Worldwide transfer pricing reference guide 2014

Taiwan (continued)
Return disclosures/related party disclosures (continued)
• The related parties’ financial information, including total revenues, gross margins, operating margins and net margins
• Whether the enterprise has prepared transfer pricing documentation for that fiscal year
The tax authority has issued safe harbor rules for related party transaction disclosures in two rulings. 2 Both rulings provide that the
enterprise must disclose related party transactions on its income tax return if the sum of its annual operating and non-operating revenue
(total annual revenue amount) exceeds TWD30 million and meets one of the following criteria:
• The enterprise has related parties outside the territory of Taiwan (including the headquarters and branches)
• The enterprise utilizes tax credits for more than TWD500,000 or utilizes loss carryforwards for more than TWD2 million to reduce the
income tax or undistributed earnings surplus tax
• The enterprise has a total annual revenue exceeding TWD300 million
Transfer pricing-specific returns
Other than the information specified in the return disclosures/related party disclosures section above, there are currently no transfer
pricing-specific returns required by the NTA.
Frequency of tax audit and transfer pricing scrutiny by the tax authority
The MOF has issued a ruling 3 that sets forth circumstances under which a transfer pricing audit will be triggered:
• The gross profit ratio, operating profit ratio and net income before tax ratio are below the industry average
• The parent or headquarters reports profit on the global consolidation level, but the local affiliate reports loss or much less profit than the
industry average
• The enterprise reports significant fluctuations in profit over the transaction year and in the two preceding years
• The enterprise fails to disclose related party transactions in accordance with the related party transaction disclosure requirements
• The enterprise fails to determine whether its related party transactions are within an arm’s length range and fails to prepare documents
in accordance with the transfer pricing guidelines
• The enterprise fails to charge related parties in accordance with the transfer pricing guidelines or charges an abnormal amount
• The enterprise fails to provide the transfer pricing report upon a tax audit
• The transfer pricing of the enterprise has been adjusted by the tax authority, in which case, the tax years preceding and subsequent to
the year of a transfer pricing audit is likely to be selected for audit
• The enterprise has significant or frequent controlled transactions with related parties in tax havens or low tax jurisdictions
• The enterprise has significant or frequent controlled transactions with related parties entitled to tax incentives
• Any other transaction that fails to meet the arm’s length requirements in accordance with the transfer pricing guidelines
In general, the likelihood of an annual tax audit is characterized as high, as the NTA is conducting corporate income tax audits with a high
frequency.
The likelihood that transfer pricing will be reviewed as part of the annual corporate income tax audit is also characterized as high. All
the corporate income tax audits may include the request and review of the documentation, as well as related supporting materials. In
the past year, there has been increased activity from the NTA, especially with respect to requests to see documentation reports. In
particular, companies conducting business through tax havens have attracted more scrutiny, along with those making losses.
The likelihood that the transfer pricing methodology will be challenged during the audit is high, if any of the factors or circumstances
listed below is present:
2 Tax Letter Ruling Nos. 09404587580 (for tax year 2005) and 09604503530 (for tax year 2006 and onwards).
3 Tax Letter Ruling No. 09404540920, issued on 2 August 2005.
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