On 18 August 2020, Taiwan’s Ministry of Finance (MOF) has announced draft amendments to certain transfer pricing provisions based on chapter 6 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The key proposed amendments are summarized below:
Comparability Analysis
For evaluating comparable transactions based on the actual economic substances and behaviors of the transaction the following steps should be followed:
- Identifying the significant risks;
- Identification of economic substances and behaviors;
- Re-evaluate the transfer prices;
- Re-allocate risks; and
- Determining arm’s length prices for the controlled transactions.
Comparable uncontrolled transaction data (including internal and external) and controlled transactions are highly comparable when comparing the degree, a single comparable uncontrolled transaction determines the single most reliable controlled transaction (Amendment to the Article 7)
Intangible Assets
The amendments criteria are:
- Revise the definition of intangible assets. (Amendment Article 4).
- When evaluating comparable situations or transactions, the actual economic effects of the transaction should be used as the basis; Factors that should be considered when analyzing the comparable degree of intangible assets. (Amendment Article 8)
It would be possible also to use valuation techniques to estimate the arm’s length price for intangibles transferred between related parties under article 11 of the proposed guidelines. The following assumptions shall be considered when evaluating intangibles:
- The accuracy of the financial forecast and reliability.
- Growth rate.
- Discount rate.
- Remaining economic benefit years.
- The hypothesis of tax effect.
- Other assumptions affecting the valuation of intangible assets
When evaluating intangible asset transactions, special consideration should be given to the following risks:
- Development Risks
- Product Obsolescence Risk
- Infringement Risks
- Product Liability Risks
- Exploitation Risks
Documentation
The amendments also propose to revise the content that should be included in the transfer pricing report: local files and country-by-country reports.
Penalty in case of Adjustment
Under article 34 of the proposed guidelines, penalty for the transfer pricing audit and adjustment will be revised.
The draft amendments mainly discuss about intangibles and comparability analysis. MOF has given 60 days for public consultation from the day of its announcement. If enacted, the proposed guidelines are expected to apply as from tax year 2020.
