Taiwan: New Permanent Establishment Case - More Aggressive Judicial Scrutiny to Expect?
In late March of 2017 the highest court in Taiwan dealing with tax matters released a judgment (made in February 2017) that was a victory for the tax office, ending a two year long appeal by the taxpayer in relation to a BVI company controlled by a Taiwan resident. The court held that the BVI company was in substance a Taiwan company, invoking a "place of effective management" logic, and that the income earned by the BVI company was attributable to its Taiwan office and subject to Taiwan corporate tax.
Although this was not the first time a Taiwan court invoked "substance over form" principle in dealing with offshore tax havens companies with substantive operations in Taiwan, it differs from prior cases in at least two aspects:
(a) The court used a "place of effective management" logic in its reasoning, even though this doctrine has not become legally effective in Taiwan; and
(b) The court in passing shifted the burden of proof to the taxpayer and maintained that the taxpayer has the burden to establish that the income earned offshore by the non-resident company was "wholly unrelated" to the activities of the permanent establishment in Taiwan.
The facts of this case are in many ways typical of many Taiwan businesses that rely on the use of tax haven companies. The taxpayer was a Taiwan resident who operated a BVI company named "Alcohol Soft" that sold software "Alcohol 120%" online. He was the only shareholder and director, and was the responsible person of the company. He registered an IP address for the use of the company website in Taiwan. He also established an OBU account (an offshore banking account with a Taiwan bank) under the name of the company for receiving customers' payments. Though the opinion was not explicit, we may assume that the online sale was directed towards Taiwan customers.
The tax office in Taiwan balked and maintained that the BVI company was in substance a Taiwan company, which should have applied for Taiwan business license and filed corporate tax returns. After unsuccessful administrative appeals, the taxpayer first filed a lawsuit in the first level administrative court in July of 2015, and won. But The Supreme Administrative Court rejected that ruling and remanded it for further consideration. The lower court then re-decided the case and held for the tax office, finding that the taxpayer had to file an income tax return for the relevant years. The case was appealed to The Supreme Administrative Court again and the court sustained the ruling for the tax office.
In its analysis the court found that the money in OBU account was attributable to the taxpayer, and that the taxpayer, through the BVI company, was in substance operating a Taiwan taxable business. Critical to the court's reasoning was its analysis that the company (though registered in BVI) should be regarded as a resident company on the basis that the taxpayer was the "main administrative office" of the company:
(a) He set up the BVI company and was the only shareholder and director.
(b) The OBU account was managed and controlled by him.
(c) He controlled the website of the company and had the ability to perform commercial transactions through the website. The IP address was registered in Taiwan and allowed customers to purchase and download the software "Alcohol 120%".
The court also mentioned that, even if the taxpayer was a "non-resident enterprise" as claimed, the result would have been the same because the company's income was earned by the taxpayer managing and controlling all transactions through the website as an administrative office that such office should be a PE in Taiwan. In this case, so long as appellant conducted the business as a PE in Taiwan and received payments from foreign customers, such payments were considered Taiwan source income, and the total amount of the OBU account would still be subject to Taiwan tax. In a different passage of the opinion, the court also noted that in this case (where the taxpayer had a PE in Taiwan), the taxpayer would need to prove that the income earned (by the non-resident company) was "wholly unrelated" to the activities in the PE.
We see in this case the court's resolve to aggressively pursue tax havens income where it can find a connection between the tax haven and Taiwan. In so doing the court is not shy to use legal doctrine (such as the place of effective management rules) even though such doctrine has not become legally effective, or to impose additional burden of proof on the taxpayer. This case deals with a purely "domestic" setting - Taiwan residents, Taiwan business activities, Taiwan market, but use of a tax haven company to circumvent Taiwan tax. Query whether the courts in Taiwan will make the next logical step in extending the same principles to multinational companies, and attribute offshore profits of those companies to their Taiwan operations? In this BEPS-inspired world that we live in where tax offices around the world take their inspiration from one another and are emboldened to be more assertive, everything is possible.