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  • 2021-04-30


Transfer Pricing System in the Republic of China

§Article 43-1 of the Income Tax Act
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 Enterprise Merger and Acquisition 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 42 of the Enterprise Merger and Acquisition Act, 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.
§Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's Length Transfer Pricing
For determining arm's length pricing or profit of controlled transactions in a fair and reasonable way, the Ministry promulgated the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's Length Transfer Pricing on 28 December, 2004. These regulations provide the following information:
▶The types of transactions governed by these Regulations, include the following:
  Transfer of tangible assets;
  Use of tangible assets;
  Transfer of intangible assets;
  Use of intangible assets;
  Use of funds; and
  Other types of transactions prescribed by the MOF.
▶Arm's length principles to be followed by taxpayers and tax authorities: When profit-seeking enterprises and collection authorities-in-charge evaluate whether the result of a controlled transaction is at arm's length, or determine the arm's length result of a controlled transaction, the following principles shall be followed:
  The comparability principle;
  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.
▶Transfer pricing methods:
Presently the following transfer pricing methods can be used to evaluate whether the result of controlled transactions is at arm's length, or to determine their arm's length result:

The traditional transaction methods, including the comparable uncontrolled price method, the uncontrolled transaction method, the resale price method, and the cost-plus method;

The profit methods, including the comparable profit method and the profit split method.
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.
▶Requirement for disclosing information:
When filing income tax returns, profit-seeking enterprises, except for those which enjoy different tax treatments from their related parties and have a turnover amount 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 simple summary of controlled transactions, and other related information.
▶Requirement for preparing transfer pricing documentation:
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., commencing and including the taxable year 2005. However, in order to alleviate taxpayers' burden and compliance cost, the MOF established the safe harbor rule on 30 December, 2005(the rule was revised on 6 November 2008 and the revised rule applies to profit- seeking enterprises income tax returns starting from fiscal year 2008). The profit-seeking enterprises of which controlled transactions meet the requirements regulated under the safe harbor rule may replace their Transfer Pricing Report with other evidentiary documents which are able to sufficiently prove that the results of such transactions are at arm's length.


Release date:2019-08-01 Last updated:2021-01-05