Profits from Foreign-Source Income in Treaty Partner Countries: Overseas Tax Overpaid Due to Non-Application of Tax Treaty Cannot Be Credited
The Taipei National Tax Administration (TNTA) of the Ministry of Finance announced that although Taiwan has concluded comprehensive income tax treaties with 35 countries, if a company has income sourced from one of these treaty countries but fails to apply the treaty, any excess foreign tax paid cannot be credited against Taiwan’s corporate income tax.
According to TNTA, under Article 3, Paragraph 2 of the Income Tax Act, a domestic enterprise (i.e., whose head office’s registered office is within Taiwan territory) must report and combine its domestic and foreign-source profits for income tax purposes. Taxes already paid abroad under local law may be credited within the statutory limit against the enterprise’s total profit-tax liability. However, under Article 36, Paragraph 2 of the Guidelines for the Audit of Applicable Income Tax Treaties, if the income is exempt from tax in the treaty partner country (e.g., business profits) or subject only to a capped tax rate (e.g., dividends, interest, royalties), then any excess foreign tax paid cannot be credited regardless of the fact the company has applied or not applied Tax Treaty in the partner country.
Below is the example highlighted from the Ministry of Finance.
A Taiwanese company “A” reported royalties of NTD2 million paid from its Thai affiliate and claimed a foreign tax credit of NTD300,000 (tax rate 15%) for tax withheld in Thailand. However, the Taiwan-Thailand Double Taxation Agreement limits royalty withholding tax rate to 10%, i.e., NTD200,000. Because the company did not apply the treaty in Thailand, thus overpaid NTD100,000 in Thai as income tax. The overpaid amount of NTD 100,000 is not eligible for a foreign tax credit in Taiwan, and the TNTA should adjust the allowable credit accordingly.
The TNTA emphasizes that companies reporting foreign-source income should carefully check whether an income tax treaty can be applied to their case, and if so, apply to the treaty partner country for tax treaty relief first, in order to protect their interests.
