Newsletter
BUSINESS TAX ON SERVICES SUPPLIED TO BONDED ZONES
When a business entity receives an order for services from a foreign customer, and sells such export-related services to the customer, or pro-vides services in Taiwan that are utilized over-seas, the transaction is eligible for zero-rate business tax under the provisions of Article 7 Subparagraph 2 of the Business Tax Act (BTA). If subsequently the foreign customer sells the fruits of such labor to a firm within a cus-toms-bonded zone in Taiwan, then because the business tax liability of most firms in bonded zones is calculated according to the provisions of Chapter 4 Section 1 of the BTA, if the services purchased are exclusively for the purposes of the bonded-zone firm's business in taxable goods or services, they can be exempted from business tax, and the overall business tax rate for the above series of transactions is zero.
However, if the same business entity received an order for services from a foreign customer and, acting on the customer's instructions, provided such services or the fruit of such services directly to a firm within a customs-bonded zone in Tai-wan, then although the business entity was paid in foreign currency, prior to 23 August 2007 such transactions were always held not to meet the conditions for zero tax rating under Article 7 Subparagraph 2 of the BTA. Furthermore, because the customer was not in Taiwan, it could not deduct input tax. Thus if the foreign customer resold such services to a firm within Taiwan, this would result in tax being levied on tax, which was incompatible with the spirit of the value-added business tax, and was not conducive to Taiwan's economic development.
In response to this situation, on 23 August 2007 the Ministry of Finance issued a ruling stating that if a Taiwanese business entity, acting on the instructions of a foreign customer and receiving payment in foreign currency, supplies services or the fruits of services to a business entity located in a science-based industrial park, an agricultural science and technology park, a free port zone, or a duty-free export processing zone, or to a bonded factory, bonded warehouse, or bonded logistics center supervised by the customs au-thorities, then the transaction is eligible for the zero rate of business tax, regardless of whether the service supplier is located the dutiable zone or in a bonded zone. The MOF takes the view that overall tax revenue will not be affected by this change, and hopes that the move will en-courage businesses to establish research and development centers in Taiwan, thereby bringing in high technology and promoting Taiwan's technological development.
The ruling applies to cases not finally assessed by 23 August 2007, or arising after that date.