Following the implementation of the VAT regime on e-services provided by foreign e-services providers in 2016, the Ministry of Finance has recently promulgated the relevant income tax regime. Similar to the VAT regime, the income tax regime focuses on the revenue received by foreign e-services providers from their e-services provided to onshore Taiwan customers.

The main points of the income tax regime are as follows:
1. What types of transactions are addressed under the Income tax regime?
Similar to the VAT regime, the following types of activities are addressed under the income tax regime as well: “Sale of e-services” and “Services that are utilized with specified physical location within Taiwan”.
For “sale of e-services”, it refers to either: services that are provided and utilized through internet download or other electronic transmission to computer equipment or mobile devices, or services that are provided and utilized online or other electronic means (e.g. online game, online ads, and streaming services).
While “services that are utilized with specified physical location within Taiwan” refers to: services that are provided through the internet or via other electronic means and utilized at a physical place such as hotel/lodging booking , car rental services.

2. The determination and calculation of Taiwan sourced income
In accordance with the Taiwan income tax rule, foreign entities would only be subject to Taiwan income tax on income derived that are Taiwan sourced.
Under the context of the income tax regime on e-services, the following types of income are considered as Taiwan sourced:

a. For “sale of e-services” type of transaction, income derived from services that are provided entirely offshore but requires onshore individual or enterprise's assistance to complete the provision.
b. For ”services that are utilized with specified physical location within Taiwan”: if the location where the services is utilized is onshore.
In terms of the calculation of the taxable income, the income tax regime allows the foreign e-services providers to claim actual costs and expenses incurred or adopt a deemed profit ratio. However, the use of deemed profit ratio would require pre-approval from the authority.
In addition, the tax regime also allows the taxpayers to claim a contribution ratio, which determines how much of revenue derived is attributable to onshore activities and offshore activities. Similar to the utilization of deemed profit ratio, the use of contribution ratio would also require pre-approval from the tax authority.

3.When will the income tax regime become effective and what period will be covered?
The income tax regime would be effective starting from January 1st, 2017, and the first self-reporting would need to be made during the month of May 2018 and before May 31st, 2018.
For your ease of understanding, an illustration of the flow of the income tax regime is illustrated below.

1. If foreign e-service providers (including both platform providers and non-platform providers) wishes to adopt deemed profit ratio and contribution ratio in the calculation of their taxable income, pre-approval from the tax authority would be required.

2. While platform providers may apply with the tax authority and be subject to withholding based on the net amount of the payment they received, e.g. the relevant transaction/services fee which they charge to the actual e-service providers, however, under such scenario the platform providers would need to make withholding on the portion of the payment (received from the Taiwan services purchasers) which they pay to the actual e-services providers, and pay the withholding tax amount collected to the tax authority.

3. The utilization of the deemed profit ratio and contribution ratio will only be applied to income received starting from 2017. Nonetheless, for income received prior to and including 2016, the foreign e-service may still claim actual costs and expenses incurred.

4. Foreign e-service providers may apply for refund of any excess tax payment arising under the implementation of the e-service income tax regime, within 5 years after the date with the payment is received.

Lynn Chen
Partner, Tax department