Taiwan Ministry of Finance announces amendments to

Tax Insights
from Transfer Pricing
Taiwan Ministry of Finance
announces amendments to transfer
pricing assessment rules
March 19, 2015
In brief
On March 6, 2015, the Taiwan Ministry of Finance (MOF) announced the amendments to eight existing
articles, and introduced one new article to the Regulations Governing Assessment of Profit-seeking
Enterprise Income Tax on Non-Arm’s Length Transfer Pricing (TP Assessment Rules).
Main points of the amendments:
Introduction of the concepts in Chapter 9 of the OECD Transfer Pricing Guidelines concerning
business restructuring. Companies engaged in business restructuring in FY2014 are required to
disclose and document in their FY2014 transfer pricing reports whether the restructuring was
conducted in compliance with the arm's length principle. This is expected to heavily increase the
efforts required to prepare compliant transfer pricing documentation for applicable companies in
Clarification that the profit split method may be considered if the relevant entities make unique and
valuable contributions to the controlled transactions they are involved in.
Requirement for companies being merged or dissolved to prepare transfer pricing reports along with
their final income tax returns.
Lowering of the advance pricing agreement (APA) application threshold and revising the APA
application timeline.
Introduction of the use of a company's costs and expenses to reversely calculate its revenue by
applying the prescribed Profit Standard of the Same Trade (Profit Standard), in cases where the
company cannot provide reliable revenue information.
In detail
In order to keep pace with the
developments in international
taxation, improve audit
efficiency, streamline APA
application procedure and
reduce the risk associated with
double taxation of multinational companies (MNC), the
Taiwan MOF has announced
proposed amendments to the TP
Assessment Rules.
The main points of the
amendments and possible
impacts are covered below.
Tax Insights
Introduce the factors to be
considered in conducting
business restructuring and
profit allocation
The Taiwan TP Assessment Rules
provide that business restructuring
includes (without being limited to):
conversion from full-fledged
distributors to limited risk
distributors, from full-fledged
manufacturers to contract
manufacturers, the centralizing or
decentralizing of ownership/
management of intangible properties
across different entities within the
group, the downsizing or winding-up
of operations, as well as any other
arrangements announced by the MOF.
Where a Taiwan entity of an MNC
group undergoes any business
restructuring mentioned above, it
should disclose and document in its
transfer pricing report the
assessments on whether the business
restructuring is conducted at arm’s
length, while addressing the
Special considerations for risks
The rights and obligations of the
participants before and after the
business restructuring.
The appropriateness of the
transfer of profit potential and
reallocation of risk from the
business restructuring.
Proper consideration is accounted
for in the transfer of (tangible and
intangible) assets or activities
which the business restructuring
Proper indemnification is
provided to the restructured
enterprise for the termination or
substantial renegotiation of
existing arrangements.
Remuneration of post-restructuring
controlled transactions
The factors to be considered in this
regard include:
Selection and application of a
transfer pricing method for the
post-restructuring controlled
transactions based on
comparability analysis.
Comparison of the
indemnification from the business
restructuring, and the pre and
post restructuring profitability of
the restructured enterprise.
These include:
Whether the conduct of the
associated enterprise conforms to
the contractual allocation of risk.
Whether the attribution of profits
among group enterprises before
and after the restructuring
complies with the arm’s length
principle, considering the function
and risk profiles of the enterprises
Whether the risk-bearers have the
proper capability to control the
risk, and financially assume the
Appropriate compensation in cases of
business restructuring
The factors to be considered in this
regard include:
The business reasons for and the
expected benefits of the business
The tax authorities are to properly
recognize the actual transactions
undertaken by the taxpayer in the
business restructuring through the
review of relevant documents and
information provided. If the
economic substance of the transaction
deviates from its form, the tax
authority should perform an
adjustment based on the actual
transaction recognized.
2. Broaden the scope of using
profit split method
Before the amendment, the Taiwan TP
Assessment Rules only provided that
the use of the profit split method in a
transfer pricing analysis was suitable
when activities carried out by the
participants in a controlled
transaction were highly integrated; in
such cases separate evaluations of the
results of the participants were
difficult to perform. The amended TP
Assessment Rules include the
situation where each participant to the
controlled transaction makes unique
and valuable contributions to the
controlled transaction, as another
appropriate situation to which the
profit split method may be applicable
in the transfer pricing analysis. This
brings the situation into alignment
with the OECD TP Guidelines.
3. Require transfer pricing
reports from companies to be
merged or dissolved
The proposed revision of the TP
Assessment Rules requires that
companies to be merged or dissolved
prepare transfer pricing reports along
with their final income tax returns, in
addition to the requirement under the
pre-amended TP Assessment Rules to
prepare transfer pricing reports along
with the preparation of their annual
income tax returns.
4. Introduce various
amendments to the existing
APA application mechanism
The threshold in the transaction
amount for the application of an APA
in Taiwan is lowered in the amended
TP Assessment Rules. The amended
TP assessment Rules also extend the
duration for APA applicants to
provide the required set of documents
and information to 3 months, yet
simultaneously removes the existing
possibility of requesting a one month
extension. Moreover, companies
considering the application of an APA
Tax Insights
can apply for a pre-filing meeting
under the amended TP Assessment
Rules. The tax authority should
complete the pre-filing meeting within
3 months of the application date and
notify the applicant through writing if
a formal APA application can be
5. Introduce reverse calculation
of revenue using Profit
Standard of the Same Trade
The Profit Standard contains
prescribed gross margins and net
margins announced by the Taiwan
Ministry of Finance for different
industries, and is generally used by
Taiwan tax authority in the cases
where a taxpayer has in its accounting
book its revenue figure but not its cost
and/or expense figure, or when the
taxpayer's revenue is considered
reliable (e.g. the revenue is derived
externally and can be evidenced by
contracts or invoices), but there is
doubt on the costs or expenses (e.g.
costs and/or expenses are booked by
the taxpayer without any supporting
documents). In such cases, the preamended Taiwan TP Assessment
Rules allow the tax authority to apply
the prescribed profit ratios in the said
Profit Standard to the taxpayer's
revenue to calculate the deemed profit
of the taxpayer.
However, the pre-amended TP
Assessment Rules are silent in the
reverse situation where the taxpayer
can only provide its cost and expense
figure. The amended TP rules provide
for the tax authority to calculate the
deemed profit of the taxpayer in the
reverse situation, using the cost and
expense figure as the starting point.
The takeaway
determine transfer pricing
considerations when a business group
underwent business restructuring.
The newly released amendment by the
MOF requests companies engaged in
business restructuring to disclose and
make assessments in their Taiwan
transfer pricing reports regarding the
arm’s length nature of the business
restructuring. However, the extent of
disclosure and the method of
evaluation have yet to be clearly
identified, which may create
ambiguity for taxpayers in relation to
tax compliance, and increase the
possibility of dispute with the tax
Furthermore, if the tax authority
identifies inconsistent business
substance in the controlled
transaction, the tax authority is
entitled to make a transfer pricing
adjustment. This may lead to
controversy when determining the
consistency of business substance in
actual practice.
The amendments described above do
not contain the disclosure
requirements for transfer pricing
documentation and country-bycountry reports addressed in the
revised Chapter 5 of the OECD
Transfer Pricing Guidelines. As such,
we are likely to see further
amendments to the Taiwan TP
Assessment Rules in this regard.
Companies should pay close attention
to the transition of the domestic and
international tax environments,
monitor their operations to improve
tax compliance, and develop defence
strategies against potential challenges
on the result of their controlled
transactions, including business
PwC’s perspective
Before the amendment, the Taiwan TP
Assessment Rules were in effect for
ten years, and within this period the
OECD added Chapter 9 of the
Transfer Pricing Guidelines to
Tax Insights
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your regular PwC contact or one of the
individuals listed below:
Transfer Pricing
Lily Hsu, Taipei
+886 2 2729 6207
[email protected]
Elliot Liao, Taipei
+886 2 2729 6217
[email protected]
Simon Huang, Taipei
+886 2 2729 6666, ext. 23927
[email protected]
Meer Liu, Taipei
+886 2 2729 6666, ext. 23665
[email protected]
Transfer Pricing Global and US Leaders
Isabel Verlinden, Brussels
Global Transfer Pricing Leader
+32 2 710 44 22
[email protected]
Horacio Peña, New York
US Transfer Pricing Leader
+1 646 471 1957
[email protected]
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