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backASIAtalk January, 2010

New PE Development - Drop Shipments Taxed In Taiwan

The Taipei High Administrative Court recently ruled that drop shipments of products from Taiwan to offshore customers are subject to Taiwan income tax calculated on the profit attributable to the storage and distribution activities conducted within Taiwan.

As reported in the press, this case involved Hynix, a Korean semiconductor company that imported untested DRAM ICs into a distribution center in Taiwan. The ICs were delivered to testers for final testing and were delivered from there to customers both inside and outside of Taiwan. The distribution company filed an income tax return on behalf of Hynix but reported only the shipments to customers in Taiwan. The tax authority assessed income tax on the drop shipments both in and outside Taiwan. Hynix filed an appeal, contending that the shipments to its customers outside of Taiwan did not give rise to Taiwan sourced income and therefore were not subject to Taiwan income tax.

The Taipei High Administrative Court held in favour of the tax authority.

Permanent establishment risks associated with this industry, especially for fabless IC companies, have been of concern for some time, and this case appears to be the first instance where a Taiwan court has considered and endorsed the position of the tax authority. More aggressive audit activities by the tax authority can be expected in view of current fiscal conditions. Companies that engage in similar drop shipments from Taiwan to other countries should review their business models carefully and consider planning techniques to minimize their tax exposures.

Source: Baker & McKenzie - GAI

For more information or to contact Baker & McKenzie, please click here.

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