In order to deal with the problem of transfer pricing and to realize fair and legitimate taxation in the field of controlled transactions made between a profit-seeking enterprise and its related parties, a provision relating to transfer pricing was enacted into Article 43-1 of the Income Tax Act (ITA) in 1971. In addition, similar transfer pricing provisions were included in Article 50 of the Financial Holding Company Act and Article 42 of the Business Mergers and Acquisitions Act in 2001 and 2002, respectively.
Article 43-1 of the ITA addresses the adjustment of income necessary for enterprises with non-arm's length transactions. This article authorizes collection authorities-in-charge to adjust the calculation of the income of an enterprise in order to accurately determine its taxable income and tax liability. However, this adjustment can only be done with the prior approval of the Ministry of Finance (MOF) and in pursuance of the arm's length principle. The application of Article 43-1 is invoked when a profit-seeking enterprise, with other enterprises within or outside the territory, has an affiliated relationship with, or is directly or indirectly owned or controlled by another enterprise, allocates revenue, cost, expenses, and profits and losses among its related businesses which are incompatible with the arm's length principle, and with the intention to avoid or reduce its income tax liabilities in the ROC.
Article 43-1 of the ITA governs transfer pricing activities both within domestic enterprises as well as multinational enterprises. Therefore, when collection authorities-in-charge perceive profit-seeking enterprises as having transactions with their related enterprises (i.e., controlled transactions), which are incompatible with the arm's length principle, the authorities may start the process of investigation and adjustment as long as the requirements prescribed in Article 43-1 of the ITA have been met. As for Article 50 of the Financial Holding Company Act and Article 47 of the Business Mergers and Acquisitions, the investigation and adjustment undertaken by collection authorities-in-charge in accordance with the arm's length principle shall apply to the transactions conducted by any company subject to those acts with its related enterprises, individuals or non-profit organizations (i.e., controlled transactions), and shall also apply to the transactions with its unrelated parties which are considered as non-arm's length.
For determining arm's length pricing or profit of controlled transactions in a fair and reasonable way, the MOF promulgated the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's Length Transfer Pricing on 28 December, 2004 and revised it on March 6, 2015. The amendment promulgated on November 13, 2017, which introduces the three-tiered transfer-pricing documentation (i.e., master file, transfer-pricing report, and country-by-country report), referred to the final report and recommendations of OECD BEPS Action 13. In order to be in accord with the latest international transfer pricing developments and maintain tax fairness, the amendment promulgated on December 28, 2020 adds and revises relevant regulations on intangible assets and other transfer pricing issues.
▷Use of tangible assets;
▷Transfer of intangible assets;
▷Use of intangible assets;
▷Use of funds; and
▷Other types of transactions prescribed by the MOF.
▷Adoption of the most applicable transfer pricing method;
▷Evaluation of separate transactions;
▷Use of current year data;
▷Adoption of an arm's length range;
▷Analysis of reasons for losses;
▷Separate evaluation of revenues and expenditures;
▷Other arm's length principles prescribed by the MOF.
▷The profit methods, including the comparable profit method and the profit split method; and
These regulations also define the applicable methods depending on the types of transaction. The profit-seeking enterprises undertaking controlled transactions are not required to check each transfer-pricing method to determine the one which is most appropriate; instead, they may select one or more of a choice of transfer-pricing methods to ascertain the most appropriate one for their circumstances based on the comparability or similarity between controlled transactions and their comparables, and the reliability of the adjustments made to eliminate the differences.
These regulations also define the applicable methods depending on the types of transaction. The profit-seeking enterprises undertaking controlled transactions are not required to check each transfer pricing method to determine the one which is most appropriate, instead, they may select one or more of a choice of transfer pricing methods to ascertain the most appropriate one for their circumstances based on the comparability or similarity between controlled transactions and their comparables, and the reliability of the adjustments made to eliminate the differences.
When filing income tax returns, profit-seeking enterprises, except for those which have their total amount of revenue and controlled transaction amount under the disclosing threshold established by the MOF, shall disclose information regarding their related parties, and the controlled transactions between the enterprises and their related parties. The enterprises which are required to disclose information shall fill out the relevant form including an organization chart, a brief description of the related parties, a summary of controlled transactions, and other related information.
From fiscal year 2017, in the case of a constituent entity of a multinational enterprise (MNE) group, the profit-seeking enterprise shall disclose information of the domestic entity appointed by the MNE group to submit the master file, the ultimate parent entity, the domestic entity appointed by the MNE group, or the surrogate parent entity to submit the country-by-country report, when filing income tax returns.
Where a profit-seeking enterprise that is resident in the ROC is a constituent entity of an MNE group, it shall prepare a master file when filing income tax returns and submit it to the local tax authority within one year after the end of the fiscal year. If there are two or more constituent entities of the same MNE group that are resident in the ROC, the MNE group may designate one of such constituent entities to submit the master file, and the other constituent entities of the MNE group that are resident in ROC may be exempt from submitting a master file.▷Transfer-pricing report (Local file)
When filing income tax returns, profit-seeking enterprises shall prepare a “transfer- pricing report” in regard to their controlled transactions and other related documents, such as a complete organization structure, summaries of controlled transactions, etc.; they shall also provide the transfer-pricing report and other related documents after receipt of a notice of investigation sent by the tax authorities, commencing with and including the taxable year 2005. After that, the MOF amended the contents of transfer-pricing reporting according to the BEPS Action 13 Report.▷Country-by-Country Report
Where a profit-seeking enterprise that is resident in the ROC is the ultimate parent entity of an MNE group, it shall prepare a country-by-country report of the current fiscal year in accordance with the prescribed format and submit the report to the tax authority within one year after the end of the fiscal year. Where an MNE group whose Ultimate Parent Entity (UPE) is not resident in the ROC and appoints a surrogate parent entity as a sole substitute for the ultimate parent entity to submit a country-by-country report, other profit-seeking entities of the MNE Group which are resident in the ROC shall not be required to submit a country-by-country report. If an MNE group whose ultimate parent entity or surrogate parent entity is not resident in the ROC, and the tax authority is unable to acquire the country-by-country report through any agreement that requires the exchange of country-by-country reports with the jurisdiction of the ultimate parent entity or surrogate parent entity, its constituent entity which is resident in the ROC shall submit the country-by-country report; where there are two or more constituent entities of the MNE Group that are resident in the ROC, the MNE Group may designate one of such constituent entities to submit the country-by-country report.