A draft amendment to the Income Tax Act was approved today by the Executive Yuan Council and will be sent to the Legislature for deliberation.
According to the Ministry of Finance (MOF), this amendment aims to follow the international trends of establishing controlled foreign corporation (CFC) rules to resist tax avoidance and harmonizing national accounting rules through the adoption of International Financial Reporting Standards (IFRSs).
The MOF cited the following reasons for the amendment:
1. Beginning next year, Taiwan's listed, over-the-counter and emerging companies will use IFRSs to manage their accounting.
2. The January 4, 2012 amendment to Article 14, Paragraph 2 of the Securities and Exchange Act stipulates that the preparation of publicly traded companies' financial statements is no longer prescribed by Chapters IV, VI, and VII of the Business Entity Accounting Act.
3. Standards for the amortization of intangible assets must be improved.
4. Taiwan must follow the international trend toward establishing CFC rules and requiring a place of effective management to confirm the profit-seeking enterprise's resident status.
The main points of the amendment are as follows:
1. Unless otherwise prescribed by this law, other laws and provisions established by the MOF or the Ministry of Economic Affairs, businesses can only recognize realized revenues, costs, expenses or losses and must state specific ways of realizing these amounts. (Article 22)
2. Profit-seeking enterprises should recognize costs, expenses or losses only when these are realized; those that were recognized but not realized as of this amendment's enactment date should be classified as revenues for this fiscal year, and their tax amount payable shall be paid over the next five years according to an annual average. (Article 24)
3. To prevent businesses from avoiding taxes by shifting their earnings to affiliated companies in tax havens and retaining them there, the widely accepted CFC rules are adopted with a specific enactment date set up: starting from 2015, enterprises that hold a stake in an affiliated foreign company are required to recognize relevant investment income using the equity method. Earnings distributed by the affiliated company are exempt from double income taxation. (Article 43-3)
4. To prevent profit-seeking enterprises from setting up companies in tax havens for the purpose of tax avoidance, from 2015 onwards, businesses whose place of effective management is within the ROC are subject to this country's business income taxes. (Article 43-4)
5. Other legal rights and goodwill are added to the list of intangible assets eligible for amortization over a prescribed number of years; identifiable intangible assets with definite financial value valid for a certain number of years may be amortized upon the Ministry of Finance's approval. (Article 60)
6. From 2013 onwards, asset revaluation regulations do not apply to businesses with financial statements based on the principles of the Securities and Exchange Act or the Insurance Act. (Article 61)
7. From 2013 onwards, businesses with financial statements based on the principles of the Securities and Exchange Act or the Insurance Act should adopt their aggregate balance of undistributed earnings as defined by these laws as the denominator of their tax deduction ratio. (Article 66-6)
8. From 2013 onwards, businesses whose financial statements are based on the principles of the Securities and Exchange Act or the Insurance Act should adopt a specific period's net profit after tax as defined by these laws as their undistributed net profit after tax. (Article 66-9)