Today (24th) the Ministry of Finance issued a Decree which stipulates that when tax collection authorities negotiate cross-border bilateral or multilateral advance pricing arrangements (hereinafter referred to as "BAPAs") with the competent authorities of our treaty partners, they may determine the method of examining whether the controlled transactions fall within the arm's length range. They can either adopt the results of the controlled transactions on a year-by-year basis or using the average results of the controlled transactions of the covered years as a whole. On the occasions of the results of the controlled transactions not within the arm's length range, either an upward or a downward adjustment should be made to the income of the enterprise at an agreed point within the arm's length range. Moreover, this adjustment could be either calculated and made separately to the income of the enterprise on a year-by-year basis or be aggregated as a sum and made one-time to the last year covered in the BAPA.
The Ministry of Finance explained that, all of its 33 effective income tax agreements include an Article of "Mutual Agreement Procedures"(hereinafter referred to as "MAP"). Multinational enterprise (MNE) groups apply for BAPAs based on the MAP provisions in order to avoid double taxation arising from the transfer pricing adjustments made respectively by the tax collection authorities of the contracting parties on the income of the controlled transactions. As both parties conclude appropriate conditions (such as arm's-length methods and the scopes, etc.) to determine the pricing or profit margin range of the controlled transactions within a certain period "in the future," the BAPAs may improve taxation certainty, prevent disputes, avoid double taxation on income, and provide a friendly taxation environment for multinationals.
The Ministry of Finance further explained that, considering different countries with their own domestic transfer pricing laws and regulations to adjust the results of the controlled transactions not within the arm's length range differently (e.g. adjustments made to any point within the arm's length range or to the median of the arm's length range), and different industries bearing different levels of risk towards business cycles or operation cycles, the Ministry of Finance released this Decree to grant the tax collection authorities flexibility to negotiate with the competent authorities of the treaty partners. It aims to harmonize with the transfer pricing laws and regulations of other countries, to consider global operating risks borne by multinationals and reflect economic realities, as well as to reveal the benefits of the income tax agreements.
The Ministry of Finance illustrated with an example. Company A is an enterprise in Taiwan, and its affiliated enterprise, Company B, is an enterprise in Country B. Company A and Company B applied for a BAPA to the competent authorities of Taiwan and Country B, respectively, which covers the controlled transactions for the years 2021 to 2025. In ordinary situations, the tax collection authority in Taiwan may negotiate with the competent authority of Country B and conclude the terms such as taking Company A as the tested party, using a comparable profit method (Transactional Net Margin Method) with the operating net profit margin as the profit level indicator, and setting the arm's length range from 3% to 8%. According to this Decree, the tax collection authority in Taiwan may additionally agree on the following matters:
1. The method to examine whether the results of the controlled transactions are in line with the BAPA:
Whether the operating net profit margin of Company A falling within the aforementioned arm's length range (3% to 8%) could be examined either by checking the margin for each year from 2021 to 2025, or by checking the simple average of the margin for those five years.
2. The extent of adjustment when the results of the controlled transactions are not within the arm's length range:
Either an upward or a downward adjustment should be made to Company A's income at the point closest to the range (i.e., 3% or 8%) or at any other point within the range.
3. The methods of adjustment when the results of the controlled transactions are not within the arm's length range:
The amount of adjustments made to Company A's income could either be calculated and made separately for each year from 2021 to 2025, or be aggregated and made one-time to the year 2025.
The Ministry of Finance pointed out that, this Decree grants flexibility for tax collection authorities to conclude BAPAs with the competent authorities of the treaty partners. It may retain taxpayer's rights, fulfill the core spirit of eliminating double taxation endorsed in income tax agreements, and comply with the principles indicated in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the Organisation for Economic Co-operation and Development (OECD). For more information, please browse relevant documents (including regulations, application forms, and flow charts) published on the website of the Ministry of Finance (path: Ministry of Finance > Service > International Fiscal Affairs > Mutual Agreement Procedures (MAP)).
Contact person: Ms. Yu-Hsuan Wang, Section Chief.
Contact Number: (02) 2322-8183