Newsletter
MAJOR NEW SUI TAX INCEN-TIVES
On 6 February 2003, the President promulgated amendments to the Statute for Upgrading Indus-tries. The main changes were revisions to Arti-cles 6 to 8, and the addition of Articles 9-1 and 9-2, which provides more tax benefit to the in-dustries. The key points are as follows:
Ÿ Amended Articles 6 to 8
Articles 6 to 8 define the various tax incentives available for investments. The old articles pro-vided that within certain limits, investment ex-penditure could be offset against corporate in-come tax for the year of expenditure; if the amount to be offset exceeded the available al-lowance for that year, the remainder could be offset over the subsequent four years. The amended articles each provides that the invest-ment expenditure may be offset against the corporate income tax liability for any year or years within a five-year period beginning with the year of expenditure.
Literally, there would appear to be no substan-tive difference between the old and the new provisions. But in past tax collection practice, the authorities have taken the view that the tax-able income for the year of expenditure should first be offset against the tax credit derived from investment in the same year; only if the tax credit from investments in that year was less than the maximum annual allowance, could the tax credit of previous years be applied. This meant that any credit carried over from the previous years was relegated to second position in the order of priority, with the result that there might never be an opportunity to apply it throughout the sub-sequent four years, or that it could not be fully offset within the available time limit, so that the company would lose the tax benefit.
The amendment to "a five-year period beginning with the year of expenditure" removes any order of priority, so that a company can first offset amounts outstanding from previous years, and carry over the tax credit derived from invest-ments in the current year for use in the future.
There was also a minor glitch in the passage of the amendments. The old Article 6 Paragraph 5 provided that if the tax collection authorities discovered major misrepresentation in a com-pany's claim for tax credit on investments in re-search and development or in personnel training, no such credit could be claimed for three years. In this context, how the authorities defined "major misrepresentation" would greatly affect taxpayers' interests, but the Ministry of Eco-nomic Affairs (MOEA) and Ministry of Finance (MOF) were unable to reach a consensus on what criteria should be applied, and the provision was dropped from the amended Article 6. This may have been due to an oversight, and the MOF and MOEA are now actively drafting a proposal in the hope that the above provision can be restored during the current session of the Legislative Yuan.
Before the addition of this article, only busi-nesses located within science-based industrial parks could enjoy exemption from import duties and business tax when importing for their own use machinery of types not yet made in Taiwan. Following the introduction of Article 9-1, any company in a science-based industry, regardless of whether it is located within a science-based industrial park, can enjoy such exemption. Duty and tax can also be reclaimed on such equipment imported since January 2002.
The term "company in a science-based industry" is not defined in law, and the Industrial Devel-opment Bureau (IDB) of the MOEA is currently considering criteria for defining such industries. According to officials involved, there may be a number of criteria for judgment, although these have not yet been formally announced. They may, for instance, include: whether the company makes or provides a product or service that has been granted permission to locate in sci-ence-based industrial park within the past five years; whether its products or services are among those listed in Article 5 of the Regulations Gov-erning Incentives for Emerging Strategic Indus-tries as Applicable to Manufacturing and Tech-nical Service Industries; whether its expenditures on research and development in the past three years have been equivalent to at least 3% of its total operating revenues; or in the case of a newly established company, whether its products or services relate to the R&D or manufacture of hi-tech products. The final criteria are still under consideration by the competent authority in consultation with academics and experts.
This article provides that manufacturing enter-prises and related technical service enterprises can enjoy a five-year tax holiday on income from the operation of equipment purchased through new investments made during the two years from 1 January 2002 to 31 December 2003. New in-vestment means the formation of a new company, or an increase in the capital of an existing com-pany. No minimum investment is stipulated, and an increase in capital may be by cash injection or by the conversion of retained earnings to capital.
The procedure to be followed is that within six months after a new company is established or the capital increase made, or from the date when the Executive Yuan announces regulations govern-ing the incentives under Article 9-2, the com-pany should apply to the IDB for a letter ap-proving its investment plan, and after completing its execution of the approved plan should apply for a certificate certifying completion. It can then enjoy exemption from corporate income tax on additional income arising out of the invest-ment, for five years from the completion date of the investment plan.