Snapshot: advance pricing agreements in Taiwan

Taiwan has had an APA programme comprising unilateral APAs (UAPAs) and bilateral APAs (BAPAs) since 2004 and does not have a multilateral APA programme. The tax authority will allow a taxpayer to apply for a unilateral APA in cases where a bilateral APA could not be negotiated or finalised. Bilateral APAs can be converted to unilateral APAs, but unilateral APAs cannot be converted to bilateral APAs; however, there is a possibility of double taxation based on the agreement reached between the two countries.

The Ministry of Finance (MOF) is open to APAs and willing to optimise them as a means to prevent double taxation and base erosion and profit shifting. Because of the policy encouragement of the MOF and the active promotion of local tax authorities, the number of applications has been increasing since 2017.

According to the latest public research, from 2007 to 2020 there were 26 UAPA applications, among which there are 13 agreements successfully signed by taxpayers and tax authorities. On the other hand, from 2008 to 2020 there were 18 BAPA applications, among which there are four agreements reached between the two countries.

Describe the process for obtaining an APA, including a brief description of the submission requirements and any applicable user fees.

In accordance with article 23 of the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm’s-Length Transfer Pricing (TP Regulation), the qualifications and procedure for applying for APAs are as follows.

1. the total transaction value of the APAs applied for reaches NT$500 million or the annual transaction value reaches NT$200 million;
2. no significant tax evasion in the preceding three years; and
3. the required documents, including the transaction information and transfer pricing report, have been put in place.

Application deadline: the application shall be filed with the tax authority in accordance with the prescribed format before the end of the first fiscal year covered by the transactions referred to in item 1 above.

In Taiwan, there is a mechanism for convening preparatory meetings. Applicants may request a preparatory meeting by filing an application in writing with the tax authority three months before the end of the first fiscal year.

Per article 9 of the Directions Governing Application of Mutual Agreement Procedures of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income promulgated on 25 November 2020 (MAP Directions), if a taxpayer wishes to apply for cross-border BAPAs, the applicant should apply for the MAP and APAs with the competent authority (Department of International Fiscal Affairs) and the tax authority in Taiwan, respectively.

How long does it typically take to obtain a unilateral and a bilateral APA?

Generally, the entire process of applying for a UAPA may require six to 18 months, whereas an application for a BAPA may require two to three years, as stipulated in the double tax agreement (DTA) between Taiwan and the DTA partner country.

How many years can an APA cover prospectively? Are rollbacks available?

An APA will be valid for a maximum of five years. There is no rollback mechanism available.

What types of related-party transactions or issues can be covered by APAs?

All types of related-party transactions can be covered by APAs, including tangible and intangible property transfers, tangible and intangible property uses, related-party services, and financial transactions (including loans, prepayments, temporary payments, guarantees, payment extension or other arrangements).

Is the APA programme independent from the tax authority’s examination function? Is it independent from the competent authority staff that handle other double tax cases?

There is no separate department for the APA programme in Taiwan. However, the APA programme is in spirit independent of the tax authority’s review function. The personnel for the APA application and tax audit cannot overlap. The information provided for the APA application can only be used for the APA application and shall not be used for tax investigations or other events unrelated to the APA application.

Advantages and disadvantages

What are the key advantages and disadvantages to obtaining an APA with the tax authority?

The key advantages of APAs are minimising transfer pricing disputes, providing legal certainty and easing tax calculation.

The advantages of an APA can include:

• the tax authority not making any transfer pricing corrections on the covered transactions that were conducted in accordance with the agreed terms of the finalised APA;
• reducing the uncertainty and enhancing predictability arising from related-party transactions conducted in the future;
• providing certainty concerning the transfer pricing method to be applied to particular transactions;
• lowering the ongoing compliance costs and reporting requirements once the APA has been agreed;
• reducing the risk of double taxation, especially in the case of BAPAs;
• avoiding costly and time-consuming litigation or examinations; and
• the opportunity to establish or improve the relationship with the tax authority in a non-adversarial environment.

The disadvantages of an APA can include:

• external professional fees;
• close scrutiny of a transaction by the tax authority;
• significant time of key executives;
• no guarantee that the tax authority will agree terms that are acceptable to the taxpayer; and
• a large amount of information must be volunteered to the tax authority.

There are some factors that cause difficulties in reaching an agreement about APAs with the tax authority:

• lack of flexibility in negotiation regarding some issues in APA applications, such as the most appropriate transfer pricing method that is in line with the facts and circumstances surrounding the transactions proposed in the APA; and
• the taxpayer proposing an APA result that is lower than the actual or current performance.

The tax authority may decline to approve an APA in the following circumstances:

• the related-party transaction lacks economic motive;
• the economic substance of the related-party transaction is different from its form;
• the related-party transaction is undertaken with the purpose of minimising tax burden;
• the information, evidence or statement submitted by the taxpayer is untruthful or not in accordance with the actual conditions; and
• the information, evidence or statement requested by the tax authority for the purpose of material testing is not provided by the deadline in the written request.