This item was originally published in Bloomberg BNA Tax Planning International: Asia-Pacific Focus.
When the OECD announced a range of 15 different BEPS Action Plans several years ago, of which the digital economy was among them, the Ministry of Finance (MOF), the ultimate tax ruling body in Taiwan, prioritized its own action plans in response, taking into account its capacity constraint, relevance, urgency and other factors. At that time, its action for the digital economy was also in their long-term plan. Subsequently, when the MOF recently announced that starting 1 May 2017, non-resident suppliers of electronic services to Taiwanese consumers are required to register for, charge, collect, and remit 5% Taiwanese VAT, it was in fact the first legislative change in Taiwan in response to the BEPS Action Plans which became its No. 1 top priority.
Story behind the new VAT regime
It all starts with a national lottery scheme. In Taiwan, sales of goods and services generally must be accompanied by issuance of tax invoices, generally referred to as the Government Unified Invoices (GUI). GUIs come with regulated content and, most important of all, a serial number preassigned by the tax authority. Every two months, the government holds a lottery draw based on the serial numbers of the GUIs and the top prize is TWD 10 million (USD 300,000). Because of this lucrative prize, Taiwan consumers are always eager to obtain GUIs for their expenditures.
But they don't get GUIs for their online expenditures with non-resident sellers of electronic services. Under current VAT law, non-resident sellers cannot register for VAT to issue GUIs and Taiwan buyers are required by law to report and pay the VAT voluntarily. As can be expected this is not enforced in practice. With online e-commerce business expanding, an increasing number of discontented consumers are upset that they do not receive GUIs for their expenditures (not knowing that they actually bear the VAT obligation), and many complain to the tax offices accordingly. One additional incentive for such reporting is that they will get 20% of the penalty if their reports ultimately lead to detection of a tax evasion. As the number of bounty hunters goes up, the tax offices are overwhelmed with such reports and feel that they need to take action against the online sellers. In the meantime, the mass media has joined in the row, portraying (often falsely) non-resident sellers as not paying their fair share of tax. The national campaign against non-resident sellers culminated when eager legislators, wishing to placate these constituents, drafted the new legislation.
The VAT and Non-VAT Business Tax Act (BTA) was amended as a result of the above political pressure and the amendments were promulgated on 28 December 2016 with the effective date pending. After some delay the MOF then set the effective date as 1 May and issued a guideline for registration by non-resident sellers of electronic services to individual Taiwan buyers. As a result, starting 1 May 2017, non-resident companies covered by the new VAT regime are required to collect VAT from their covered sales and the first due date for remittance of the VAT to the tax office will be 15 July for the months of May and June.
Scope of the new VAT regime
Pursuant to Article 28 of the amended BTA, non-resident suppliers of electronic services to Taiwan individuals, without a fixed place of business in Taiwan, shall be the taxpayer of VAT. Therefore, only business-to-consumer (B2C) sales will be covered. Business-to-business (B2B) sales will still be governed by current law whereby the business buyers shall self-assess their VAT position and determine whether or not VAT is due under the current reverse charge mechanism.
Under the guidance on registering for the new regime, a non-resident supplier of covered services must register for VAT through an online interface on the MOF website. This interface is not yet operational, but we understand that it will be available in English in the coming weeks. To register, a non-resident supplier must provide the following information/documents:
i. the non-resident's company name
ii. the name of the person responsible for the company's affairs (eg the chairman of the board of directors of the entity that makes supplies to Taiwanese consumers)
iii. company information (domain name, web address, date on which the company began providing electronic services to Taiwanese consumers, country of incorporation, incorporated company name, company incorporation number)
iv. information about the company's Taiwanese tax agent (if any)
v. bank account information
vi. Chinese translations of the company's incorporation documents, authenticated and notarized by both a Taiwanese embassy / consulate and a notary public in the company's country of incorporation
Although the non-resident can provide items (i)–(v) online, the documents in item (vi) presumably must be provided in hard copy to the MOF.
The new regime continues to require non-resident suppliers of covered services to issue GUIs to Taiwanese consumers, but the application of this requirement is suspended until 1 January 2019. Specifically, the MOF recently issued a tax ruling that provides for a "grace period" with respect to this requirement from 1 May 2017, through 31 December 2018. Thus, as a practical matter, non-resident suppliers of covered services still must charge, collect, and remit VAT starting 1 May, but such suppliers may continue to use their preferred method of invoicing Taiwanese consumers until 1 January 2019.
The MOF approved this grace period because it is not prepared to process the GUIs that will arise from transactions between non-resident suppliers and Taiwanese consumers. For each cross-border supply, the supplier would have to send a GUI to the Taiwanese consumer, and would then have to upload the GUI to the MOF website within 48 hours of sending the GUI to the consumer. As there is currently no de minimis threshold for the GUI requirement, even a USD 0.99 download would trigger an individualized GUI. Given the volume of low value transactions involving digital suppliers, the MOF could be faced with processing tens of millions of additional GUIs each year. Although the commercially reasonable approach would be to eliminate the GUI requirement from the new regime altogether, GUIs are immensely popular with Taiwanese consumers because each GUI represents a lottery ticket for the government run lottery. Therefore, there is intense pressure on the MOF from the Taiwanese political establishment to require non-resident suppliers to issue GUIs so as to placate the politicians' constituents.
Business-to-business v Business-to-consumer
Distinction between B2B and B2C is important because the new regime covers only B2C sales, whereas B2B sales will still be subject to the reverse charge mechanism under current BTA. However, the MOF has yet to issue guidance on how to determine the distinction between B2B and B2C.
Based on our experience from dealing with the MOF on behalf of our clients, it is our impression that the MOF tends to follow the money to determine who should register for the new VAT regime. Therefore, the platform companies, not the merchant of records, will likely be required to register because they are the ones who collect the full rate from the buyers. This practical approach instead of following the legal relationships between the parties (for instance some players use an agency model while others use the buy/sell model) appears to be preferred by the MOF.
The MOF recently issued two rulings to demand local vendors to issue GUIs and charge VAT for their supplies to the non-resident platform companies. One ruling is for online travel agency while the other is for game developers. This combined with the above requirement for platform companies to collect VAT at full rate will likely create a scenario of double tax. The MOF expressed that they would allow input VAT credit under such circumstances. But even if input VAT credit is allowed, it will still require a lot of extra administrative burden and efforts to track the input VAT.
Direct tax consequences
Registering for VAT potentially exposes non-resident suppliers to Taiwanese direct tax consequences. Under current Taiwanese law, income from services that non-resident enterprises provide to Taiwanese customers is treated as Taiwan source income that is subject to Taiwanese direct tax. The only exception is the sales of apps which are characterized as sales of standardized software and thus is free from Taiwan income tax. To facilitate the collection of this tax, Taiwanese customers are generally required to withhold and remit to the MOF 20% of the gross amounts of outbound payments for services. In B2C transactions, this collection and remittance obligation shifts to the non-resident supplier because the individual consumers cannot fulfill the obligation of withholding under current Taiwan tax law. To date, the Taiwanese tax authorities have had limited success in assessing withholding tax against non-resident suppliers because they have limited visibility into the revenue streams that such suppliers derive from the Taiwanese market. However, where a non-resident supplier registers for VAT and reports revenues from the Taiwanese market, the MOF will likely have sufficient visibility into the supplier's revenues to assess Taiwanese withholding tax against the supplier.
With all of the above uncertainties, companies are encouraged to engage the MOF to clarify issues and concerns specific to their operations. The MOF is fully aware that each company might have its own issues that need clarification from them and they cannot write a comprehensive enforcement rule that fits all. Thus, they are open to requests for meetings from covered companies for private rulings on their specific tax issues.