The Taipei National Tax Administration (TNTA), Ministry of Finance indicated that non- taxable income of other Contracting States based on tax treaties may not be credited against our country’s tax due if the overpaid foreign tax failed to apply to such treaties.

The TNTA said that according to Article 3 of the Income Tax Act, for any profit-seeking enterprise having its head office within the territory of the Republic of China, profit-seeking enterprise income tax shall be levied on its total profit-seeking enterprise income derived within or without the territory of the Republic of China; provided, that in case income tax has been paid on the income derived outside of the territory of the Republic of China in accordance with the tax act of the source country of that income, such tax paid may, upon presentation by the taxpayer of evidence of tax payment issued by the tax office of said source country for the same business year and attested by a Chinese embassy or consulate or other organizations recognized by the Government of the Republic of China in the said local, be deducted from the amount of tax payable by the taxpayer at the time of filing final returns on the total profit-seeking enterprise income. But Article 124 of the same Act states, where there are special provisions in tax treaty signed by the Republic of China with a foreign country, such special provisions shall prevail. And based on Article 26 of “Regulations Governing Application of the Agreements for Avoidance of Double Taxation with Respect to Taxes on Income ”, where the income derived from the other Contracting State is subject to the exemption or the limited tax rate in that state in accordance with the provisions of the treaty, but no application has been made for the exemption or the reduction rate of such income to that other state, the overpaid foreign tax on such income may not be claimed to credit against the tax payable in the ROC.

The TNTA pointed out that company A’s 2007 profit-seeking enterprise income tax return was reviewed and was found that its international transport profit in Vietnam has been incorporated into the return and filed for deductions of tax paid in Vietnam. However, according to “Agreement for the Avoidance of Double Taxation” between Taipei Economic and Cultural Office in Vietnam and Vietnam Economic and Cultural Office in Taipei, the ROC and Vietnam have signed a comprehensive tax agreement. In accordance with Article 8 of the aforementioned tax agreement, profits derived by an enterprise of a Contracting Party from the operation of ships or aircraft in international traffic shall be taxable only in that Party. That is to say, profits from the operation of international transport shall be taxable only in the ROC, not Vietnam. According to the aforementioned regulations, the TNTA then rejects tax payables in the ROC to be credited against by the overpaid foreign tax that the company does not apply for exemption in Vietnam.

The TNTA particularly stressed, given the increasingly frequent trade activities, for avoidance of double taxation, the ROC has signed tax treaty with 23 countries (territories). Taxpayers should notice and understand the applications of tax treaty to ensure their own interests.