On 18 August 2020, the Taiwan Ministry of Finance (MOF) announced draft amendments to the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on NonArm’s-Length Transfer Pricing (TP Assessment Rules). The amendments refer to the OECD Transfer Pricing Guidelines (July 2017) (OECD TP Guidelines) and incorporate provisions from the guidelines regarding transactions involving the use of intangible assets and risk assumption to provide guidance for value-chain arrangements of MNEs. The main revisions of the amendments are:
Intangible assets – a step towards certainty
Transfer pricing issues relating to intangibles have become a key concern of tax authorities. These were also addressed in the G20/OECD base-erosion profit-shifting (BEPS) action plans. Taiwan’s amendments contain changes adopted from the OECD TP Guidelines Chapter VI, which incorporate recommendations in relation to BEPS final reports.
Define “Intangibles”
The current version of the TP Assessment Rules does not provide an explicit definition of “intangible assets”, but instead lists various rights (e.g. business rights, copyrights, patents, trademarks, enterprise names and brand names, etc.) as examples. The amendments incorporate the definition of intangible assets from OECD TP Guidelines, which define “intangible” as something which is (a) not a physical asset or a financial asset and (b) meets the following conditions:
- capable of being owned or controlled for use in commercial activities; and
- the use or transfer of which would be compensated had it occurred in a transaction between independent parties in comparable circumstances.
Evaluate transactions involving intangible assets’ DEMPE functions
The amendments provide the much-needed clarity to evaluate transactions involving intangible assets. Firstly, they include additional factors to be considered when evaluating the degree of comparability of intangible assets, such as terms of transfer, stage of development, and rights to future enhancement. Secondly, they add a detailed functional analysis to identify the parties performing functions, using assets, and managing risks related to development, enhancement, maintenance, protection, and exploitation while evaluating the respective contribution of participants in transactions involving intangible assets.
Risk analysis – six steps
In the past, taxpayers and tax authorities have heavily relied on written agreements or documents while determining the arm’s-length outcome for risk assumption. The amendments add detailed guidance on steps, considerations, and compensation when conducting risk analysis.
Penalty – non-disclosure
To protect the domestic tax base, the MOF decided to lower the threshold on penalties for the non-disclosure of controlled transactions. If a taxpayer fails to disclose all of its controlled transactions and the non-disclosed amount assessed by the tax authority reaches (1) 5% of the taxpayer’s annual taxable income and (2) 15% of the taxpayer’s annual net operating revenue, the taxpayer would be subject to a fine of at the most two times the amount of the tax evaded as a result of the non-disclosure.
The amendments are expected to be implemented by the end of 2020. MNEs engaged in commercial activities in Taiwan should review their intercompany arrangements to see if certain transactions have not been disclosed to prevent any possible penalties that may arise.
Read the WTS Global Transfer Pricing Newsletter here.
