Profit-Seeking Enterprises Should Pay Attention to Any Applicable Tax Treaty before Filing Their Foreign Tax Credit
National Taxation Bureau of Taipei (NTBT), Ministry of Finance, stated that a profit-seeking enterprise whose head office is within the territory of the ROC should pay its income tax on a global basis. In this case, it is allowed to declare the foreign tax credits in regards to their foreign-source income. However, attention should be paid to whether this foreign-source income is deemed as non-taxable income in the foreign-source country in accordance with the relevant tax treaty.
NTBT pointed out that Paragraph 2, Article 3 of the Income Tax Act stipulates that a profit-seeking enterprise having its head office within our country shall pay its income tax on the income derived within and without the territory of the ROC. However, for the income derived abroad, the income tax paid under the tax laws of the foreign country may be fully deducted only if the tax paid does not exceed the amount of tax which, computed at the domestic applicable tax rate, is increased in consequence of inclusion of its income derived from abroad. Moreover, the above-mentioned tax credits are not allowed to be deducted if the relevant foreign-source income is subject to Paragraph 2, Article 36 of the Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income, in which income should be firstly applied to an applicable tax treaty as non-taxable or tax-relief income in the foreign-source country, prior to filing any tax credit in our country.
NTBT offers as an example a case of Company A, with its head office in our country, as below. In 2017, Company A filed NTD$6 million for overseas commission income earned in Vietnam, and relevant foreign tax credit of 1 million in its ROC’s annual tax returns. After inspection, NTBT found that the nature of the income was business profit in Vietnam, and Company A had no permanent establishment in Vietnam. According to Article 7 of the Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income between the Taipei Economic and Cultural Office in Vietnam and the Vietnam Economic and Culture Office in Taipei, only our country has the right to levy the business profits. That is, the commission income earned in Vietnam is not taxable in Vietnam. If Company A has paid any relevant Vietnamese income tax, it should file with the Vietnamese tax authority for a tax refund under Article 7 of the aforementioned Agreement, and therefore the overpaid income tax in Vietnam is not allowed to be declared as a tax credit in the income tax returns in our country.
NTBT calls for profit-seeking enterprises to pay attention to possible tax treaty application before filing relevant tax credits for overseas income.
(Contact person: Revenue Assessor Wu of the First Legal Affairs Division; Telephone: 2311-3711 ext.1819)
Reference URL：https://www.mof.gov.tw/Eng/singlehtml/f48d641f159a4866b1d31c0916fbcc71?cntId=ef1dd9e92ed14cf0b5085cf41c62fe23