When reporting foreign tax deductions, profit-making enterprises should pay attention to whether there is a tax treaty applicable

In recent years, with the prosperity of international trade, more and more profit-making enterprises have earned foreign income through cross-border investment. In order to avoid double taxation, Article 3, Paragraph 2 of Taiwan's Income Tax Law stipulates that if a profit-making enterprise has paid income tax on its foreign-source income in the country where the income is from, it can deduct the increased profit-making enterprise income tax settlement payable due to the addition of foreign income within the prescribed limit. However, it should be noted that if the foreign income comes from a country that has signed a tax agreement with Taiwan, it should be noted whether the income has applied for income tax reduction or exemption from the other contracting party in accordance with the agreement. If the application of the agreement is not applied, it may affect the profit-making enterprise's right to deduct the tax amount.

The Southern District National Taxation Bureau of the Ministry of Finance stated that according to Article 124 of the Income Tax Act, the basis for taxation of foreign income should give priority to the provisions of the tax treaty, that is, the income obtained by a profit-making enterprise from the other contracting party to the treaty should first apply to the other contracting party for tax exemption or reduction in accordance with the provisions of the treaty for income that is exempt from tax or has a maximum tax rate in the other contracting party. If the profit-making enterprise fails to apply to the other contracting party for tax reduction or exemption of income tax and overpays foreign taxes, according to Article 36, Paragraph 2 of the Audit Criteria for the Application of Income Tax Treaties, the overpaid tax shall not be declared to be deducted from the profit-making enterprise's tax payable in our country.

The bureau gave an example, in 2013, Company A received service fees of NT$5 million from Company A in Thailand, and obtained a certificate of payment of NT$750,000 in income tax issued by the Thai tax authorities. When Company A filed its 2013 corporate income tax return, it reported a deduction of NT$750,000 for income tax paid on foreign income. However, according to the business profit provisions of Article 7, Paragraph 1 of the "Agreement on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion between the Taipei Economic and Trade Office in Thailand and the Thailand Trade and Economic Office in Taipei" signed between Taiwan and Thailand, an enterprise in one territory, unless engaged in business through a permanent establishment in the territory of the other party, shall have its income or profits taxed only by that territory. Upon investigation, it was found that Company A did not have a permanent establishment in Thailand. The service remuneration (i.e. operating profit) it received from Company A in Thailand should be levied income tax by our country in accordance with the provisions of the aforementioned agreement, while Thailand is exempted from taxation. Because Company A did not apply to the Thai tax authorities for tax exemption on business profits under the tax treaty, it overpaid foreign income tax of NT$750,000. According to Article 36, Paragraph 2 of the Rules for Auditing Income Tax Treaties, it cannot claim a deduction from the corporate income tax payable in my country.

The bureau reminds that profit-making enterprises that obtain foreign income should pay attention to whether there are any tax treaties that apply to income tax reductions and exemptions. If there are applicable tax treaties but they have not applied, the profit-making enterprise can apply for a certificate of residence in Taiwan from the national tax bureau under its jurisdiction, and submit relevant application documents, and apply for reductions and exemptions or refunds of overpaid taxes from the tax authorities of the other contracting party in accordance with the tax treaty to protect its own rights and interests.

Contact person for press release: Auditor Wu of the Business Taxation Group, 06-2223111 ext. 8043