It is inevitable that accounts payable happens in businesses. The Taiwan National Taxation Bureau reminds that when companies declare for corporate income tax, it is important to pay attention to the prescription on various kinds of outstanding accounts payable, which can vary from 2 – 15 years. Furthermore, if a payment is unsettled upon prescription, it must be changed to other income in accounting in that current year.

When Taiwan companies file tax returns, many expenses will be listed as expenses in the year in which rights and responsibilities are incurred. But in fact, the payment has not yet been paid. Since the Civil Code Article 125 to 127 stipulates prescription for various payments, it continues to be delayed until the time limit of the creditor’s claim expires, in theory, the Taiwan company does not have to pay any more, and therefore should be reclassified as taxable income.

There are different prescriptions on various kinds of payment claims. In general, they can be divided into 3 categories:

1. The prescription for most payment claims is 15 years.
   
   
2. However, the Civil Code also stipulates a shorter prescription for special payment claims. Take profit-making business as an example, payment such as interest, bonus, rent, pension and severance payment, etc., the claim is extinguished by prescription if it is not exercised within 5 years.
   
   
3. For payments such as payment for goods, freight, contract remuneration, attorneys, accountants, notaries, and advance payments will be extinguished by prescription if it is not exercised within 2 years.

Taiwan companied tend to list the above mentioned payments as expenses in the year when the rights and responsibilities are incurred. If the payments are still unsettled upon the right of claim extinguished, according to the Income Tax Act Article 24 and Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax Article 108-2, they shall be classified as other income in the year of prescription extinguished.

However in some cases, even if the debt is over prescription, some Taiwan companies still choose to pay off the relevant payment due to good faith. In this case, even if the payment has been changed to other income for taxation, if the payment is settled in the future, it can still be listed as “non-business expenditure”.