The Impact of Taiwan's VAT on Overseas Orders and Local Firm Competitiveness

As the trend towards economic globalization continues, large international producers with complex logistics and supply models are becoming ever more common. These major international producers routinely purchase large amounts of basic goods and materials from suppliers in Taiwan, requiring them to be sent directly to their OEM/ODM for the manufacture of finished goods, which are then directly distributed to customers around the world. In the global supply chain, Taiwanese companies play an extremely important role as suppliers and providers of processing and manufacturing services. Past analyses of taxation issues in Taiwan have mostly focused on income tax. However, one of the most influential taxes is "value added tax", or VAT.

The following discussion will focus mainly on questions of VAT assessment arising from the buying and selling of goods in Taiwan by foreign companies, and it will also examine the effect of VAT on Taiwan's economic development.

VAT faced by foreign companies buying/selling goods in Taiwan

Suppose foreign company A procures materials from business B in Taiwan and asks it to send the materials to manufacturer C in Taiwan for processing and packaging, and then has the finished goods distributed to domestic customers (domestic sale) or to foreign customers (foreign sale). Under the relevant regulations, when B sells the goods, it must issue a 5% tax payable duplicate VAT invoice to give to A, as well as a triplicate 5% tax payable invoice, with "sale on consignment" clearly written on it, to give domestic manufacturer C. Manufacturer C is entitled under the law to deduct, or have remitted, tax on such income. Because a foreign-registered business does not have a business tax invoice number, it is unable to file a "business tax" (i.e., VAT) return, and hence A cannot deduct or have refunded the tax in the VAT invoice that it gets from B. The related VAT issues are summarized below.

• The lack of a tax refund system creates double taxation, counter to the principle of value added taxation in the Value Added and Non-Value Added Business Tax Act.
  
  The international taxation principle behind the value added tax is that it is only the country of final consumption that has the right to receive the tax: Any tax obligation incurred in intermediate procurement, manufacturing, distribution, etc., should basically be deducted from other taxes or refunded to the businesses in question. Therefore, any country along the international supply chain that lacks a mechanism for refunding tax will find that this has a serious impact on the willingness of large multinationals to conduct business there.
  
  Taking Taiwan's current laws and practices: "Business agents" are covered under the Income Tax Act, and the Value Added and Non-Value Added Business Tax Act still has no rules on registering business agents (other than mentioning that firms in the international transport business may operate through a business agent), and there is no system by which a foreign business may independently register as a VAT taxpayer. In one of its directives (Tai-Tsai-Sui Letter No. 910450379, dated January 1, 2004) the Ministry of Finance indicated that the VAT regulations do not apply to a foreign business that handles business registration in the name of its business agent in Taiwan.
  
  Because foreign businesses do not have business tax serial numbers, they have no way to file VAT tax returns on their sales, and so the tax invoices received from manufacturers cannot be used to offset the tax they pay on their sales, so they end up getting taxed twice, in violation of the spirit behind VAT systems in Taiwan and elsewhere. If foreign businesses could be given the chance to register business tax serial numbers required to file regular business tax returns, the tax authority would be able to obtain more accurate information for levying income taxes.

• VAT rules are a mess, leaving foreign businesses not knowing what to do.
  
  Besides the fact that the taxation methods run counter to the principle underlying VAT taxes, as indicated above, official interpretations issued to date are also inconsistent when it comes to rules for levying VAT on goods sold in Taiwan by foreign businesses. (For reference, see MOF letters Tai-Tsai-Sui No. 871936481, No. 0900454850, No. 910453451 and No. 930450281.)
  
  From these pronouncements, one may gather that the tax authority has been unable to convey clearly the background of the transactions, so that businesses and employees of the tax authority often have different interpretations of how and where the rules apply. This creates disputes between tax collectors and taxpayers, and it leaves businesses at a loss over what to do. Therefore, to clear up the mess and bring consistency to the tax code, we must reconsider how we tax, on the one hand, foreign firms that order goods from Taiwanese producers and have them traded on their behalf, and on the other, logistics centers in Taiwan.

• Effect on Foreign Firm's Willingness to Engage in Economic Activity in Taiwan
  Suppose a large international conglomerate places a NT$1 billion order with a firm in Taiwan, and because of the above situation, it incurs a VAT tax loss of NT$50 million, there being no way to deduct that from its local tax bill. The result is a 5% reduction in the group's global profits, which could have a serious impact on this large multinational's willingness to source goods from Taiwan, or to establish an international logistics hub there.

• Impact on the International Competitiveness of Taiwanese Companies
  Taiwan's business taxes indirectly affect the international competitiveness of its companies. To take the European Union as an example, many EU countries (e.g., Germany, Spain and Italy) are unwilling to refund VAT to Taiwanese companies because Taiwan does not have a mechanism for refunding its own VAT, and this is based on the principle of tax fairness reciprocity. That being the case, not only are foreign companies less willing to engage in trade with companies in Taiwan, Taiwanese companies are also indirectly affected in terms of their opportunities to apply for VAT refunds in other countries.