In an era dominated by digitalization, cross-border electronic services have become a cornerstone of international trade and business growth. As the world relies more on digital transactions, it’s really important for international businesses to know how taxes work for online services.
This article will explain on the tax system on Taiwan cross-border electronic services and the reduction of withholding tax. It will help those foreign enterprises earning income from Taiwan buyers via online transactions.
Understanding the Definition of Taiwan Cross-Border Electronic Services
International businesses sometimes are easily to encounter the tax issue when providing online services to Taiwan clients or payers. Thus, it is important to understand the definition of Taiwan cross-border electronic service listed as below:
- The services used via the internet or other electronic tools and saved to devices (such as smartphone, tablet computer, etc.) for use.
- The services used online without being stored on any devices, such as online games, advertisements, audio-visual browsing, and voice frequency broadcasting, information contents and interactive communications.
- Other services used are provided through the internet, e.g., the services provided through online platforms and used at physical locations.
Based on the business models and payment method, foreign enterprises providing cross-border electronic services are mainly divided into two types as below:
Foreign Platform Operator
A foreign enterprise establishes platforms on the internet for buyers and sellers to conduct the international transactions and collect service fees from platform users.
Recognition of Income Sources from Taiwan
A Foreign Platform Operator establishes platforms on the internet for sellers and buyers conduct international transactions. If the seller or buyer is located in the territory of Taiwan, the service fees shall be recognized as income sources from Taiwan.
Foreign Non-Platform Service Provider
A company offers non-platform electronic services to the buyers via its website or platforms, such as selling e-books and standardized software, online games, online music and films, online advertisements, social networking site, online database or auction.
Recognition of Income Sources from Taiwan
(1) The sale of the electronic service is used WITHOUT a physical location:
- Stand-alone software or e-books
A company saves its product into a device via internet, so as to offer electronic services to buyers in Taiwan. The remunerations collected therefrom are NOT regarded as income from sources in Taiwan.
However, if the product is provided with the assistance and involvement of a person or company of Taiwan, the remunerations collected therefrom shall be recognized as income from sources in Taiwan.
- Online games, films, music, or advertisements
A foreign enterprise offers real-time, interactive, handy, and continuing electronic services to domestic buyers within Taiwan, the remunerations collected therefrom shall be recognized as income sources from Taiwan.
(2) The sale of the electronic service is used AT a physical location:
A foreign enterprise selling services which are delivered by physical locations, such as accommodation services and automobile renting services. If the locations of delivering services or running the business are within Taiwan, the remunerations collected are regarded as income sources from Taiwan.
Withholding Tax on Taiwan Cross-Border Electronic Services
Withholding tax is the amount withheld by the payer of income and remitted directly to taxation administration. The withholding tax rate for Taiwan cross-border electronic services is fixed at 20%. If not consider the costs or expenses happened in foreign countries, the full amount of service revenue will be directly subject to 20% withholding tax. The tax withholder shall settle all the taxes withheld for the national treasury and file a withholding tax statement within ten days from the date of withholding.
Application of Reduction of Withholding Tax Rate
When foreign enterprises selling electronic services and are recognized as deriving revenue sources from Taiwan, they may be eligible for deducting related costs and expenses from those revenues. Their taxable income source from Taiwan may be calculated based on the applicable net profit ratio and domestic profit contribution ratio, and be subject to income tax at 20%.
Net Profit Ratio
(1) When accounting books and supporting documents are provided, the taxable income amount shall be calculated by deducting related costs and expenses from the gross revenue sourced in Taiwan.
(2) When accounting books and supporting documents are not available, but contracts, business scope, onshore and offshore transaction flows, and other sufficient evidence are provided to the national taxation bureau for verifying the applicable net profit ratio:
- Platform service provider: the applicable net profit ratio is 30%.
- Non-platform service provider: applicable net profit is same as the deemed net profit of similar business or industry
(3) For foreign enterprises not applicable to the above Items 1 and 2, their taxable incomes shall be calculated based on a net profit ratio of 30%.
(4) If the actual net profit ratio assessed by the national taxation bureau is higher than the net profit ratio from Items 2 and 3, the actual net profit ratio shall be applied to calculate taxable incomes.
Domestic Profit Contribution Ratio
- When the whole transaction flow is onshore or the services are both provided and used within the territory of Taiwan, the deemed domestic profit contribution ratio is 100%.
- When there are sufficient documents to prove a clear division of the onshore and offshore transaction flows as well as the ratio of the contribution attributed to the services performed within Taiwan, the domestic profit contribution ratio shall be determined based on the supporting documents provided.
- When the above Item 1 is not met and there is no sufficient document to fulfil the above Item 2, the deemed domestic profit contribution ratio is 50%. However, if the actual domestic profit contribution ratio assessed by the national taxation bureau is higher than 50%, the actual domestic profit contribution ratio shall be applied.
Example
If a company is a platform service provider and apply for the net profit ratio and domestic profit contribution ratio. In the case if the net profit ratio is 30% and domestic profit contribution ratio is 50%, the reduced withholding tax rate is calculated as below:
Reduced withholding tax rate = 20% * 30% * 50% = 3%
Conclusion
Foreign enterprises who provide Taiwan cross-border electronic services and receive service remuneration can reduce the effective withholding tax rate by applying relevant tax benefits. It will significantly reduce the tax burden when doing the international business with Taiwan clients.
PREMIA TNC provide the free tax consultant services in order to assist you in applying for tax reduction with the national tax bureau. Our professional experts will not only save your valuable time but also make the application procedure smoothly. Please feel free to contact with us!
FAQ
Q1: Must I get the approval from the Taiwan tax authority to enjoy the reduced withholding tax rate for cross-border electronic service revenue?
A: Yes, you must get the approval letter from the tax authority before adopting the reduced withholding tax rate.
Q2: Can a foreign individual apply for the reduced withholding tax rate for cross-border electronic service revenue?
A: No, the applicant must be a foreign business entity.
Q3: Can we apply for tax refund if the approval is received after the whole revenue amount had been withheld at 20%?
A: Yes, you can apply for tax refund within 10 years after the payment was made.
