In recent years, some foreign companies have used the loopholes of international tax policies and different tax regulations among various jurisdictions for tax planning, which resulted in tax base erosion and unfair competition for domestic enterprises. In light of this, the Economic Cooperation and Development Organization (OECD) released the Report on "Tax Base Erosion and Profit Transfer" (BEPS) in February 2013 and released the final draft of the 15 Action Plans for the report in October 2015. The BEPS Report and 15 Action Plans provided governments with reference for revising the domestic tax law and the international tax policy, so as to prevent multinational companies deliberately transferring their profits to tax havens or low-tax jurisdictions. The BEPS Report and 15 Action Plans are recognized and supported by the world's twenty largest economic jurisdictions (G20). As a result, anti-tax avoidance has become an important issue for tax authorities in almost every jurisdiction, including the Republic of China (ROC or Taiwan).
The Ministry of Finance ROC (MOF) has formed various task forces to study the 15 action plans under the BEPS Report. In line with the international tax regime and to mitigate tax avoidance, the MOF has adopted certain measures including amending tax regulations and developing new taxation platforms that are recommended by the OECD.
Lee and Li Bulletin has reported on the relevant anti-tax avoidance laws and regulations made or promulgated by the MOF. This paper intends to focus on the three subjects that clients are most concerned about recently, and explains their key points so as to provide readers reference for conducting cross-border transactions and/or developing their group's tax policy.
1. Amend the Tax Collection Act to authorize the MOF to effect, on a reciprocal basis, the automatic exchange of tax and bank account information with other jurisdictions for tax matters.
The 5th Action Plan under the BEPS Report is, "Counter harmful tax practice more effectively, taking into account transparency and substance". The main context is, in responding to those tax heavens or countries with significant tax incentives, to consider the transparency and economic substance factors, and take effective actions to counterattack. The OECD defines the Automatic Exchange of Information ("AEOI") as the new standard for international information transparency, and publishes the Guidelines for the Automatic Exchange of Financial Account Information for Tax Use, including the Common Reporting and Due Diligence Standard ("CRS") and the Competent Authority Agreement ("CAA", which can be either a bilateral agreement or multilateral agreements), as the standard for each jurisdiction to follow and comply with when implementing the automatic exchange of information of financial accounts.
The OECD determines the degree of transparency of each country based on whether a country adopts the new international standard for AEOI to effect the information exchange and build up its automatic exchange mechanism, and the OECD will publish the list of non-cooperative tax jurisdictions and set up retaliation and sanctions measures in July 2017. Thus far, more than 100 jurisdictions have signed the CRS MCAA and are committed to implementing the CRS by 2017 or 2018; the ROC Government is also eager to become a participant of the CRS MCAA.
However, as the ROC is not an OECD member, and due to political obstacles, the ROC cannot participate in the CRS MCAA. Nonetheless, in order to prevent the ROC from being deemed a jurisdiction that fails to comply with the CRS, and, therefore, be included in the non-cooperative tax jurisdiction to be issued by the OECD, the MOF is committed to following the regulations set by the OECD and implementing alternatives to the MCCA. The MOF has adopted alternatives, including (i) entering into bilateral agreements with other jurisdictions and (ii) amending Articles 5-1 and 46-1 of the Tax Collection Act.
The Executive Yuan (cabinet) approved the draft amendments to the Tax Collection Act on February 9, 2017, and submitted them to the Legislative Yuan for review and approval the next day. If the draft amendments are passed by the Legislative Yuan, the MOF will then have the authority, on a reciprocal basis, to effect the automatic exchange of tax and bank account information with other jurisdictions for tax matters. The amendments specify details regarding what kind of information will be exchanged (which includes information on property, income, sales, tax payment, bank account, and other tax related information) and when such information will be exchanged (including on request, automatic or spontaneous exchange).
Although the ROC is unable to participate in the signing of the MCAA, it is necessary for the ROC to build up a complete legal basis and commitment to effect the CRS in view of (i) the increasing international standard for information transparency, (ii) the announcement to be made by the OECD in July this year regarding the list of non-cooperative tax jurisdictions, (iii) protection of ROC's tax revenue and maintaining tax fairness, and (iv) avoidance of international sanctions or retaliation. The author sincerely hopes that the lawmakers will promptly pass the amendments.
2. The Anti-Tax-Avoidance Clauses (CFC and PEM Rules) have been incorporated into the tax law but the effective date is to be determined by the Executive Yuan
In early 2016, the MOF proposed amendments to Articles 43-3 and 43-4 of the Income Tax Act ("ITA") to include two important international anti-tax clauses: the Controlled Foreign Corporation ("CFC") rule, and the Place of Effective Management ("PEM") rule, and submitted them for the Legislative Yuan's review and approval. In light of the offshore corporate tax avoidance trends exposed by the Panama Papers scandal, the Legislative Yuan accelerated and completed the proceeding to pass these rules on 12 July 2016, and the President promulgated these rules on 27 July 2016.
The background for the CFC rule is that, under the ROC's current tax system, income received by the ROC business enterprises from their foreign affiliates is taxed when such income is repatriated to the ROC in the form of dividends, which often results in business enterprises deferring repatriation of income generated by their foreign affiliates to the ROC. To stop the ROC business enterprises from keeping their earnings in low-tax jurisdictions, the MOF incorporated the CFC rule into the ITA. According to the CFC rule, the ROC business enterprises should declare their pro rata share of their CFCs' taxable profits as their investment income in their annual tax returns.
Offshore affiliates will be defined as the CFCs of ROC business enterprises if the offshore entities are (i) more than 50% owned (directly or indirectly) or controlled by the ROC business enterprises and/or their domestic affiliates, and (ii) established in low-tax jurisdictions (jurisdictions where the business enterprise income tax rate is lower than 11.9% or taxes are levied only on domestic-sourced income).
The adoption of the CFC rule into the ROC's ITA should eliminate the deferral of taxation on earnings generated by the offshore affiliates of the ROC business enterprises and should encourage them to regularly distribute their retained earnings to the ROC business enterprises.
The background for the PEM rule is that, under the current tax laws, offshore business enterprises are subject to the ROC income tax only on their ROC-sourced income. As such, some investors established offshore business enterprises in low-tax jurisdictions, yet have their primary business operations in the ROC. In order to combat this tax-avoidance tactic, and to ensure that such offshore business enterprises are properly subject to the ROC's tax system, the MOF incorporated the PEM rule into the ITA.
The term "PEM" refers to the place where the substantive management and commercial decisions of business enterprises are made. More specifically, business enterprises in the following situations will be deemed as having their PEM in the ROC:
(i) Business enterprises whose major business/ financial/ human resource decision-makers are the ROC residents, whose head offices are located in the ROC, or whose major business/ financial/ human resource decisions are made in the ROC;
(ii) Business enterprises whose financial statements, accounting books, board resolutions, and/or shareholder resolutions are produced and/or stored in the ROC; and
(iii)Business enterprises whose main business operations are in the ROC.
Business enterprises incorporated in low-tax jurisdictions with their PEM in the ROC will be regarded as ROC business enterprises for income tax purposes. Such enterprises will be taxed in accordance with the ROC ITA and relevant tax regulations; thus, they will be subject to taxation on a worldwide income basis at the rate of 17%.
The PEM rule should discourage the ROC business enterprises from forming affiliates in low-tax jurisdictions simply to avoid the ROC income tax. It is also worth noting that the PEM rule will likely have a favorable impact on the business enterprises to which it applies since such business enterprises may be entitled to benefits under the treaties that the ROC has signed with other tax jurisdictions.
In order to give business enterprises time to make the necessary adjustments after the passage of the CFC and PEM rules, the lawmakers authorized the Executive Yuan to determine the effective date of these two rules. According to the Executive Yuan, these two rules will not be effective right away; instead, the Executive Yuan will take the following factors into consideration before setting their effective date: (i) the effective date of the Cross-straits Agreement; (ii) the CRS is implemented internationally; and (iii) the completion of the establishment and promotion of the enforcement rules of the CFC and PEM rules.
Although the CFC and PEM rules would unlikely be enacted soon, considering that they are in compliance with the international trend, the enactment of the rules is only a matter of time. In light of their tax impact, investors (whether ROC or non-ROC investors) whose current business structures involve ROC business enterprises with offshore affiliates should re-evaluate the necessity of having affiliates located in low-tax jurisdictions and may need to consider adjusting their business structures accordingly.
3. Foreign e-commerce operators under B to C model must file tax registration and pay VAT in the ROC from May 1, 2017
Before the last amendment, under the ROC Business Tax Act ("BTA"), 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 the ROC and sells services in the ROC, the ROC 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 the ROC individuals, most, if not all, do not establish any FPB in the ROC; 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 ROC individuals; however, in practice, ROC 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 ROC government but is also unfair to the ROC e-commerce operators as they are required to pay 5% VAT on their sales revenue while FEOs without FPB in the ROC are not.
In response, the MOF proposed amendments to the BTA, most of which were based on the recommendations made by the 1st Action Plan of the BEPS Report (Address the tax challenges of the digital economy), and the approaches adopted by EU members, Korea and Japan. The Legislative Yuan passed the amendments at the end of last year.
The amendments abolished the VAT exemption for service fees under NT$3,000; in addition, they provide the legal basis to require a foreign e-commerce operator that does not have a FBP in the ROC and sells cross-border digital services to the ROC individuals ("FEO") to file a tax registration and become a taxpayer of the VAT payable.
Based on the amended BTA, starting from May 1, 2017, FEOs that generate annual sales of NT$480,000 (approximately US$16,000) or more from selling cross-border digital services to the ROC individuals are required to (i) file a tax registration like the ROC business operators, and (ii) pay the VAT payable. A FEO may engage an ROC individual or business entity with a FPB in the ROC as its tax agent for such tax registration filing and payment of VAT. The MOF is still contemplating the issue as to whether the FEOs are required to file income tax return and pay income tax.