Taiwan's Ministry of Finance issued a notice on 3 August 2022 that provides guidance on limits for claiming foreign tax credits.
The Amount of Foreign Tax Credit Shall Not Exceed the Limitation
The National Taxation Bureau of the Southern Area, Ministry of Finance expressed that the profit-seeking enterprise with its head office in the territory of the Republic of China (R.O.C.) shall file the profit-seeking enterprise income tax return for all its income derived within or without the territory of the R.O.C. If the income tax has been levied on the foreign source income by the source country of that income, such tax paid shall be deducted from the amount of tax payable within the limitation. In addition to the aforesaid limitation, the overpaid foreign tax credit on the income that has not been applied for Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income (hereinafter "the DTA") shall not be claimed to credit against the tax payable in the R.O.C.
The Bureau further explained that 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 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.; provided, that in case 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, 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, 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. In accordance with Paragraph 2, Article 36 of the DTA, where the income derived from the other Contracting State subjecting to the exemption or the limited tax rate in that Contracting State in accordance with the provisions of the DTA, but no application has been made for the exemption or the reduction of such income, the overpaid foreign tax credit on such income may not be claimed to offset the tax payable in the R.O.C.
The Bureau summarized the main points about the limited amount of foreign tax credit. The details are as follows:
For example, a domestic Company A received royalties of NT$9 million from Thailand in 2020 and NT$1.35 million tax was withheld on such income. As a result of relevant costs and expenses of NT$3 million, the taxable income derived from abroad was NT$6 million (NT$9 million－NT$3 million). Company A declared total profit-seeking enterprise income of NT$14 million (Domestic income NT$8 million + Abroad income NT$6 million) when filing profit-seeking enterprise income tax return of 2020. The increase of NT$1.2 million (Total income NT$14 million × Tax rate 20%－Domestic income NT$8 million × Tax rate 20%) in income tax payable results from the inclusion of its income derived from abroad. However, the limited tax rate of such royalties shall be 10%, or NT$0.9 million of tax payable (NT$9 million × 10%), 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." Therefore, the amount of foreign tax credit allowed to be declared by Company A under the said Agreement was just NT$0.9 million. As for the overpaid foreign tax of NT$0.45 million (NT$1.35 million－NT$0.9 million), Company A shall prepare the Certificate of Residence issued by the tax collection authority of the R.O.C. and relevant application documents stipulated by the tax collection authority of Thailand, then apply to the tax collection authority of Thailand for refund of overpaid tax under the said Agreement.
The Bureau would like to remind domestic profit-seeking enterprises that taxable income derived outside of the territory of the R.O.C. shall be determined first after the deduction of relevant costs and expenses from full income derived from abroad, then limited amount of foreign tax credit could be computed at the applicable domestic applicable tax rate. In order to maintain their rights and interests, profit-seeking enterprises should make sure if they are eligible to apply for tax reduction and exemption under the DTA.