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6.5. Deductions

Necessary and ordinary expenses or losses incurred in the course of business are deductible, provided they are supported by adequate documentation and conform to regular business practices. Non-conforming claims may result in the adjustment of taxable income based on profit rates of similar businesses by the Taiwan tax authority.

Specific deductible items

The following are deductible when calculating Taiwan corporate income tax liability.

Operations Expenses

General expense incurred in the course of operating a business, such as rent expenses, office supplies, traveling expenses, etc. are deductible.

Interest Expense

Interest expenses incurred on loans necessary for conducting business operations is deductible in the period the expense is incurred or paid. Interest expense is only deductible when a loan is obtained for reasonable and necessary cases. In general, a reasonable and necessary case is when current funds are not sufficient to cover business operations. If a loan is not deemed necessary, the related interest expenditure will not be considered as a deductible expense.

Further, a number of restrictions apply, including the following:

  • For Interest on borrowing from non-financial institutions that exceeds rates prescribed by the Taiwan tax authority, the excess expense will not be deductible
  • When an enterprise both borrows and loans funds, any difference between interest paid and interest received will not be deductible
  • If the interest expense is on an inter-company loan, deductible interest expense is limited to a debt to equity ratio of 3:1
  • Interest on capital loans is not deductible
  • These restrictions generally do not apply to banks, insurance companies, financial holding companies, etc.

Inventory Expense

Inventory expense may be stated at the lower of cost or market value. Cost of goods sold may be determined using the following methods:

  • First-in, first-out (FIFO)
  • Last in first out (LIFO)
  • Specific Identification
  • Weighted average
  • Moving Average

Two different methods cannot be used in a single fiscal year. In addition, if the LIFO method is used, inventories cannot be valued at the lower of cost or market value.

Bad and doubtful debts

Bad and doubtful debts are tax deductible as losses if the debt becomes uncollectable due to insolvency, bankruptcy, etc. of the debtor, or neither principal nor interest has been paid on the debt for two or more years despite request for payment.

The allowance for bad debt is limited to 1% of the enterprise's balance of outstanding trade accounts and notes receivable at year end. Any bad or doubtful debt that has been allowed a deduction but ultimately recovered will be treated as taxable profits of the year in which it is recovered.

Research & Development

Expenditure incurred on research and development for the improvement of manufacturing processes or techniques or to develop new products or technologies is deductible

Foreign Currency Assets and Liabilities

When calculating taxable income for Taiwan, assets and liabilities denominated in non-Taiwan currency must be valued at the exchange rate on the closing day of the accounting period. Only foreign exchange gains/losses that are realized can be included in taxable income.

Employee Remuneration

Employee remuneration is deductible when calculating corporate income tax liability. Deductible remuneration can include salaries, wages, meal and lodging allowances, bonuses, covering of business related expenses, and other types of employee compensation.

Insurance & Pension Expense

Contributions made for employees' labor insurance, health insurance, and pensions are deductible. Contributions made for pension cannot exceed 15% of the enterprise annual payroll.

Payments for Directors

Director fees or salaries are deductible as long as the payments are prescribed under the enterprise's articles of incorporation or under a resolution of a shareholder's meeting.

Dividend Payments

Dividend payments made to shareholders are not tax deductible.

Royalty Payments

Royalty payments are generally deductible based on the contractually agreed amount. However, if payments are deemed non-compliant with the arm's length principle or not in accordance with ordinary business practices, they will be deemed non-deductible.

Service and Management Fee Payments

Service and management fee payments are typically deductible, but will be subject to transfer pricing rules if such fees are paid between related parties. However, management fees paid by a Taiwan branch to its head office are still deductible even if the head office allocates the expense to their branch with no markup, as long as the head office provides real operational support.

Deduction for head-office expenses

Deduction for management expenses will be allowed to the branch after verification and approval, if following requirements are met:

  • The foreign head office is not open to the public but has an operating department which shares management expenses with other affiliates within the group.
  • The apportionment of the head office’s management expenses is not included in the Taiwan branch’s purchasing cost, and funding is made available to the Taiwan branch for its working capital needs without any finance charge.
  • The apportionment of management expenses is calculated on the basis of each income share of the head office and branch divided by the total company’s revenue.

Entertainment Costs

Entertainment expenses incurred in the course of business are deductible. However, the deductible amount is limited to certain caps defined by Taiwan tax law. The caps are based on prescribed rates applied to either the value of an enterprise's purchases in a year, their sales, their yearly freight income, or their business income. The rates range from 0.05% to 1.2%.

Non-Deductible Items

The following are not deductible when calculating Taiwan corporate income tax liability.

  • Expenses and losses that are not incurred in the course of business or do not have adequate supporting documents
  • Fines and penalties paid for late reporting, non-reporting and late payment of tax. As per clarification issued by the tax authorities, interest on outstanding tax payments due may be categorized as a tax deductible expense, while the penalties for late payments, late returns, incorrect returns, etc. cannot be regarded as tax deductible.
  • Certain interest payments (covered above under interest expense)
  • Expenses incurred for expansion, replacement, improvement or repair of tangible assets that increases the value of the asset and cannot be exhausted within two years are considered an increment in capital and not deductible
  • The portion of any loss or expense incurred for damage due to force majeure that has been indemnified by insurance