The National Taxation Bureau of Taipei, Ministry of Finance (hereinafter referred to as the “NTBT”) stated that, to create a friendly income tax environment for foreign investment in Taiwan and to strengthen the international competitiveness of enterprises, 33 comprehensive income tax agreements have been signed and brought into force so far. If a profit-seeking enterprise receives income derived from a country which has signed an income tax agreement with our country (hereinafter referred to as “the other Contracting State”), it should note whether the income tax agreement has provisions on tax exemption or a limited tax rate. The enterprise should give priority to applying for the application of the relevant provisions to the other Contracting State according to the nature of the income, so as to avoid double taxation by overpaid tax in the source country of income and not being allowed to deduct tax payable in our country.
NTBT stated that, according to the provisions of paragraph 2, Article 3 of the Income Tax Act, for any profit-seeking enterprise having its head office within the territory of the Republic of China (hereinafter referred to as the “ROC”), profit-seeking enterprise income tax shall be levied on its total profit-seeking enterprise income derived within and without the territory of the ROC; however, the income tax paid to the source country of income may be deducted to the extent that such deduction shall not exceed the amount of tax which, computed at the applicable domestic tax rate, is increased in consequence of inclusion of its income derived from abroad. In addition, in accordance with Article 124 of the Income Tax Act, where there are special provisions in income tax agreement signed by the ROC with a foreign country, such special provisions shall prevail. If the income derived from the other Contracting State of an enterprise is entitled to tax exemption or a limited tax rate according to the income tax agreement, the enterprise should give priority to applying for the exemption or the reduction to the other Contracting State under the income tax agreement. However, if the profit-seeking enterprise overpays foreign taxes by failing to apply for the application of the exemption or the reduction in accordance with the income tax agreement, the over-paid foreign tax shall not be deducted from the profit-seeking enterprise income tax payable in our country, in accordance with the provisions of paragraph 2, Article 36 of the Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income.
For example, if domestic Company A files dividend income of NT$10 million received from its invested Company B in Indonesia in the 2018 profit-seeking enterprise income tax return, and paid income tax of NT$2 million in accordance with the Indonesian tax law. Because there is an income tax agreement signed between Indonesia and our country, and according to the provisions of paragraph 2, Article 10 of the Agreement between the Taipei Economic and Trade Office and the Indonesian Economic and Trade Office to Taipei for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, if the dividend recipient is the beneficial owner of the dividend the tax levied shall not exceed 10% of the total dividend. That is, Indonesia can only levy a tax of NT$1 million on the aforementioned dividend income based on the limited tax rate of 10%, and Company A may only deduct this tax amount from the profit-seeking enterprise income tax payable in our country. However, Company A did not apply to the Indonesian taxation authority for the applicable limited tax rate on the dividend income in accordance with the income tax agreement. In accordance with the aforementioned provisions of the Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income, the overpaid foreign tax cannot be deducted from the profit-seeking enterprise income tax in our country. NTBT denies this part of the foreign deductible tax credits and assesses a tax deficiency of NT$1 million.
NTBT appeals to profit-seeking enterprises with income sourced from the other Contracting State to note whether tax exemptions, limited tax rate, or other preferential treatments are included in the income tax agreement. If the relevant provisions are met, profit-seeking enterprises should give priority to applying to that state, in order to protect their own rights.
(Contact person: Section Head Chien of the First Examination Division; Telephone 2311-3711, ext. 1308)