurred from the evaluated decline in prices of those securities that are held for short-term investment purposes, whilst not yet realized, is tax deductible. (Article 3)
In principle, only expenses and losses actually incurred and realized are tax deductible. Prior to the Amendments, only the following four items of unrealized expenses/losses were tax deductible:
(1) Loss incurred from the evaluation of the price declination of inventory;
(2) Provision for retirement/pension funds;
(3) Provision for bad debts; and
(4) Other unrealized expense or loss prescribed under any other law or specially approved by the Ministry of Finance.
6. The documentation requirements for travel expenses are relaxed (Article 74).
For domestic lodging/accommodation charges, the relevant documents issued by travel agencies are acceptable supporting documents for declaring said charges.
For an international flight, if the boarding pass is missing, a photocopy of the passport showing that the bearer has indeed traveled abroad is an acceptable supporting document.
In a case where an employee drives his/her own car for business purposes and pays highway toll(s) electronically, a statement issued by the employee confirming the amount of tolls paid is sufficient for the employer to declare the toll(s) paid as tax deductible.
7. Group insurance premiums paid by a business entity for its employees are tax exempt for the employees (up to NT$2,000 per employee per month); such group insurance policies include (i) life insurance, (ii) health insurance, and (iii) injury insurance. (Article 83)
8. The payment of tax on Special Goods and Special Services ("SGS Tax") shall be handled in accordance with the following provisions (Article 90):
a. The SGS Tax paid on the sale of real property shall be deducted from the proceeds from the sale of the real property.
b. The SGS Tax paid on goods manufacturedby a business entity shall be declared by that entity as a tax expense for that year.
c. The SGS Tax paid on goods imported by a business entity shall be included as part of the purchase or manufacture cost of such goods.
d. The SGS Tax paid on goods that a business entity purchased in an auction held by the court or a governmental agency shall be included as part of the purchase or manufacture cost of such goods.
e. The SGS Tax paid on services shall be deducted from the sales revenue of such services.
9. The amount of export loss that is tax deductible but exempt from the requirement of having to be supported by documents issued by foreign inspection institutions, is increased from NT$500,000 to NT$900,000 for each claim of export loss. (Article 94, para 9)
10. The major components of a fixed asset can be separately recorded on the property list, and depreciated over the useful life, which cannot be shorter than the life for depreciation stated on the Table of Useful Life of Fixed Assets. (Article 95, para 9)
11. It is no longer a requirement to report to the tax authority for approval before destroying or abandoning assets that have exhausted their life for depreciation, as stated on the Table of Useful Life of Fixed Assets. (Article 95, para 10)
12. A business entity that undertakes a build-operate-transfer project is required to record the total cost of the project as a fixed asset, and depreciate the value of the fixed asset over the operation period. If the life for depreciation of the fixed asset stated on the Table of Useful Life of Fixed Assets is shorter than the operation period, the depreciation may be calculated over a number of years not shorter than that stated on the Table of Useful Life of Fixed Assets. (Article 95, para 16)
13. To claim tax deduction of an investment loss incurred by a foreign invested entity which did not have any business operations ("F Co No. 1"), the Taiwan investor must submit documents to show that the loss was incurred by another invested company owned by F Co No. 1 due to operating loss. (Article 99).
14. If a business entity reaches an agreement with its dealer(s) or customer(s) that the business entity will invite the latter to a complimentary tour should the latter achieve a certain sales/purchase target, the business entity should treat the expenses paid by the business entity as other expenses, report the payment to the tax authorities and issue non-withholding tax statement(s) to the dealer(s) or customer(s) that went on said tour. (Article103)
In line with the above, the dealers and customers that went on such complimentary tours should report the expenses paid by the business entity as their taxable income. Whether such a provision is feasible remains to be seen.
15. If a business entity reclassifies its fixed assets and intangible assets into different asset categories due to its adoption of the IFRS for the first time, it should still, for tax purposes, calculate the depreciation or amortization expense based on the original asset categories. (Article104)
16. If a business entity adjusts its previous years' profit or loss items upon adopting the IFRS or changes in accounting principles, such adjustments shall have no impact on its income tax return. (Article111)
In summary, the Amendments (i) include a new difference between IFRS and tax regulations (Item No. 1 above), (ii) eliminate and clarify certain differences between IFRS and tax regulations (Item Nos. 2, 3, 10, 12, 15 and 16 above), (iii) explicitly prescribe some of the amendments to relevant laws and regulations (Item Nos. 5, 7, 8, 13 and 14 above), and (iv) relax some documentation requirements and increase the amount of loss that can be declared as tax deductible without the documents required (Item Nos. 4, 6, 9 and 11 above). Overall, the government's effort to cope with international trends and to simplify the process for taxpayers is evident.