Profit-seeking enterprises must prepare "Transfer Pricing Reports" in regard to their controlled transactions and other related documents in accord with the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's Length Transfer Pricing (as per the Regulations on Transfer Pricing below). Special attention should be paid to these reports in order to avoid these common errors:

1. Controlled transactions shall be individually analyzed based on the common practices for Transfer Pricing Reports, in which the analyses are performed on enterprise-wide Profit and Loss. However, Article 7, section 3 of the Regulations on Transfer Pricing requires separate analysis to determine whether or not the Arm's Length Principle applies.
2. Profit-seeking enterprises usually chose self as targets of the analysis under the Comparable Profit method. However, Article 18, section 3 of the Regulations on Transfer Pricing stipulates that this applies only for simple cases with no unique, or high-value intangible assets.
3. Analysis methods of arm's length transactions or the profit margin index chosen shall not use controlled transactions as the basis of calculation. For example,

1. A profit-seeking enterprise that directly or indirectly holds 20% or more of the total outstanding voting shares or capital stock in another profit-seeking enterprise;
2. Any case where 20% or more of the total outstanding voting shares or capital stock in a profit-seeking enterprise and another profit-seeking enterprise are directly or indirectly owned or controlled by the same person;
3. A profit-seeking enterprise that holds the highest percentage of the total outstanding voting shares or capital stock in another profit-seeking enterprise and such percentage is 10% or more;
4. Any case where one half or more of the executive shareholders or directors of a profit-seeking enterprise and those of another enterprise are the same;
5. Any case where the aggregate number of directors appointed by one profit-seeking enterprise and the number of directors appointed by the other enterprise(s) in which it directly or indirectly holds 50% or more of the total outstanding voting shares or capital stock in another profit-seeking enterprise reaches one half or more of the total number of directors of the latter profit-seeking enterprise;
6. Any case where the chairman, general manager, or its equivalent or superior of one profit-seeking enterprise is that of another enterprise, or has the relation of a spouse or blood relation within the second degree with that of another profit-seeking enterprise;
7. Any case where the head office of a profit-seeking enterprise is located outside the territory of the ROC, and its branch office within the territory of the ROC and its head office or branch offices outside the territory of the ROC are related parties. In the case where the head office of a profit-seeking enterprise is within the territory of the ROC, the head office or branch office within the territory of the ROC and its branch offices outside the territory of the ROC are related parties;
8. Any case where a profit-seeking enterprise directly or indirectly controls the personnel, finance, or business operation of another profit-seeking enterprise, including situations where:
   1. The enterprise appoints the general manager or its equivalent or superior of another profit-seeking enterprise;
   
   
   1. The enterprise that is not a financial institution lends money or guarantees the loans to another profit-seeking enterprise to an amount representing 1/3 or more of its total assets;
   
   
   1. The profit-seeking enterprise cannot commence its production and business activities without the other enterprise's provision of patent, trademark, copyright, secret formula, proprietary technology or any franchises, in which the underlined sales of such production and business activities account for 50% or more of the total sales of the former profit-seeking enterprise in the same year;
   
   
   1. The price and terms of the profit-seeking enterprise's purchase of raw materials, components and goods are controlled by another profit-seeking enterprise; and the underlined purchase of such raw materials and goods accounts for 50% or more of the total purchase of raw materials and goods of the former profit-seeking enterprise in the same year; and
   
   
   1. The sales of products of the profit-seeking enterprise are controlled by another profit-seeking enterprise, and the underlined sales of such products account for 50% or more of the total sales of the former profit-seeking enterprise.
9. A profit-seeking enterprise and another one have entered into a joint venture agreement, or an agreement to conduct business jointly; or
10. Other circumstances whereby a profit-seeking enterprise has control or major influence over the personnel, finance, business operation or management decisions of another profit-seeking enterprise.

1. Select the tested parties and tested activities in accordance with Paragraph 3 of this Article.
2. Select the comparable Uncontrolled Transactions similar to the selected tested party and tested activities in accordance with subparagraph 1 of Article 7 and Article 8 hereof.
3. Select the profit level indicator in accordance with Paragraphs 4 to 6 of this Article.
4. Determine the average profit margin of the comparable Uncontrolled Transaction. The average profit margin is equivalent to the sum of the numerator under any subparagraph of Paragraph 4 of this Article within a specific time period divided by the sum of the denominator under the same Paragraph 4 of this Article within the same time period. The aforesaid specific time period is prescribed in Subparagraph 4 of Paragraph 6 of this Article.
5. Calculate the comparable operating profit by using the average profit margin prescribed in the preceding Paragraph and the annual average of the operating assets, net sales revenue, operating expenses, or other items of the related business activities of tested parties within a specific time period, and determine the Arm's-length range in accordance with Items 1 and 2, Subparagraph 5 of Article 7 hereof.
6. The operating profit is deemed to be at Arm’s-length if the average operating profit earned from engaging in the tested business activity by the tested party within a specific period falls within the Arm's-length range prescribed in the preceding Paragraph. If the operating profit falls outside the Arm's-length range, the operating profit of the tested party in the current year shall be adjusted to the median of the operating profits of all the comparable Uncontrolled Transactions in the current year. In the event that the current year data is not available, as described under Subparagraph 4 of Paragraph 6 of this Article, the adjustment shall be made based on the median of the operating profit of all the comparable Uncontrolled Transactions as prescribed in the preceding subparagraph.
7. Determine the Arm's-length Result of the participant(s) of the same Controlled Transaction who, other than the tested party, is/are liable to the ROC income tax pursuant to the ITL, based on the Arm's-length operating profit of the tested party.

1. Return on operating assets (“ROA”): the ratio calculated by using the net operating profit as the numerator, and the operating assets as the denominator.
2. Return on Sales (“ROS”): the ratio calculated by using the net operating profit as the numerator, and the net sales revenue as the denominator.
3. Berry Ratio: the ratio calculated by using the gross profit as the numerator, and the operating expenses as the denominator.
4. Return on cost and expense: the ratio calculated by using the net operating profit as the numerator, and the cost of goods sold or operating cost and expense as the denominator.
5. Other profit level indicators as approved by the MOF. The net operating profit mentioned in the preceding paragraph means the amount of the gross operating profit less the operating expenses, excluding the income unrelated to the tested activities and the extra-ordinary income and loss from going-concern activities of the tested party. The operating assets shall be the assets used by the tested party in the relevant business activity, including the fixed assets and current assets but excluding excess cash, short-term and long-term investments, idle assets, and assets irrelevant to the business activities. The operating expenses do not include the non-business related interest expenses, income tax and other expenses irrelevant to the tested activity.

1. The nature of the tested party’s activity.
2. The degree of comparability of the available information regarding the Uncontrolled Transaction, the quality of the data used, and the assumptions made.
3. The reliability of the profit level indicator measuring the Arm's-length operating profit of the tested party.
4. The time period covered by the information prescribed in Item 2 of this Paragraph should reflect the reasonable profit of the Uncontrolled Transaction. The time period should include at least three consecutive years, including the year of the subject transaction and two years preceding such transaction. In case the current year data is not available to the profit-seeking enterprise when filing the current year profit-seeking enterprise income tax return, the profit-seeking enterprise may use at least three of the consecutive prior years’ data of the comparable Uncontrolled Transactions without current year data.

1. The factors affecting comparability, including the functions performed, risks assumed, the operating assets employed, the market level of the relevant trading products or services, the operation scale, the stage of a business or product cycle, etc.
2. The rationality and compatibility of the allocation of costs and expenses, income and assets between the relevant activities and other activities of the tested parties.
3. Consistency in accounting practices.

1. Comparable principle: The results of comparable Uncontrolled Transactions conducted by Unrelated Parties in comparable circumstances are deemed as the arm’s-length transaction results and shall be compared with the results of Controlled Transactions to evaluate whether or not the latter results are at arm’s-length.
2. The adoption of the most appropriate Arm’s-length Method: The most appropriate Arm’s-length Method shall be applied based on the different transaction types and in accordance with the Regulations when determining the Arm's-length result.
3. The Evaluation on a specific transaction basis: The different arm’s-length methods shall, unless such a method otherwise requires, apply to each transaction on a transaction-by-transaction basis. However, if separate transactions are linked or continuous, such transactions should be evaluated together using the most appropriate Arm’s-length Method to determine the Arm's-length transaction result.
4. The using of the current year data:
   1. The Arm's-length result shall be determined based on the data of current year, i.e. the year when the profit-seeking enterprises conduct Controlled Transactions and that of the same year in which Unrelated Parties undertake Comparable Uncontrolled Transactions. However, in any of the following situations, the multiple year data covering the current year and previous years can be used:
      1. The industry to which the business enterprise belongs has been affected by the business cycles.
      
      
      1. Tangible Assets, Intangible Assets and services have been affected by their respective life cycles.
      
      
      1. The profit-seeking enterprise adopts the market penetration strategy.
      
      
      1. The profit-based method is adopted to determine the arm’s length result.
      
      
      1. Other circumstances prescribed by the MOF.
   
   
   
   1. If the data of current year mentioned under the preceding Item are the financial statements for the Comparable Uncontrolled Transaction under Article 20 and such data is not available to the profit-seeking enterprise when it files the current year profit-seeking enterprise income tax return, the profit-seeking enterprise may replace such information with the average of three consecutive prior years of comparable Uncontrolled Transactions. In any exceptional situations in the preceding subparagraph, the profit-seeking enterprise may use the consecutive prior year's data of the comparable Uncontrolled Transactions without current year data.
   2. When the profit-seeking enterprise follows the preceding subparagraph, the collection authorities-in-charge shall adopt the same principle as those used by the taxpayer when investigating and assessing the Non-arm’s-length Transfer Pricing.
5. Use of arm's-length range:
   1. The term "Arm's-length range" refers to a range of Arm's-length results of two or more comparable Uncontrolled Transactions when applying the same Arm's-length Method. If the data of the comparable Uncontrolled Transaction is incomplete for determining the differences between it and the Controlled Transaction, or for making adjustments to eliminate the impacts on the transaction result caused by such differences, the range of between the 25th percentile to the 75th percentile of the Arm's-length result shall be used as the "Arm's-length range".
   
   
   1. When using multiple year data in accordance with item 1 of the preceding subparagraph, the Arm’s-length range in item 1 of this subparagraph shall be determined based on the respective average of the multiple year results of the comparable Uncontrolled Transactions.
   
   
   1. If the result of a Controlled Transaction falls within the Arm's-length range, the transaction shall be deemed as made on an Arm's-length basis and no adjustment is required. If the result falls outside the Arm's-length range, the transaction result shall be adjusted in accordance with the median of the results of all comparable Uncontrolled Transactions under item 1 or the median of the range constituted by the average of the multiple year results under item 2 of this subparagraph.
   
   
   1. If the internal comparable Uncontrolled Transactions of the profit-seeking enterprise undertaking with its unrelated party is highly comparable to the Controlled Transactions so as to determine a single reliable Arm’s-length result of the Controlled Transaction, such result may be used regardless of the provision of the preceding item 1 to item 3.
   
   
   1. If the adjustment, made in accordance with the preceding two items, would decrease tax liability within the territory of the ROC, no adjustment shall be made.
6. Analysis of Reasons for losses: If a profit-seeking enterprise declares loss but its group has a positive result globally, the reason of the loss and the Arm’s-length nature of the transactions between/among it and Associated Enterprises shall be analyzed.
7. Separate evaluation of revenues and expenditures: The receivables of one party of two parties making Controlled Transaction to the other party, and those of the other party to such party, shall be evaluated based on the price when calculating the accrued revenues and expenses of either party separately.
8. Other Arm's-length principles prescribed by the MOF.