Taiwan Tax - part 1 overview
While this may be long overdue, this will be the first of a few posts regarding taxes in Taiwan. This is intended as much for foreigners looking to gain insight into the Taiwanese tax system, as much as I also hope it reaches the Taiwan Ministry of Finance. Please note that these posts will all be general in nature and are not meant to be taken as tax advice. One should always consult with a tax professional to discuss one's specific tax situation. This first post will cover an overview of personal taxes in Canada, the U.S., and Taiwan.
First here's a quick overview of the taxation systems in Canada and the U.S.:
To simplify compliance, persons who's main income is from employment receive one of the following forms from their employers, clients, finance entities, and the government. The Canadian forms are listed first and the US forms second were applicable:
T4, W2 - wage reporting by employers
T5, T5008, 1099-B, 1099-DIV, 1099-INT, 1099-MISC, 1099-NEC - these forms report investment income such as, interest, dividends and capital gains
T4E, T4A , SSA-1099 - mainly used to report government assistance programs such as employment insurance. In the US the SSA-1099 is issued for all federal programs
T4A, form 1099 - independent contractor payments
T4RSP, T4P, T4PS, T4RIF, T4OAS, T4RCA - Canadian forms for various pension amounts received. The different forms are used based on the source of retirement funds
T5013, K1 (form 1065) - partnership return
T3, Form 1041 - trust returns
The above are the most commonly issued forms, and do not represent all of the forms. The forms are issued by the entity making the payments with one copy going directly to the CRA or IRS and the other to the person. This allows the CRA or IRS to ensure all forms are included in the person's return. Should the CRA or IRS want to ensure the forms are completed as required, they with undertake an audit of the issuing entity or person.
Individuals can choose to complete their tax returns on their own, or by hiring a tax professional to complete it on their behalf.
Where using a professional, the professional is only responsible to ensure the information provided by the client is entered correctly into the forms, assuming the professional asked all of the basic questions to ensure nothing is missed. The client remains liable for any information not provided to the professional, along with any inaccurate information provided.
Full income tax acts and code for Canada and the U.S. can be found by clicking on the links.
Individuals can file their tax returns for free at any tax service office, or can choose to hire a professional to complete their tax returns.
The Taiwan tax code can be found here.
The following are some of the main differences between the way taxes work in the U.S. and Canada and Taiwan:
In Canada and the U.S. any person making a payment to another which requires a form must create one and provide a copy to the taxpayer and another to the tax authority. There are minimum thresholds that must be passed to require a form for contract payments, for instance $600 USD for a form 1099-MISC, and $100 CDN for T4A. Employment income has no de minimis test, and as such a W2 or T4 must be issued regardless of amount or withholdings. In Taiwan, Any person making a payment which is subject to withholding taxes, and the withholding taxes have been remitted to the government must issue a form properly completed with stamps to the taxpayer and government. This is a massive difference. In Taiwan a person can have multiple jobs, each of which pays them less than the minimum required for taxes, but combined would exceed the basic exemptions, and in effect have no tax forms, and would not have to file taxes, although required to do so. In Canada, any person considered to be a resident for tax purposes is required to file a tax return regardless of income level. In the U.S. one must file if they exceed a minimum income threshold, however, most will choose to file regardless to receive a refund and gain access to credits and social programs. Failure to file a tax return, will typically result in the CRA or IRS requesting that returns get filed. Ignoring these requests, can then result in an arbitrary assessment by the CRA or IRS, as they have the power to effectively arbitrarily decide the income earned by a person and issue a statement with taxes owing. The taxpayer would then have to appeal the arbitrary assessment by completing tax returns. Canada and the U.S. have further incentives for low income individuals to file their tax returns by offering refundable tax credits and social programs that can only be accessed by having filed a tax return.
The Canadian tax systems is solely based on tax residency. Legal status in Canada is not relevant for tax purposes. In The U.S. taxation is based on residency and citizenship. Those that do not hold U.S. green cards or citizenship are taxed in the U.S. only on their U.S. sourced income, if they are non residents, and worldwide income as residents. U.S. green card holders and citizens are required to file U.S. tax returns regardless of residency, however, there are a multitude of exclusions and credits, and as such filing a U.S. tax return is generally more of a formality than an actual obligation to pay taxes for those that are residents of other countries for tax purposes. On the other hand, Taiwan operates a tax system based on residency. Different tax rules apply to residents and non residents of Taiwan, essentially creating two tax systems. For instance, Taiwan imposes an 18% withholding tax on remuneration up to 183 days, and it drops to 5% after the 183 days is met. This applies to those working in Taiwan whether for a Taiwanese employer, or as part of a relocation by a foreign employer to Taiwan. Foreigners working in Taiwan for under 90 days for a foreign employer, that is not reimbursed by a Taiwanese entity has not tax obligations. The taxation on gains and losses on the sale of real estate are also different based on whether one is resident or non-resident.
Canada requires the reporting of all non-personal use foreign property using form T1135 for all tax residents. This includes bank accounts, investment holdings, rental properties and the like where the aggregate cost exceeds $100,000 CDN. The U.S. requires U.S. citizens to file Form 114 (FBAR), for all foreign property exceeding $10,000 USD.
Canada, and Taiwan require that self employed earnings earned by an entity located in another country, and servicing clients and customers only in that other country, be reported where the work is performed regardless of residency. However, in Canada this is not applicable to most, as most enter Canada to gain access to the Canadian market, and set up their entities locally. Canada also has a waiver from the requirement that can be filed to avoid having to report this type of income for those considered non-residents in Canada. The U.S. does not tax non-resident aliens on their foreign earned income. The U.S. also has an exclusion for foreign earned income for resident aliens and citizens, which reduces the tax liability to only cover social security and medicare.
Taiwan requires foreigners with tax forms from Canada or the U.S. to have their forms notarized, and/or have their foreign income verified by a foreign CPA that must include their CPA number on it, or a statement from a foreign government. There are quite a few flaws with this, for the following reasons:
- A notarized form isn't likely attainable for the following reasons:
- A notary cannot verify that a form is accurate, as tax forms can be created by anyone
- A form might have an amended version issued after the original. Mistakes do happen when forms are issued
- Most likely cannot get a foreign CPA to sign off for the following main reason:
- As mentioned above a CPA isn't responsible for ensuring completeness or accuracy of information provided by clients. The only income I would sign off on is my own. A client could not pay me enough to certify theirs, without a lot verbiage around liability
- Government statement - typically a notice of assessment:
- In Canada one typically receives a notice of assessment on filing their return. In the U.S. need to request one. The notices are based on taxes as they are filed.
- As the notices are based on filing they are not necessarily correct. The CRA and IRS have audit policies as mentioned above, and can take up to seven years to exercise their abilities, at which point a new notice will be issued if discrepancies are uncovered. No guarantees that even an audit will uncover everything
- Amendments - mistakes happen, and taxpayers can choose to voluntarily amend their tax returns if they notice mistakes after filing their taxes and prior to a notice of an audit
Tax filing deadlines and due dates on payments for personal tax:
- Canada - April 30th for employed individuals and June 15th for self employed. Payments for both are due April 30th. Any payments received after April 30th are charged interest based on the CRA prescribed rates. Penalties and interest are charged on late filed returns based on taxes owing.
- U.S. - April 15th - an extension can be filed which automatically providers a six month extension, however interest and late payment penalties may apply if tax obligations are not fully paid by April 15th.
- Taiwan - individual returns are filed between May 1st and May 31st, with tax payments due June 3rd. There are interest and penalties on late payments and late filed returns along with incorrect or fraudulent returns.
Part 2 covers the Taiwan tax calculation and can be found here
Part 3 covers tax issued that should be aware of employed and self employed individuals along with those that fully own a Canadian Corporation and can be found here
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