A Study of Transfer Pricing Tax System
Date Issued
2007
Date
2007
Author(s)
Ho, Ching-Chiang
DOI
zh-TW
Abstract
The era of globalization has forced enterprises to become boundaryless with global network in order to make best use of global resources. From early foreign investments to recent more investments with mainland China, internationalization has become a mature business model. When multinational companies assess their cost based on raw materials, products, services, etc, taxation is also an important consideration. These companies would consider tax regulation in different countries to then decide where they would keep their profit to minimize overall taxation. Therefore, transfer pricing regulation has become an important factor in multinational tax planning, which has also maintained each country’s best interest in taxation.
Taiwan’s transfer pricing compliance standard only came out since 2004. This study focus on Taiwan’s transfer pricing regulations with reference to OECD’s articles, comparison with other countries’ transfer pricing policies, and the understanding of Taiwan’s implementation issues. Following are recommended considerations on transfer pricing regulations and how business entities may conform to existing transfer pricing system:
1. Suggestions on Transfer Pricing Regulations:
a. Amendment of Transfer Pricing Regulation No.34
According to the definition of arm’s length transaction which involves several judgments, tax payer is subject to penalty when the difference between the amounts claimed by tax authority versus tax payer is over a certain amount according to Transfer Pricing Regulation No.34 and Income Tax Act Article No.110. However, proof of evidence on tax payer’s willfulness or gross negligence on related party transactions shouldn’t also be considered as well?
b. Need a clear definition of year-end one-time adjustment with the adjustment fall within the area of arm’s length range.
In international practice, if tax payers’ related party transactions seem to deviate from arm’s length range, they can perform a year-end one-time adjustment. Taiwan has no real case or regulation yet and is recommended to set confirmed guidelines for compliance, e.g. besides income tax, should related indirect tax also be adjusted? If tax payer performs year-end one-time adjustment, should the adjustment always be the middle of arm’s length range according to Transfer Pricing Regulation No.7 ?
c. It is recommended to raise the threshold of submitting transfer pricing report (Safe Harbor’s rule).
Due to the need of enormous proof of evidence and judgment on arm’s length transactions, the cost of compliance for tax payer and also the cost of audit for tax authority are very high. Therefore, it is recommended to reduce the transfer pricing report preparation scope.
d. Recommend to add Full Cost Mark-Up Method to be one of the profit indicators for Comparable Profit Method.
Comparable Profit Method is a popular international practice commonly used among countries, especially the Full Cost Mark-Up Method used in the manufacturing industry where significant usage of operating asset activities can be reflected. This method is recommended for Taiwan’s consideration.
e. It is recommended for Ministry of Finance (MoF) not to perform secret comparables during transfer pricing compliance check. MoF owns the country’s tax database which is not released to public and therefore affects the fairness of tax payer’s information. It is suggested for MoF to publicly announce not to reference to secret comparables.
2. Recommendations for business entities:
a.Business entities should consider Advanced Pricing Arrangements (APAs) in advance.
Transfer pricing report is for protective purpose which can not completely reduce the transfer pricing adjustment risk or to significantly reduce the time and cost of justification with tax authority. Setting the APAs in advance can help business entity to hedge future tax liability which will then reduce the contingent tax risk and therefore increase the efficiency and effectiveness of establishing business strategy.
b.Recommend multinational enterprises to conduct global minimum taxation planning while adopting to transfer pricing regulation.
Arm’s length principle suggests that the terms and price of enterprises’ related party transactions should be consistent to non-related party’s terms and price. Therefore, multinational enterprises need to consider each subsidiary’s organization function and risks, etc, which are also part of global minimum taxation planning activities, while adopting the transfer pricing regulation.
c. Recommend to include transfer pricing system as part of internal control system.
Transfer pricing report is not just for post reference but also an important evaluation tool at the beginning of transaction where circumstances and risks from all parties have been considered. Therefore, this should be included in internal control system for continual reviewing and monitoring.
d. Suggest multinational enterprises to value tax and legal professionals.
Multinational enterprises need to have professional expert team to help establishing and maintaining a global transfer pricing strategy. This requires tax and legal expertise in assessing global business activities, investment structures, business models, each country’s tax structure, and analyzing related party’s transfer pricing functions, risks, and asset management, etc.
Subjects
移轉訂價
關係人交易
常規交易原則
避風港條款
常規交易方法
常規交易範圍
預先訂價協議
Transfer Pricing
Related Party Transaction
Arm’s Length Transaction
Transfer Pricing Report
Safe Harbor’s Rule
Transfer Pricing Method
Arm’s Length Range
Advanced Pricing Arrangements
Type
other