Taiwan’s development and reactions with Global Minimum Taxation

The Organization for Economic Cooperation and Development (OECD) is proposing the Global Minimum Tax (GMT) on multinational corporate profits to ensure that large multinational enterprises (MNEs) are subject to a 15% effective minimum tax rate regardless of where they operate. Currently, around 45 jurisdictions have implemented domestic tax laws to effectuate GMT, with more countries preparing to follow the trend and adapt their tax systems to accommodate this trend of global taxation. As Taiwan is not a member of the OECD nor admitted to the Inclusive Framework, it may choose to follow this global trend on a voluntary basis and make legislative changes that align with its own interests.

OECD GMT would impact Taiwanese large MNEs

Based on revenue data extracted from the Taiwan Stock Exchange (TSE), 210 listed companies crossed the GMT’s threshold of €750 million in 2021, with 203 companies doing so in 2022. Despite there being more than 1,700 listed companies in the same periods, the revenue of the top 200+ listed companies had accounted for more than 90% of the total. Furthermore, most of these top 200+ listed companies operate internationally, with their aggregated revenues far exceeding Taiwan’s GDP. This means that a large portion of their revenue and profits are earned abroad and not yet remitted back to Taiwan. If the overseas profits were held in low-tax jurisdictions, they would fall exactly within the scope designed by GMT.

Taiwan’s corporate AMT scheme

Taiwan has a standard Corporate Income Tax (CIT) rate of 20%. Due to high-tech industries and profiting from the special tax benefits, such as tax-free income and tax credits for R&D activities, Taiwan has employed a corporate Alternative Minimum Tax (AMT) regime since 2004. This Taiwanese AMT regime aims to include tax benefits in the AMT tax base and levy a 12% tax. Unlike GMT, the Taiwanese AMT mainly focuses on domestic tax benefits and does not apply to corporate overseas income. Furthermore, it applies to all profit-seeking enterprises with a much lower profit threshold of 600,000 NTD, approximately 20,000 USD. However, there is a discussion that Taiwan’s Ministry of Finance might propose to raise the AMT rate from 12% to 15% as a temporary alternative to the Qualified Domestic Minimum Top-up Tax (QDMTT).

Taiwan controls tax benefits available for high-tech industries

In January 2023, Taiwan amended the Statute for Industrial Innovation to include a ‘minimum effective tax rate’ as a requirement to claim tax credits for spending on innovative R&D activities. The minimum effective tax rate was 12% for 2023 and is now 15% (adjustable) from 2024 onwards. This amendment is considered Taiwan’s first official response to the OECD’s GMT initiative. Its legislative purpose is clearly to protect Taiwan’s taxing rights under GMT’s 15% minimum top-up tax regime.

What will be Taiwan next highlights on OECD GMT initiative

Due to the heavy reliance of Taiwanese MNEs on overseas operations, the tax administration must take measures to protect domestic taxing rights, such as the aforementioned limitation on tax benefits. One possible solution is to enhance the implementation of the ‘Controlled Foreign Company’ tax regime (CFC regime), which has been effective since 2023. Unlike many other countries, Taiwan’s CFC regime has adopted a relatively high threshold for the safe harbor rule. This means that the exemption from CFC taxation requires that the amount of foreign subsidiary’s passive income cannot exceed 10% of its overall income. Additionally, many Taiwanese MNEs are investing in markets around the world through certain jurisdictions of convenience, such as Singapore. Some developing countries, such as Vietnam, offer tax benefits and cheap labour to attract Taiwanese MNEs. While these jurisdictions may apply a minimum tax regime that meets OECD’s GMT standards, they may also offer Refundable Investment Credit to ‘neutralise’ the effects arising from minimum taxation. Taiwan will monitor these convenient jurisdictions and respond appropriately.

CONTRIBUTED BY
Prof. Stefan Huang - Wetec International CPA Firm, Taiwan Taipei
E: shanehua@cpawetec.com.tw