How Shall Foreign Investors Calculate Income Taxes for Carbon Credit Trading in Taiwan?
The Taiwanese Ministry of Finance ("MOF") promulgated a new interpretative order on 4 December 2023, regulating the income tax of foreign entities' carbon credits trading in Taiwan, that is, selling foreign carbon emission rights on the Taiwan Carbon Solution Exchange. According to this interpretative order, carbon credit trading by foreign investors may be taxed at 2% rate, withheld from the presumed income.
The Taiwan Carbon Solution Exchange's Role
To achieve Taiwan's Net Zero Emission Goal by 2050, the Taiwan Stock Exchange and the Executive Yuan National Development Fund Management Committee jointly incorporated the Taiwan Carbon Solution Exchange Co. Ltd. (hereinafter, "TCX") pursuant to the Climate Change Response Act promulgated in February 2023. TCX as a trading platform aims to ensure the supply and demand can be effectively matched, creating incentives for enterprises to reduce carbon emissions and further promoting the development of low-carbon production technologies and innovative industries. TCX is the sole official agency in Taiwan that is commissioned by the Ministry of Environment and the Financial Supervisory Commission to handle trading in carbon emission allowance pursuant to the Climate Change Response Act. In this context, foreign investors may trade carbon credit through TCX.
The Interpretative Order on Carbon Trading by Foreign Investors
The MOF's interpretative order dated 4 December 2023 (Reference No.: The MOF's Tai-Fi-Tax Order No. 11204681100) paved the way for foreign investors selling foreign reduction credit through TCX.
To start off, the MOF pointed out the legal basis, which is Paragraph 3 of Article 3 of the Income Tax Act (income from Taiwanese source), for levying taxes on foreign investors selling foreign reduction credits through TCX. The amount of income earned from the trading of foreign carbon credit shall be calculated by deducting relevant costs and expenses from the actual sales price, if the foreign investors can produce accounting books and/or supporting documents for verification. Otherwise, the rule is that the taxes may be calculated based on the assumed net profit margin, that is, 10% of the actual sales price.
When a foreign investor has a fixed place of business in Taiwan, such foreign investor shall calculate the income earned by its fixed place of business according to the rule stated above, and include it into the income tax return per fiscal year.
When a foreign investor does not have a fixed place of business in Taiwan, the TCX shall be granted with the power and authority to calculate the amount of income based on the net profit rate according to the rule stated above, deducting the payable income tax on the basis of withholding tax rate of 20%, and then filing income tax return on behalf the foreign investor. Here, the income tax paid by the foreign investors will turn out to be around 2% after calculation (10% of the actual sales price * 20% withholding tax rate).
Moreover, the foreign investor still may produce relevant account books and/or supporting documents to the Taxation Bureau where TCX is located, for the purpose of deducting relevant costs and expenses, applying for recalculating the income and refund of the overpaid tax, within 10 years from the date of occurrence of the said income.
Tax Treaties May Still Be Invoked
In addition, foreign investors may still invoke tax treaties over the MOF's interpretative order. Taiwan has signed tax treaties with major European and American countries (the Taiwan-US tax treaty will soon be signed). In this context, when a foreign investor does not have a regular office nor fixed place of business in Taiwan, tax treaty can still be applied so that the 2% withholding tax can be exempted.
Hung Ou Yang, Esq., Managing Partner of Brain Trust International Law Firm, specializes in transnational legal disputes, international trade, business and white collar crime, and antitrust. Hung Ou Yang has successfully resolved many high-profile civil, criminal, and transnational disputes, including but not limited to representing Simpolo, Icon, and other Indian tiles companies in an anti-dumping investigation regarding ceramic tiles, advising PharmaEngine to deal with its commercial dispute regarding a merger with a French company, representing Indo Kordsa for its corporate internal investigation which led to exposing a biggest bank fraud case in Taiwan history.