In general, transfer pricing audit and request for contemporaneous transfer pricing documentation is quite common in Taiwan. Under the following circumstances a transfer pricing investigation will likely be initiated:
- The gross profit ratio, operating profit ratio and net income before tax ratio are below the average of enterprises in the same industry
- The worldwide group of the enterprise reports profits while the enterprise reports a loss or lower than average profit in their industry
- The enterprise reports abnormal profit fluctuations in the current year and previous 2 years
- The enterprise fails to disclose related party transactions in accordance with disclosure requirements
- The enterprise fails to determine if its related party transactions are within the arm’s length principle and fails to prepare evidencing documentation
- Prices paid to an enterprise by related parties are not according to arm's length principles
- The enterprise does not provide a transfer pricing report upon request of the tax authorities
- The enterprise has been subject to transfer pricing audit in previous years
- The enterprise has transactions with related parties in tax havens or low tax jurisdictions
- The enterprise has transactions with related parties that enjoy tax incentives
- Any other transaction that fail to meet the arm’s length principles
If an enterprise is suspected of conducting transactions that are not in line with the arm's length principle, the tax authorities may begin an investigation or in more serious cases an audit. Under an investigation, the tax authorities will request the contemporaneous transfer pricing documentation outlined in the aforementioned documentation requirements and may make requests for additional documentation. Procedures for investigation/audit of transfer pricing issues are in line with the general investigation/audit procedures covered in Sec. 14.4.
An enterprise can contest the results of an investigation or audit under the objection and appeals process covered in Sec. 14.7.
The statute of limitations for assessment of transfer pricing adjustment is five years if the tax return was timely filed, and seven years if not, or the enterprise is suspected of tax fraud or avoidance. Therefore, transfer pricing documentation should be kept for at least 7 years.
The tax authorities can adjust the income of taxpayers whose controlled transactions fall outside acceptable ranges and penalties may be imposed for failure to comply with the arm’s length principle and the documentation requirements. Applicable penalties are covered in Sec. 14.5.
If an adjustment is made, a corresponding adjustment will be made on the taxable income of the counter party(s) in the non-compliant transactions if they are subject to Taiwan income tax. In the case that the counter party is a non-resident located in a jurisdiction with which Taiwan has a DTA, the Taiwan tax authority may negotiate with the foreign tax authority for corresponding adjustment.
Taiwan allows for advanced pricing agreements for enterprises that meet the following conditions:
- The total amount of the transactions applied for is at least TWD 1 billion, or the annual amount of transaction is at least TWD 500 million
- The enterprise has not committed any tax evasion in the past three years.
- All transfer pricing documentation required for the APA application is submitted within the prescribed time frame
If an enterprise is eligible to apply for an APA, the application must be made before the end of the fiscal year which is covered by the APA. The Taiwan tax authorities will notify the enterprise within 30 days if the application is accepted and will request additional documentation which must be provided within 30 days. The deadline can be extended by an additional 30 days if applied for and approved.
The application will be reviewed by the tax authorities and a decision for rejection or approval will typically be made within a year, although that may be extended for up to an additional year. There is no limit concerning bilateral APAs.
If an APA is in place, an enterprise’s tax returns will not be subject to transfer pricing audit except for the following circumstances:
- An enterprise doesn't provide an annual report regarding the implementation of the APA
- Contemporaneous transfer pricing documentation is not kept
- The provisions set out in the APA are not followed
- The enterprise provides false information or otherwise conducts wrongful acts