Is it tax deductable –
allocation of expense
of parent company?
Taiwan Subsidiary or Branch Office recognized the administration expenditure or other cost incurred and allocated by its parent company that is located in an offshore
Jurisdiction other than Taiwan|
Supreme Administrative Court Ruling 2006/11/9 95(PAN)1xx6
Filing #: Supreme Administrative Court Ruling 2006/11/9 95(PAN)1xx6
Cause of action: Profit-seeking Enterprise Income Tax
Appellant: BVI xxx Clothing Limited Taiwan
Represented by: Chung XX
Agent ad litem: Yih XX
Appellee: National Taxation Bureau of Taipei, Ministry of Finance
Represented by: Hsu XX
Due to the disagreement of Profit-seeking Enterprise Income Tax filing between parties, Appellant filed an appeal against the Ruling 200x/x/3 High Administrative Court of Taipei 9x(SU)3xx8. The court ruled as following:
Appellant pays for court costs and expenses.
Statement of Reasoning
1. In Appellant’s 1998 Profit-seeking Enterprise Income Tax filing, it listed NT$15,556,569 as other expenses, where NT$5,787,018 was claimed as shared foreign business expenses. Without the detailed internal organization chart of the offshore headquarter, itemized ex-penses checklist with verifiable receipts, Appellee had to exclude all but NT$9,769,551 due to the failure of proving its validity. Appellant, who disagreed but failed the re-examination and administrative appeal, later filed the administrative litigation.
2. Appellant claimed from the previous trial: Appellant was a branch of its offshore parent company, BVI xxx Clothing International Limited, who did not manage its own business op-eration which was entirely outsourced to Walton Consulting in Hong Kong, an independent company not controlled by BVI xxx Clothing International Limited. The disputed amount was the fees paid to Walton Consulting by its parent company. According to Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax (as the Regulation below) Article 70, Appellant was entitled by law to share these expenses. Appellee’s disapproval of listing the expenses was against the law. As such, Appellant was seeking for a favorable ruling of revoking the original decision and appeal.
3 …… 5
6. The Regulation Article 70 I&II states?Branches of a foreign company inside ROC who fit for the following conditions are qualified to share business expenses of its offshore parent company.
(1) Both companies share the same capital.
(2) If the parent company does not open its business to public, its operation division and branches can share non-operation business expenses of the parent company.
(3) In order to share business expenses, the branches should not embedded them in the cost of the goods sold or charge interest/rent for the working capital and assets the parent company provides.??The calculation of shared business expenses should be based on the percentage of the revenues for each divi-sion or branch. Under special circumstances, the company can apply for other sharing plan from Tax Authority. Branches, who listed shared foreign business expenses in its fiscal tax filing, must provide a local CPA certified financial report of the offshore parent company with total revenues and business expenses shown. The report has to be notarized by ROC Embassy or other government approved agencies or the proof from the local Tax Authority. For those adopting other sharing plan the report must state what to share, how to calcu-late, and how much each division and branch share.? According to the article, the compa-ny who listed shared foreign business expenses should be responsible for presenting the information to Tax Authority for validation. In Appellant’s 1998 Profit-seeking Enterprise Income Tax filing, it listed NT$5,787,018 as shared foreign business expenses. Appellee ex-cluded them all. Appellant filed the administrative litigation and claimed that BVI xxx Clothing International Limited who did not manage its business operation, which was entirely outsourced to Walton Consulting in Hong Kong, an independent company not controlled by BVI xxx Clothing International Limited. The amount of fees paid to Walton Consulting by its offshore parent company was indeed the necessary business expenses and could be shared according to the Regulation Article 70. The court found that the CPA certified financial report supplied by Appellant was issued by Ernst & Young in Hong Kong, not by CPAs of BVI where its parent company located and neither the proof from BVI Tax Authority, which does not comply with the Regulation Article 70. In addition Appellant did not present the valid receipts for approval. The original decision was justifiable, which there is no applicable of the Regulation Article 70. Since Appellant presented two different internal organization charts, which one was real became irrelevant, and three registrations of branches, which could not clear up their inter-relationship. These would not lead to a favorable decision toward Appellant. The decision of the previous court denying Appellant’s request of submitting local receipts of business expenses after the closure of debate did not violate Administrative Litigation Act Article 189 I. Again referring to another case of BVI xxx Clothing Limited Taiwan regarding sharing of business expenses Appellant was approved a half of the amount after negotiation with Appellee. However this case was not similar due to lack of the negotiation process. The decision of the previous court denying Appellant’s request of referring to afore-mentioned case did not violate the Principle of Fairness. Though for of the previous court the statement of reasoning not exactly the same as this court and inability of rejecting portion of Appellant’s evidence would not reverse the outcome of the trial. Other comments accusing the previous court of mishandling of evidence and improper fact finding were not considered as proper causes for appeal. The court found that the accusations of Appellant’s request for revocation of the previous ruling were groundless. The appeal should be dismissed. The court concluded that the appeal was unfounded. Based on Administrative Litigation Act Article 255 I, 98 III, the court dismissed the appeal.
Profit-Seeking Enterprise Income Tax Act ( Income Tax Act)
If a profit-seeking enterprise whose head office is outside the territory of the Republic of China has a fixed place of business or business agent is located inside the territory of the Republic of China, the fixed place of business or business agent shall keep separate ac-counting books and its profit-seeking enterprise income tax shall be assessed accordingly.
A profit-seeking enterprise which has an affiliated relationship with, or is directly or indi-rectly owned or controlled by another enterprise within or without the territory of the Re-public of China, whereof, if it is found that arrangement of their mutual income, cost, ex-pense, profit or loss distribution does not conform with the regular business practice, hence, results in a tax evasion or reduction, the collection authority-in-charge for the pur-pose of computing the accurate income of the enterprise may report it to the Ministry of Finance for approval in effecting an adjustment in accordance with the regular business practice.
Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax
(Guidance and Regulation for Business Income Tax Audit)