Taiwan Subsidiary or Branch Office recognized the administration expenditure or other cost incurred and allocated by its parent company, 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 follows:
Appellant pays for court costs and expenses.
Statement of Reasoning
- 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 organizational chart of the offshore headquarters, itemized expenses checklist with verifiable receipts, Appellee had to exclude all but NT$9,769,551 due to failing to prove expense validity. Appellant, who disagreed but failed the re-examination and administrative appeal, later filed the administrative litigation.
- Appellant claimed from the previous trial: Appellant was a branch of its offshore parent company, BVI xxx Clothing International Limited, which did not manage its own business operation but outsourced all management to Walton Consulting in Hong Kong, an independent company not controlled by BVI xxx Clothing International Limited. The disputed amount consisted of the fees paid to Walton Consulting by its parent company. According to Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax (as per 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.
- The Regulation Article 70 I&II states that Branches of a foreign company inside ROC who fit the following conditions are qualified to share business expenses of their offshore parent companies.
- Both companies share the same capital.
- If the parent company does not open its business to the public, its operation division and branches can share non-operation business expenses of the parent company.
- In order to share business expenses, the branches should not embed 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 division or branch. Under special circumstances, the company can apply for an adjusted sharing plan from the Tax Authority. Branches that list shared foreign business expenses in their fiscal tax filings, must provide local-CPA-certified financial reports of the offshore parent companies with total revenues and business expenses shown. Each report has to be notarized by the ROC Embassy or other government approved agency or provide other proof from the local Tax Authority. For those adopting other sharing plans, the reports must state what was shared, how it was calculated, and the relative share of each division and branch. According to the article, the company that lists shared foreign business expenses is responsible for presenting the information to the 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 excluded them all. Appellant filed the administrative litigation and claimed that BVI xxx Clothing International Limited did not manage its business operation, but rather outsourced all management 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 were indeed 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 BVI CPAs located in the same country as the parent company. The report also lacked proofs from BVI Tax Authority, all of which fail to comply with Regulation Article 70. In addition, Appellant did not present valid receipts for approval. The original decision was justified, and Regulation Article 70 did not apply. Appellant presented two different internal organization charts, but which one was real became irrelevant, and three branch registrations did not clear up their inter-relationship. These considerations could not lead to a favorable decision toward Appellant.
The decision of the previous court denying Appellant’s request to submit 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 for half of the amount after negotiation with Appellee. However, this case was not similar, due to the lack of the negotiation process. The decision of the previous court denying Appellant’s request of referring to the aforementioned case did not violate the Principle of Fairness. Although the previous court statement showed a remote similarity, the reasoning was not exactly the same as this court, and the inability to reject a portion of the Appellant’s evidence would not reverse the outcome of the trial. Other comments accusing the previous court of mishandling evidence and improper fact finding were not considered as proper causes for appeal.
The court found that the Appellant’s requests for revocation of the previous ruling were groundless, and 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
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 accounting 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 indirectly 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, expense, 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 purpose 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.