Recently the Ministry of Finance issued a tax ruling which prescribes a specific and simple formula for the calculation of income earned by foreign profit-seeking enterprises that engage in domestic free-trade-zone ("FTZ") businesses to import, manufacture, process, store and deliver goods to their onshore or offshore clients.  This tax ruling will help to establish an attractive tax environment for foreign profit-seeking enterprises to invest in the domestic FTZ.

  1. The income of a foreign profit-seeking enterprise, which does not have a fixed place of business within the territory of the Republic of China (ROC), earned from engaging domestic FTZ businesses to import, manufacture, process, store and deliver goods, is deemed as profits generated from engaging the industry of manufacturing, trade and commerce within the territory of the ROC under Article 8(9) of the Income Tax Act ("ITA"). Except for the exemption from the profit-seeking enterprise income tax pursuant to Article 29(1) of the Act for the Establishment and Management of Free Trade Zones, FTZ businesses are deemed as agents of the foreign profit-seeking enterprise, and shall, to the extent of the business which they conduct as agents, keep accounting books, and issue, obtain, and maintain relevant vouchers for the calculation of the foreign profit-seeking enterprise's income within the territory of the ROC pursuant to Articles 21 and 41 of the ITA. FTZ businesses shall also file and pay the profit-seeking enterprise's income tax on behalf of the foreign profit-seeking enterprise under Article 73(2) of the ITA.
  2. Pursuant to Article 83 of the ITA, if a FTZ business fails to submit the above accounting books and vouchers, the tax authorities may determine the foreign profit-seeking enterprise's ROC-sourced income based on the available taxation data, or determine the total profits from the whole trade process within and outside of the territory of the ROC by the deemed profit standards applied to the same trade concerned, and thereafter calculate its ROC-sourced income according to the proportion of contribution it makes to the trade process within the territory of the ROC. If it is difficult to allocate the proportion of contribution to the trade process within and/or outside the territory of the ROC, the tax authorities may calculate the proportion of contribution it makes to the trade process within the territory of the ROC in accordance with the following:
    1. The contribution rate for the importation, storage, and delivery of goods is 12%.
    2. If manufacturing and processing are conducted in addition to importation, storage, and delivery, the contribution rate will be: 12% + the cost and expense of manufacturing and processing within the territory of the ROC  the total cost and expense of manufacturing and processing within and outside of the territory of the ROC. However, the contribution rate shall not exceed 100%.
    3. The cost and expense of manufacturing and processing within the territory of the ROC includes the relevant cost and expense for the purchase of raw materials and the processing; the total cost and expense of manufacturing and processing within and outside of the territory of the ROC are calculated according to the cost and expense of manufacturing and processing within the territory of the ROC plus the price of foreign goods on the import declarations.
    4. If the price of foreign goods on the import declarations is evidently higher than the market price at that time, to avoid or minimize tax obligations, the tax authorities may assess the amount according to the available taxation data, or with reference to the duty-paying value of the same or similar imported goods.