Taiwan Corporate Tax: Expanded Audit by Reviewing Declaration
Taiwan company has three methods to file corporate income tax (profile-seeking enterprise income tax): Expanded audit by reviewing declaration on tax, audit by reviewing account books and accountant tax compliance certification. In general, all companies in Taiwan are required to adopt the “Audit by Reviewing Account Books” method for accurate taxation. However, to simplify the collection procedures and enhance convenience for taxpayers, the Taiwan Ministry of Finance has implemented the “Guidelines for Expanded Audit by Reviewing Declaration on Corporate Income Tax Cases” (hereinafter referred to as the “Review Guidelines”). According to these guidelines, companies with a total annual net operating income and non-operating income of less than NTD30,000,000 (or NTD10,000,000 for certain industries, such as real estate agencies, management consulting, and multi-level marketing with commission income) can adjust their profit margins according to the legal standards of their respective industries. Companies that meet these standards and settle their tax payments before the filling deadline may opt taxation based on a review and verification of their declared taxable income.
When filing corporate income tax using the “Expanded Audit by Reviewing Declaration on Tax” method, the income tax payable is calculated as follows:
Income Tax Payable = (Annual Net Operating Income + Non-Operating Income) X Expanded Audit Profit Margin Rate (1%-10%, note 1) X Tax Rate
Note 1: The expanded audit profit margin rate for each industry is subject to slight annual adjustments and will be announced on the Taiwan National Taxation Bureau’s website.
For example:
Company A, with an annual net operating income of NTD5,000,000 and an annual non-operating income is NTD1,000,000, applying an expanded audit profit margin rate of 6%, the business income tax payable would be NTD72,000.
The calculation is as follows:
(NTD5,000,000+NTD1,000,000) X 6% X 20% tax rate = NTD72,000.
Advantages of expanded audit by reviewing declaration for Taiwan company:
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The probability of an audit is approximately 10%, significantly lower than other methods. The Taiwan National Taxation Bureau primarily relies on submitted documentation for tax assessment.
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Reduced costs associated with outsourced accounting services.
Disadvantages of expanded audit by reviewing declaration for Taiwan company:
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Even if a company incurs losses in a fiscal year, it must still calculate taxable income using the expanded audit profit margin rate unless it switches to the “Audit by Reviewing Account Books” method. Companies accustomed to the expanded audit method may face challenges, such as incomplete documentation, preventing them from transitioning to the account books audit method.
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If the Taiwan National Taxation Bureau conducts a legal audit and finds discrepancies, such as incomplete records or insufficient documentation, the company may be taxed based on industry profit standards. This can result in a higher tax liability than what would be owed under the regular audit method.
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Companies cannot offset profits and losses across different fiscal years.
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Maintaining two separate sets of accounts can complicate financial transparency. This may pose challenges when seeking investors, as reorganizing accounts can be labor intensive.
While the chance of being audited by the Taiwan National Taxation Bureau is low, companies may sometimes be reported by consumers or competitors. If a company using the expanded audit method is found to have underreported its operating income, the calculation of the underreported income follows two methods:
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If Taiwan company has reported its costs, the underreported income should be calculated based on the full amount of the unreported income.
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If a company has not reported its costs, the calculation of the underreported income can be based on the gross profit margin standard of similar industries. However, this calculation is limited to not exceeding the total annual net operating income as determined by the industry profit standards.
For example:
Company A, operating in the interior renovation industry in 2022, utilized the “Expanded Audit by Reviewing Declaration on Tax” method for filing corporate income tax. The company originally reported an operating income of NTD5,000,000. Using the industry’s expanded audit profit margin rate of 7%, the company calculated a taxable income of NTD350,000, resulting in an income tax payable of NTD70,000.
The Taiwan National Taxation Bureau discovered that company A underreported NTD3,000,000 in operating income. As the related costs for this income were not reported, the calculation of underreported income was based on the “Industry Griss Profit Margin Rate” of 21%. This resulted in an underreported taxable income of NTD630,000, which, when added to the originally reported taxable income of NTD350,000, brought the total taxable income to NTD980,000. However, sice this amount exceeded the income determined by the “Industry Net Profit Rate” of 10% based on the total annual net operating income, the tax authorities adjusted the taxable income to NTD800,000. Consequently, the revised income tax payable was calculated as NTD160,000. After deducting the original tax paid of NTD70,000, an additional tax of NTD90,000 was levied.
This is presented in a calculation table as follows:
(thousand)
|
|
Self-Declared
in 2022
|
|
Underreported-Recalculated
in 2022
|
|
Income - Self-Declared
|
A
|
|
5,000
|
|
a
|
|
5,000
|
|
Income - Discovered
|
B
|
|
|
|
b
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Expanded Audit Net Profit Rate 7%
|
C
|
|
7％
|
|
|
|
|
|
Discovered, Using Industry Standard Gross Profit
Rate 21%
|
D
|
|
NA
|
|
c
|
b*21%
|
630
|
|
|
|
|
|
|
|
|
|
|
Taxable Income
|
E
|
A*C
|
350
|
|
d
|
E+c
|
350+630=980
|
|
Taxable Income – Total Income, Using
Industry Standard Net Profit Rate 10%
|
|
|
|
|
e
|
(a+b)*10%
|
800
|
|
Taxable
Income -Recalculated After Discovery
|
|
|
|
|
f
|
d, e lower
|
800
|
|
|
|
|
|
|
|
|
|
|
Tax Rate 20%
|
F
|
|
20%
|
|
g
|
|
20%
|
|
Tax Payable
|
G
|
E*F
|
70
|
|
h
|
f*g
|
160
|
|
|
|
|
|
|
|
|
|
|
Tax Adjustment
|
|
|
|
|
i
|
h-G
|
90
|
KNOWLEDGE
