Recent Development of Advance Pricing Arrangement in Taiwan

Since the implementation of the transfer pricing guidelines in 2004, the tax authorities have entered into approximately ten Advance Pricing Arrangements (APA). The total number of APAs is low in the last ten years in comparison with that of other countries. To promote APAs, Taiwan’s Ministry of Finance (MOF) amended the transfer pricing guidelines on 6 March 2015 to reduce the threshold of APA application and include the provision of pre-filing meeting. This article analyzes the criteria of application, documentation requirements, pre-filing meeting, exemption of transfer pricing audits as well as the pros and cons of APA.

Criteria of APA Application

Prior to the amendment of transfer pricing guidelines on 6 March 2015, the criteria of APA application is as follow:

  • The total amount of the transactions, being applied for APA, is not less than NT$1 billion or the annual amount of such transactions is not less than NT$500 million;
  • No significant tax evasions were committed in the past three years;
  • Have prepared the documents required under Article 24 of the transfer pricing guidelines and completed the transfer pricing reports; and
  • Other criteria prescribed by the MOF.

In the amendment, the threshold of APA application is reduced as follows:

The total amount of the transactions, being applied for APA, is not less than NT$500 million or the annual amount of such transactions is not less than NT$200 million;

Documentation Requirements

To apply for an APA, the following documents and reports shall be provided:

  • A comprehensive business overview, including history, main business activities, and an analysis of economic, legal and other factors that affect transfer pricing.
  • Global organizational structure of the group.
  • Relevant information of the related parties involved in the transactions, including an analysis report covering the following six aspects: operation, legal, tax, finance, accounting, and economy, as well as the income tax returns and financial statements for the three years prior to the application.
  • Relevant information concerning the transaction applying for an APA:
  • Name of the related parties involved in the transaction and their relationship with the Applicant;
  • Type, flow, date, object, amount, price, and contractual terms of the transaction as well as the use of the property or services transferred. The use shall include the descriptions regarding whether the property is transferred for sale or use and its benefits; and
  • The time period covered by the related transaction.

 

  • The Transfer Pricing reports shall, in addition to the documentation required under Article 22 of the transfer pricing guidelines, specify the following information:
  • Assumptions affecting the pricing;
  • In case of adopting a transfer pricing method not provided under the transfer pricing guidelines, a special analysis along with supporting evidentiary documents explaining the reasons why such method is more suitable than the other methods as provided and why it can achieve an arm’s length result.
  • Important financial accounting policies that have a direct impact on the pricing methods.
  • The material differences in financial accounting and tax laws between the countries involved in the transaction and Taiwan provided that such differences would have an impact on the adoption of arm’s length m

 

  • The pricing information of the same or similar transactions conducted by the applicant and other related parties.
  • The annual forecast of the operation results and business plans within the effective period of the APA.
  • Upon filing the application, the explanations or conclusions on issues related to the adoption of the transfer pricing method that have occurred or are currently under discussion with local or foreign competent authorities or APA that have been approved.
  • Whether there are issues related to potential double taxation and whether bilateral or multilateral APAs of tax treaty countries are involved.
  • Other information as requested by the tax authorities.

The applicant or its agent shall attach a table of contents and index when filing the documents and reports in accordance with the preceding paragraph. If the information to be produced is in a foreign language, a Chinese translation shall also be attached, unless otherwise approved by the tax authorities to provide an English version.

Pre-Filing Meeting

Prior to the filing of an APA, an enterprise is entitled to apply for a pre-filing meeting with the tax authority three months before the fiscal year end by providing the following information for determination of APA application:

  • Period to be covered by the arrangement
  • Global organizational structure of the group
  • Main business activities of the enterprise
  • Related parties involved, the controlled transactions, and the descriptions of functions and risks
  • Reason for the application
  • Other relevant information

Exemption of Transfer Pricing Audits

In accordance with Tax Letter Ruling No. 9404540920, under an APA, a tax return is not subject to a transfer pricing audit except when:

  • The enterprise fails to provide the tax authority with the annual report regarding the implementation of the APA.
  • The enterprise fails to keep the relevant documents in accordance with transfer pricing guidelines.
  • The enterprise fails to follow the provisions of the APA.
  • The enterprise conceals material facts, provides false information or conducts wrongful acts.

Pros and Cons of APA

The pros and cons of APA are as follow:

Pros:

  • No need to prepare transfer pricing reports but the annual APA implementation reports within the valid period (three to five years). Costs for tax compliance can therefore be reduced significantly.
  • Avoid tremendous time cost on transfer pricing disputes.
  • Mitigate or avoid the risk of double taxation and ensure maximization of corporate profits.
  • Enhance certainty on taxpayers’ future tax liabilities within the valid period of APA.
  • Build up a decent relationship with the tax authority and enhance the corporate image.

Cons:

  • Considerable time costs for first time application.
  • More detailed and specific information about industry and taxpayer will be requested during the APA review process.

Implication

APA is the best tool for the risk management of transfer pricing for multinational companies (“MNCs”). An arm’s length result agreed in advance can not only enhance the certainty of tax liability, but mitigate the risk of TP audit and avoid the time cost when a dispute arises.

MNCs are suggested to apply for the APA where applicable and suitable. In addition, MNCs are recommended to discuss significant TP issues as well as expectations with the tax authorities in the pre-filing meetings to ensure that the APA application can be completed with efficiency and effectiveness.

 

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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George Chou

George Chou

Partner at Ernst & Young

Email: [email protected]
Tel: +886 2 2757 8888 ext 2735

George Chou is a member of the transfer pricing practice of the Ernst & Young global member firm in Taiwan. He joined Ernst & Young in April 1994. He has extensive experience in both preparing transfer pricing documentation and assisting with transfer pricing audit defence cases. He is also experienced in tax compliance, tax advisory and transaction tax, as well as customs and international trade.

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About George Chou

Email: [email protected]
Tel: +886 2 2757 8888 ext 2735
George Chou is a member of the transfer pricing practice of the Ernst & Young global member firm in Taiwan. He joined Ernst & Young in April 1994. He has extensive experience in both preparing transfer pricing documentation and assisting with transfer pricing audit defence cases. He is also experienced in tax compliance, tax advisory and transaction tax, as well as customs and international trade.