Foreign Software Industry Taxation in Taiwan
With the growth of digitalized economic activities, to establish a “permanent entity?at the income incurred country seems not necessarily. For software industry, it is much convenient and accessible to provide their service online cross-country, so the taxation occurred on which country is becomes more unrecognizable.
For current service models in software industry, the models can basically be divided into the following 3 types from the history of development:
(1) Sales of Standardized Software
(2) Sales of Non-standardized Software (Customized)
(3) Online Model: SAAS, Software as a Services
In the circumstance of being a foreign software service provider, it is suggested to understand the definition of business conduct in Taiwan and the duty of taxation.
- Sales of Standardized Software
For physical sales of software without customized software service, the income is counted as general international trading recognition. That is, the income from customers solely be levied by the head office (the country of incorporation).
The definition of standardized software, shrink wrap software, packaged software:
A: The definition of “Standardized Software?is the software, which is suitable for public users, instead of targeting for particular users, can sell to publics directly. Buyers are not allowed to proceed any copy, revision, reverse engineering, decompilation, or disassembly after purchasing single or particular quantities of software and app.
B: The definition of “Shrink Wrap Software?is the owner of software makes an authorized agreement by his/her own single party and prints this agreement on the physical package (such as outer box) for the purpose of authorization to the users. If users agree the terms of agreement, it is allowed to open the package and use the software. The typical shrink wrap software doesn’t need to be revised for publics. It is counted as standardized software.
C. The definition of “Packaged Software?is the sellers produce the software in bulk quantities, standardization, normalization procedure for users?convenience, so packaged software is shrunk wrap software usually, instead of customized software.
- Non-standardized software (Customized)
From the view of taxation entity in Taiwan, the type of sales is counted as “Income from royalty? When your Taiwan clients paid this amount of income to your foreign company, the client is required to deduct and pay total income in 20% withholding rate to Taiwan government in advance. That is, you may only receive the 80% of transaction price, so it shall be noted if the taxes are responsible for the buyer upon sealing a contract.
- Online Model: SAAS, Software as a Services
According to the new policies for cross-border e-commerce sellers promulgated by Ministry of Finance, the computation of tax payables can be applied to the net profit ratio and domestic profit contribution ratio in advance. In other words, the net profit ratio and whole business activities in Taiwan domestic profit contribution ratio are taken into consideration. The income will be calculated by the aforementioned factors first and multiplied in 20% later, instead of calculating the amount of withholding taxes by the total amount of income to multiply 20% (100*20%). In the condition of net profit ratio is 30%, following 50% of domestic profit contribution ratio, the amount of withholding taxes is decreased from 20% into 3% after multiplying 20% (100*20%*30%*50%).
The corresponsive terms for the definition as below:
(1) The services used are downloaded via the Internet or other electronic tools and saved to computers or mobile devices (such as smartphone, tablet computer, etc.) for use.
(2) The services are used online or via other electronic tools without being saved into any devices, including services used in digital form, like online games, advertisements, audio-visual browsing, voice frequency broadcasting, information contents (such as movies, soap operas, music, etc.) and interactive communications.
(3) Other services used are supplied through the Internet or other electronic tools; for example, the services are supplied through the online platforms set up by an offshore electronic business entity and used at a physical location.
(4) A foreign profit-seeking enterprise "offering platform electronic services" (hereafter referred to as "foreign platform operator") establishes platforms on the Internet (online virtual stores) for both domestic and/or overseas buyers and sellers to conduct transactions via the Internet or other electronic devices as well as collect service fees from platform users.
(5) Foreign non-selling electronic services provider means the profit-seeking enterprise offers the platform services excluding electronic services.
Sales models including:
(1) Establish website and sell electronic services to charge the sales price from buyers.
(2) Charge sales price from buyers through oversea electronic service platforms and pay the processing fees to oversea platforms from one of the mutual parties.
(3) Charge sales price from buyers through oversea electronic service platforms directly. The platforms will charge the processing fees and return the rest of amount to the oversea electronic service providers.
In conclusion, if foreign e-commerce traders (foreign companies) expect to fully exempt the related taxes, it is possible, if the selling software is standardized software, the evidence to prove this software is all made by “foreign countries?as well as this software is “single version?instead of online version (to prove which is not SAAS model) without customized services. In accordance with our experience, the definition of “Standardized Software?is usually challenged and easily verified by Taxation Bureau. On the other hand, in the condition that the form of authorization applied to automatic authorization, “non-one-time permanent authorization? it may be deemed as “Non-standardized Software?and royalty to levy the income tax in Taiwan.
In the circumstance that the foreign e-commerce traders (foreign companies) are affiliated with SAAS electronic services, the net profit ratio and domestic profit contribution ratio for electronic services income shall be applied to. In accordance with our experience, if the e-commerce traders (foreign companies) are affiliated with SAAS electronic services and applied to net profit ratio in 30% and domestic profit contribution ratio in 50%, the information requested by Taxation Bureau would be much simple and easy as well as the verification period would accelerate.
The abovementioned information is collected and sorted out as following table:
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Commercial Mode
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Standardized Software Sales
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SAAS, Software as a Services
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Non-Standardized Software Sales (Customized)
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Difficulty Degree
(Verification Period)
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Difficult
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Average
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Easy
|
|
Nature of Income
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International Trade Income
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Electronic Service Income
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Royalty Income
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|
Tax Obligation in Taiwan
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N/A
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Depend on domestic profit contribution ratio
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Yes
|
|
Possible Ratio
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0%
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20%*30%*50%=3%
- Countries with taxation agreement: 0%
(Exemption from enterprise profits)
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-Countries without taxation agreement: 20%
- Countries with taxation agreement: 10% usually
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