Newsletter
SAFE HAVEN RULES FOR TRANSFER PRICING AN-NOUNCED
Effective from 2006, a profit-seeking enterprise engaged in controlled transactions with other entities must attach a transfer pricing report when filing its annual business income tax return in accordance with Article 22 of the Income Tax Assessment Rules for Non-arm's Length Trans-fer Pricing. However, Paragraph 3, Article 22 of the Assessment Rules provides that if the value of an enterprise's controlled transactions is below thresholds set by the Ministry of Finance, it may submit, instead of a transfer pricing report, other documents sufficient to prove that the outcome of its transfer pricing is consistent with the out-come of arm's length transactions. Accordingly, the MOF issued on 30 December 2005 the Standards for Controlled Transaction Amounts for which Other Documents May Be Substituted for Transfer Pricing Reports.
The Standards provide that if a profit-seeking enterprise engaging in controlled transactions has a total income (the sum of its net operating income and its non-operating income) of less than NT$100 million for the year concerned, or the total value of its controlled transactions for the year is less than NT$100 million, it may submit other documents instead of a transfer pricing report. The same applies to an enterprise with a total annual income between NT$100 million and NT$300 million if it meets any of the following conditions:
It is not taking advantage of tax incentives, and is not offsetting losses carried over from the past five years; or, if it is lawfully offset-ting such losses, the sum of the losses offset against the business income tax for the year in question, as payable according to its final tax return, and the additional tax on undistributed retained earnings for the preceding year, is not more than NT$1 million, or the losses offset do not exceed NT$4 million.
For a financial holding company, or a com-pany as defined under the Enterprise Mergers and Acquisitions Act, or a subsidiary thereof, it does not have related parties outside Taiwan (including head or branch offices); in the case of any other type of profit-seeking enterprise, it does not have any affiliated enterprise out-side Taiwan (including head or branch of-fices).
If an enterprise does not meet any of the above conditions, it should submit a transfer pricing report along with its tax return. However, if any of the following circumstances applies to its in-dividual controlled transactions, the enterprise may indicate the circumstance in its transfer pricing report and attach other document(s) suf-ficient to show that the outcome of its transfer pricing is consistent with the outcome of arm's length transactions. The controlled transactions concerned would then be deemed compliant with the arm's length principle, and need not be indi-vidually analyzed:
One of the parties to the controlled transaction is a government agency or a state-own enter-prise.
All the parties to the controlled transaction are profit-seeking enterprises that are not taking advantage of tax incentives in Taiwan and are not deducting losses carried over from the preceding five years from their taxable in-come.
The controlled transaction is an operating in-come or operating cost item of the enterprise, and the total value of the enterprise's con-trolled transactions of the same type for the entire year does not exceed NT$10 million; transactions other than operating income or operating cost items shall be counted at 50% of their actual value.
The controlled transaction is an operating in-come or operating cost item of a profit-seeking enterprise that is not taking advantage of tax incentives in Taiwan and is not offsetting losses from the five preceding years against its taxable income; the gross profit margin re-ported by the enterprise is above the standard profit level of the same trade; and the total value of the enterprise's controlled transac-tions of the same type for the entire year does not exceed NT$20 million. Transactions other than operating income or operating cost items, for which the net profit margin reported by the enterprise is above the standard profit level of the same trade, shall be counted for at 50% of their actual value.
The controlled transaction is for the use of funds; the income reported by the provider of the funds is not less than the amount computed by the loan interest rate of the Bank of Taiwan on 1 January of the year in which the funds are provided; the sum provided is not more than NT$300 million; the cost or expenditure re-ported by the user of the funds is not more than the amount computed by the loan interest rate of the Bank of Taiwan on 1 January of the year concerned; and the sum used is not more than NT$300 million.