Under Taiwanese business tax laws, sellers are in general the payer of business tax (also known as value-added tax or VAT). However, in a case where the seller is a foreign entity without a fixed place of business (FPB) within Taiwan and sells services in Taiwan, the Taiwanese service purchaser becomes the payer of the VAT payable on such services; if the service fee is less than NT$3,000 or the purchaser is a VAT operator, the 5%VAT is exempt.
With the fast growing digital economy, while many foreign e-commerce operators (FEOs) provide electronic services to Taiwanese individuals, most, if not all, do not establish any FPB in Taiwan; instead, they either engage an affiliate or a third party to provide the so-called auxiliary or soliciting services. Technically, the VAT on the service fees generated by these FEOs should be paid by the Taiwanese individuals; however, in practice, individuals rarely pay 5% VAT on the service fees that they pay to the FEOs. Such non-payment of VAT not only means a loss to the national coffers but is also unfair to Taiwanese e-commerce operators as they are required to pay 5% VAT on their sales revenue while FEOs without FPB in Taiwan are not.
In response, the Ministry of Finance (MOF) formed a task force in 2015 to study the issue. Since July this year, the MOF and the tax administrations had held six meetings to seek opinions and advice from scholars, professionals, FEOs and Taiwanese e-commerce operators. In August, the MOF proposed amendments to the Business Tax Act, most of which are based on the recommendations made by the Organization for Economic C-operation and Development and the approaches adopted by EU members, Korea and Japan. The Executive Yuan (Cabinet) approved the amendments on 14 September 2016 and forwarded them to the Legislative Yuan for review and approval. It is expected that the Legislative Yuan will pass the amendments in the current session and that the amendments will take effect in 2017.
The proposed amendments include the following three main points:
1. Including FEOs that sell cross-border digital services to Taiwanese individuals as payers of VAT, and as business operators under business tax laws;
2. Requiring FEOs to (i) file a tax registration like Taiwanese business operators, and (ii) pay the VAT payable, provided that the FEO's annual sales meet the MOF’s threshold (likely to be NT$480,000, approximately US$16,000). A FEO may engage a Taiwanese individual or business entity with a FPB in Taiwan as its tax agent for such tax registration filing and VAT payment; and
3. Abolishing the VAT exemption for service fees of under NT$3,000.
The proposed amendments do not cover certain issues; for example, what constitutes electronic services and whether FEOs are required to issue government uniform invoices for the service fees received from Taiwanese individuals. We expect that the MOF will clarify these issues when it amends the Enforcement Rules of the Business Tax Act.