Three Items of Note for Profit-seeking Enterprises Claiming Foreign Tax Credit
With the globalization of the economy, it has become more common for domestic profit-seeking enterprises to earn overseas income. According to Paragraph 2, Article 3 of the Income Tax Act, for any profit-seeking enterprise having its head office within the territory of the Republic of China (hereinafter “the R.O.C.”), profit-seeking enterprise income tax shall be levied on its total profit-seeking enterprise income derived within or without the territory of the R.O.C. If income tax has been paid on the income derived outside of the territory of the R.O.C. in accordance with the tax act of the source country of that income, for the avoidance of double taxation, such tax paid may be deducted from the amount of tax payable by the taxpayer at the time of filing final returns on the total profit-seeking enterprise income.
The National Taxation Bureau of the Southern Area, Ministry of Finance (hereinafter "the Bureau") stated that when declaring overseas income and calculating foreign tax credit, profit-seeking enterprises should pay attention to the following three points:
1. Amount of income derived outside of the territory of the R.O.C. shall be the whole overseas income after deducting related costs and expenses.
2. Foreign tax credit refers to income tax that has been paid on the income derived outside of the territory of the R.O.C. in accordance with the tax act of the source country of that income. Those shall be converted to New Taiwan Dollars at the exchange rate on the date of payment.
Such income tax paid may, upon presentation by the taxpayer of evidence of tax payment issued by the tax office of said source country for the same business year, be deducted from the amount of tax payable by the taxpayer at the time of filing final returns on the total profit-seeking enterprise income, to the extent that such deduction shall not exceed the amount of tax which, computed at the applicable domestic tax rate, is increased in consequence of inclusion of its income derived from abroad.
3. Where the income derived from the other Contracting State, which would otherwise have been exempted from tax or subject to a limited tax rate in that other State in accordance with the provisions of the agreement for the avoidance of double taxation with respect to taxes on income (hereinafter “DTA”), has not been applied for the exemption from or reduction of tax, the overpaid foreign tax on such income may not be claimed to credit against the tax payable in the R.O.C..
For instance, domestic Company A received royalties of NT$10 million from a company in Thailand in 2022, with withholding tax of NT$1.5 million, and the related costs of NT$2 million. When Company A filed the profit-seeking enterprise income tax return for 2022, the increased income tax payable due to inclusion of its income derived from abroad was NT$1.6 million [(NT$10 million - NT$2 million) × 20%].
Company A had paid withholding tax of NT$1.5 million in Thailand, and tax payment did not exceed the amount of tax increased in consequence of inclusion of income derived from abroad, which was NT$1.6 million. However, according to “Agreement Between the Taipei Economic and Trade Office in Thailand and the Thailand Trade and Economic Office in Taipei for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income,” the reduced tax rate for royalties is 10%.
Therefore, Company A could only claim NT$1 million (NT$10 million × 10%) as the foreign tax credit. As for the overpaid foreign tax of NT$0.5 million (NT$1.5 million - NT$1 million), Company A might apply to the tax authority in the R.O.C. for the issuance of a Certificate of Residence, and then apply with application documents required by tax authority in Thailand for the refund of the overpaid tax under the said Agreement.
The Bureau would like to remind profit-seeking enterprises that, for calculating the foreign tax credit, the taxable income derived abroad shall be the whole overseas income after the deduction of relevant costs and expenses. Besides, foreign tax credit shall not exceed the amount of tax which, computed at the applicable domestic tax rate, is increased in consequence of inclusion of the income derived from abroad. Also, profit-seeking enterprises shall make sure if they are eligible to apply for tax reduction or exemption under the DTA.
For any inquiries, please call our toll-free number 0800-000-321. It is our pleasure to serve you.
Press Release Contact: Mr. Chang
Profit-seeking Enterprise Income Tax Division
TEL: 06-2223111 ext.8053
Reference URL：https://www.mof.gov.tw/Eng/singlehtml/f48d641f159a4866b1d31c0916fbcc71?cntId=39ab9741d7924fcab0b9de86c24e2b37