To manage the Transfer Pricing (“TP”) risk, MNEs would develop a global TP policy to determine how assets and risks are remunerated, via price or margin, among associated enterprises. In practice, however, many unexpected market conditions cause the actual transaction to deviate from the target results of the TP policy, where TP adjustments may therefore be required. To resolve the conflicts at an early stage, taxpayer-initiated adjustments are accepted by some countries for tax purposes.
Taiwan has a procedure which allows taxpayers to initiate TP adjustments, called the “One-Time TP Adjustment.” On 15 November 2019, Taiwan’s Ministry of Finance (“MOF”) released a new tax ruling (Tai Tsai Shui No. 10804629000) which reduced limitations on one-off TP adjustments. Beginning in 2020, enterprises can make such adjustments before the year-end if four requirements are met:
1. Transaction terms and all price-relevant factors have been concluded in a prior bilateral agreement.
2. The adjusted accounts (A/R & A/P) have been recorded for financial accounting purposes.
3. The counterparty in the controlled transactions make corresponding adjustments at the same time.
4. All taxes associated with the one-time adjustments are paid.
For companies who have imported goods from related parties and would like to adopt the above procedure, the compliance requirements can be divided into three phases: 1) upon importation before the end of the FY (“FY”); 2) submitting the one-time TP adjustment application; and 3) customs value assessment and finalisation process.1
1. The first step is to indicate in the import declaration form, “Making a one-time adjustment for FY XXXX” and attaching a proforma invoice and customs value declaration form based on a tentative price at the time of importation. A deposit will be made to customs at this stage and then reconciled when the price is finalised.
2. The final step is to prepare an application for the assessment and finalisation of the customs value according to the Customs Act within one month after the end of the FY. The taxpayer will know whether they need to pay in addition to the deposit or ask for a refund from customs.
For other types of controlled transactions like import of service and export of goods or services, declaration letters of one-time TP adjustments and other supporting documents are required to be submitted to tax authorities for tax filing purposes.
The one-time TP adjustment provides enterprises a feasible mechanism to achieve an arm’s-length result when unexpected market conditions (e.g. COVID-19) cause transaction results deviating from the target of their TP policies. Because supporting documents are required to adopt a one-time TP adjustment, it is crucial for the taxpayers to review their intercompany pricing for intercompany transactions contemporaneously. The COVID-19 crisis highlights the importance of thorough TP documentation. The creation of documentation is an ongoing process, so it is advisable for companies to start preparing their documentation ASAP.
1 Guidelines on assessing the one-time TP adjustment to determine the customs value (the “Guidelines”) on 31 December 2019
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