Insurance Tax Highlights – Asia Pacific Taiwan
April 2014
Taxing Issues: Tax reform package proposes to increase tax revenue through reduction of creditable surtax on dividend distribution and increase in business tax for insurance companies This article provides a brief overview of two draft amendments affecting insurance companies operating in Taiwan. The first is amendment to reduce the creditable surtax on dividend distribution to half of the original amount, and the second amendment is the increase of gross business receipt tax (“GBRT”) from 2% to 5%.
Richard Watanabe Tax Partner & Financial Services Industry Leader PwC Taiwan Tel: +886 2 2729 6704 Email:
[email protected] Ying-Te CHIEN Senior Tax Manager PwC Taiwan Tel: +886 2 2729 6666 ext 23667 Email:
[email protected]
Reduction of creditable surtax on dividend distribution
Currently, a 10% surtax is imposed on undistributed earnings when a Taiwan company does not distribute its current year after-tax earnings in the following year. This 10% surtax also applies to Taiwan investee companies owned by non-resident shareholders. As part of the current integrated income tax system, the 10% surtax may be creditable against dividend withholding tax for non-resident shareholders when Taiwan investee companies distributes dividends from earnings that have already been subjected to this surtax. However as part of the tax reform package presented by the Executive Yuan on 13 March 2014, the ceiling of 10% surtax creditable against dividend withholding tax for non-resident shareholders shall be reduced to one-half of the original amount, calculated as below: Dividends distributed from retained earnings that have already been levied 10% surtax
X
10% surtax
X
50%
For foreign insurance companies with subsidiaries in Taiwan, this draft amendment implies a heavier tax burden as the amount of tax creditable against future earnings distributed back to the overseas parent company will be reduced by half and the other half will no longer be creditable against dividend withholding tax. This will affect the capital stream of those foreign insurance companies with Taiwan investee companies. As such, Taiwan investee companies should reconsider their dividend distribution policy in order to avoid the 10% surtax entirely or potential loss of creditable surtax against dividend withholding tax. The proposal for the tax reform has been submitted to the Legislative Yuan for final approval. The amendment is expected to be effective from 1 January 2015 onwards. Increase in business tax for insurance companies
Significant amendments were made to the Value Added and Non Value Added Business Tax Act (“BTA”) in 1999 and 2011 to alleviate the impact of the Asian and global financial crisis on Taiwan financial industry. The gross business receipts tax (“GBRT”) rate for enterprises engaging in banking, insurance, investment trust, securities, futures, commercial paper, and pawnshops was reduced from 5% to 2% for exclusively authorised business. The GBRT rate on payment for services provided by a foreign financial institution with no fixed place of business in Taiwan engaging in exclusively authorised business was reduced from 5% to 3%. Given the Taiwanese financial industry has stabilised and now better structured, the Executive Yuan proposes to restore the 5% GBRT, summarized as follows:
Amendments to Article 11 of BTA
1. At present, exclusively authorised business income of enterprises engaging in banking, insurance, investment trust, securities, futures, commercial paper, and pawnshops are subject to the 2% GBRT rate. It is proposed that the GBRT rate for exclusively authorised business income for banks and insurance entities (local subsidiaries and Taiwan branches of foreign companies) shall be restored to 5%. Reinsurance premium, however, shall remain 1% GBRT. The increased 5% GBRT rate shall apply on insurance premium and ceding commission received Taiwan insurance entities. 2. Proceeds of financial institutions engaging in investment trust, securities, futures, commercial paper, and pawnshops relating to exclusively authorised business shall remain subject to 2% GBRT. 3. Proceeds from non-exclusively authorised business shall remain subject to 5% GBRT for all financial institutions. 4. The definitions and rules for both the scopes of “exclusively authorised operations” and “nonexclusively authorised operations” shall be prescribed by the Ministry of Finance, and submitted to the Executive Yuan for approval. Amendments to Article 36
1. It is proposed that the GBRT rate on payments made by Taiwan financial institutions to foreign financial institutions (with no fixed place of business in Taiwan) for providing banking and insurance services relating to exclusively authorised business shall be increased from 3% to 5%. On the other hand, the GBRT rate for those providing investment trusts, securities, futures, commercial paper, and pawnshop services relating to exclusively authorised business is proposed to be reduced from 3% to 2%. 2. The payment of reinsurance premium to a foreign insurance company shall remain subject to 1% GBRT. 3. Payment to foreign financial institutions relating to non-exclusively authorised business shall remain subject to 5% GBRT.
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Insurance Tax Highlights – Asia Pacific
The following diagram compares the GBRT rate for domestic and foreign financial institutions before and after the proposed amendments:
Comparison of Domestic and Foreign Financial Institutions GBRT Rate (%) Before and After Amendments Domestic Financial Institutions Types of Financial Institutions
Exclusive Authorised Business
Foreign Financial Institutions with No Fixed Place of Business in Taiwan
Present
After Amendments
Present
After Amendments
Bank, Insurance
2
5
3
5
Securities, Investment Trusts, Futures, Commercial Paper, Pawnshop
2
2
3
2
Reinsurance Premium
1
1
1
1
5
5
5
5
All Other Operations – Non-Exclusive Authorised Business
The proposal for amendment to Article 11 and Article 36 of the BTA was passed by the Executive Yuan on 13 March 2014, and is now being reviewed by the Legislative Yuan for final approval. Although the precise effective date is yet determined, domestic and foreign insurance entities (including Taiwan branches of foreign insurance companies) should observe further development on this proposal and consider its impact on their operations.
Insurance Tax Highlights – Asia Pacific
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For more information, please contact the following territory tax partners:
Country
Partner
Telephone
Email address
Australia
Peter Kennedy
+61 2 8266 3100
[email protected]
China
Matthew Wong
+86 21 2323 3052
[email protected]
Hong Kong
Rex Ho
+852 2289 3026
[email protected]
India
Nitin Karve
+91 22 6689 1477
[email protected]
Indonesia
Margie Margaret
+62 21 5289 0862
[email protected]
Japan
Nobuyuki Saiki
+81 3 5251 2570
[email protected]
Korea
Hoon Jung
+82 2 709 3383
[email protected]
Malaysia
Phaik Hoon Lim
+60 3 2173 1535
[email protected]
New Zealand
David Lamb
+64 9 355 8419
[email protected]
Phillipines
Malou P. Lim
+63 2 459 2016
[email protected]
Singapore
Yoke Har Yip
+65 6236 3938
[email protected]
Taiwan
Richard Watanabe
+886 2 2729 6704
[email protected]
Thailand
Prapasiri Kositthanakorn
+66 2 344 1228
[email protected]
Vietnam
Dinh Thi Quynh Van
+84 4 3946 2231
[email protected]
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2014 PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. HK-20140403-7