Three Ways for Taiwanese Enterprises to Respond to Tax Audits in USA

Date of Release: 2011/12/05

On 6 December 2011, PwC Taiwan organized a conference on “The Latest Tax Audits by U.S. Inland Revenue Services and the Best Defence for US-based Taiwanese Enterprises”. PwC US Partner Bernard Moens, Louis Carlow and Nick Raby addressed the most pressing issues for Taiwanese enterprises in the USA, and discuss the possible responses to the recent tax audits by the U.S. Inland Revenue Services.

Globalized tax governance for lower effective tax rates

PwC Taiwan Tax Director Albert Chou said that, what used to be considered reasonable strategies for lowering U.S. tax burdens in the past may now be seen by the U.S. Inland Revenue Services as abuses of tax-avoidance tools. Not only will these strategies be rendered ineffective in the future, multinational Taiwanese companies may even be subjected to enormous fines if these strategies do not conform to the newly announced Codified Economic Substance Doctrine.

Given the challenges of the global taxation environment, PwC Taiwan Tax Partner Wendy Chiu recommended three approaches to multinational Taiwanese companies. First, companies must take initiatives in reviewing whether their existing taxations strategies have become obsolete; secondly, they must create a complete, detailed, and forward-looking global tax governance strategy; thirdly, they should seek advice from tax experts before engaging in cross-border trades to minimize the risks of non-compliance with foreign tax laws. The three approaches will reasonably reduce companies’ global effective tax rates while ensuring regulatory compliance.

The recognition of commercial activities in USA is the key issue to tax governance

PwC US Partner Cathy Hylton pointed out that, when a foreign company sets up operations in the USA, one of the most critical issues is to determine whether invested businesses constitute the foreign company’s involvement in taxable commercial activities within the U.S. The determination of commercial activities is often complicated and relies heavily on the Facts and Circumstances Test, with detailed reviews over corporate characteristics and business scope. Because the principles through which commercial activities are recognized in the U.S. have profound impacts on foreign companies investing directly into the U.S., it is recommendable for Taiwanese enterprises to establish comprehensive tax governance strategies from an international perspective.