Taiwan amends transfer pricing guidance for intangible transactions

By Yuanchang, Toby, SU, General Manager, Fu Ten TP Consulting, Taiwan

On 28 December, the Taiwan Ministry of Finance released the final version of the new Taiwan transfer pricing regulations.

These new regulations adopt some parts of the 2017 OECD transfer pricing guidelines and OECD/G20 base erosion profit shifting (BEPS) action plans to achieve consistency with the international taxation framework. 

A key point of transfer pricing regulation amendment is the adoption of development, enhancement, maintenance, protection, and exploitation (DEMPE) functions of multinational corporations to evaluate an intangibles transaction.

If those above functions contribute to the intangible’s value, then the MNE should be compensated accordingly before a transfer price is delineated.

As the 2017 OECD transfer pricing guidelines recommended, there are six steps for analyzing intangibles transactions as follows:

1. Identify the intangibles and risks within a particular transaction
2. Identify the contractual agreements relating to the transaction in question
3. Identify which parties performed DEMPE functions by means of a functional analysis
4. Determine whether the conduct of the parties was consistent with the contractual assumption of risk
5. Delineate the actual controlled transactions relating to DEMPE
6. Determine arm’s length prices for the transactions

The amended guidance also adds a new transfer pricing method for analyzing intangibles transactions, the income method, also known as the discounted cash flow method. This transfer pricing method is commonly used in intangibles valuation.

The guidance further provides that transfer pricing analysis should use six steps to analyze risk in a controlled transaction to accurately delineate the transaction regarding that risk. These steps also follow the recommendation of the 2017 OECD transfer pricing guidelines.

The new Taiwan guidance also allows for accepting a single comparable for determining comparable uncontrolled price if any significant differences could be adjusted. 

Finally, the guidance adds a new penalty, which applies when an entity fails to disclose the required related-party transactions in a tax filing and is adjusted by the tax authority. The penalty will apply if the adjusted taxable income reaches 5% of the taxpayer’s final taxable income and 1.5% of the taxpayer’s annual net revenue. In such a case, the tax authority may apply a penalty of up to three times of adjusted tax amount.

— Yuanchang, Toby, SU is General Manager at Fu Ten TP Consulting, Taiwan.