On 23 December 2020, the Taiwanese Supreme Administrative Court issued judgement in case (109) Pan Tzu No. 661, concerning one-off adjustments to sales prices. The court denied that a one-time Transfer Pricing adjustment (Tai Tsai Shui No. 10804629000, announced on 15 November 2019) is eligible for a “one-time” sales allowance granted by the taxpayer to its subsidiary, due to a lack of supporting documents.
Development of one-time TP adjustments in Taiwan
In the past, one-time downward Transfer Pricing adjustments were recognized only under strict conditions, including causes for adjustment beyond the control of the parties, e.g. an act of God or financial crisis.
To mitigate the risk of double taxation for multinational corporations and to reflect the economic substance of a controlled transaction, Taiwan’s Ministry of Finance released a new tax ruling on one-time TP adjustments in November 2019, which accepts broader causes for adjustment. Enterprises now can make such adjustments before the year-end provided four criteria are met:
- The parties have concluded transaction terms and all price-relevant factors in a prior bilateral agreement.
- The adjusted accounts (accounts receivable & accounts payable) have been recorded for financial accounting purposes.
- The counterparty in the controlled transaction has made a corresponding adjustment at the same time.
- All taxes associated with the one-time adjustments are paid.
Background
The taxpayer, a Taiwanese company, claimed that the factors affecting market prices hadn’t been fully considered while it sold products to its overseas subsidiary, which caused the subsidiary major losses. At the end of 2015, the taxpayer reviewed their quotation and made a reduction of transaction price, which was reported as a “sales allowance” on the tax returns. The tax authority denied their contra revenue account and required the taxpayer to file back taxes. The case was appealed to the Supreme Administrative Court in 2019, where the taxpayer claimed that a one-time TP adjustment should be applicable to their “onetime” sales allowances granted to the subsidiary prior to the end of 2015.
The decision
The court held that the one-time TP adjustment cannot be applied in this case for the following reasons:
- A one-time TP adjustment is a mechanism provided to MNEs to achieve an arm’s-length result when the agreed terms and conditions pertaining to the price-relevant factors are changed. Documents must demonstrate the reasons for making the adjustment, the method for the adjustment, and the terms and conditions of the adjustment.
- The taxpayer provided only internal approvals and debit notes. There were no documents showing conditions or terms, whether price-relevant factors had been concluded by both parties, or how the adjustment would occur for each transaction. The record showed only a “one-time” sales allowance to reallocate the revenue between the subsidiary and the taxpayer. Without proper documents, the one-time TP adjustment could not apply to this case.
Observations
One-time TP adjustment allows taxpayers to adjust their accounting records by the year-end before closing the accounting. However, each adjusted account must have been recorded with supporting documents that show the reason for the adjustment. Contemporaneously reviewing intercompany prices for controlled transactions and keeping documentation for each affected transaction is the key for adopting a one-time TP adjustment.
Read the WTS Global Transfer Pricing Newsletter here.
