By Eunice Kuo and Connie Chiou The Taipei National Tax Administration (TNTA) recently issued a private ruling regarding the sourcing rules applicable to securities brokers who engage in foreign securities transactions. Under current rules, a domestic broker normally acts as an intermediary between clients and foreign brokers and only earns a spread on a foreign securities transaction. Before the ruling was issued, it was unclear whether the income earned by the foreign broker was Taiwan-source income. The private ruling sets out the TNTA’s position and illustrates the business tax and income tax consequences of the above transaction for both the domestic broker and the foreign broker. Business Tax In the ruling, the TNTA believes that the entire service charge, rather than the mere spread, received by the domestic broker in a foreign securities transaction should be subject to business tax at 2%. In addition, the amount the domestic broker paid to the foreign broker should be subject to a 5% business tax since the services are used in Taiwan and are the result of the domestic broker’s procurement of the foreign broker’s services. The purchaser of the services will be the taxpayer (i.e. the domestic broker) if the foreign broker does not have a permanent establishment in Taiwan. Income Tax The TNTA will impose income tax on the total service charge received by the domestic broker from local clients since that amount is Taiwan-source income of the domestic broker. Related costs and expenses, such as payments to the foreign broker, are deductible in computing the domestic broker’s income tax liability. The ruling also states that the commission received by the foreign broker from the Taiwan broker will not be deemed to be Taiwan-source income and, therefore, will not be subject to income tax. To be deemed non-Taiwan-source income, the Taiwan broker must direct the foreign broker to execute the foreign securities transaction on its behalf outside Taiwan. Comprehensive services, such as issuing and selling offshore depositary receipts, however, are generally considered Taiwan-source income. For additional alerts, visit the Global Tax Alerts archive. |
