Will Taiwan refund tax on offshore mandates?

On September 3, Taiwan's Ministry of Finance published a set of final rules clarifying its income tax law. The aim was to put an end to disputes frequently started by multinational firms doing business in the country over the definition of 'Taiwan-sourced' income and thus over how much (or little) tax they should pay. The rules are supposed to be universal and should be applicable to service providers across all sectors, including financial services.

Multinationals have been encouraged to review their tax status and find ways to optimise their tax savings. The clarification essentially sets out that service income should be recognised where the service is ultimately performed. Where both offshore and onshore services are rendered, as in the case of institutional mandates, the foreign entity is encouraged to deduct costs and expenses and submit proof to the tax authorities for refund consideration.

However, the announcement has created more confusion than clarity among offshore asset managers. Broadly, when institutions give overseas investment mandates to asset managers, they are buying services for investment functions that are ultimately performed outside Taiwan. While local representatives are often appointed to service institutional clients, the local reps are a secondary expense and therefore not the primary function of the 'Taiwan-sourced' income.

AsianInvestor spoke with a number of institutional salespeople about the rule change, and the more hopeful ones believe they will now be eligible to file requests for refunds of the 20% withholding tax normally charged on their mandate fees. In particular, the new tax rules are supposed to allow asset managers to file application tax refunds on service income of up to five years from the date of receipt of the relevant transaction.

Prior to the rule change, institutional clients would simply deduct the 20% from a manager's fees, and hand the sum directly to the tax authorities. Hence, it is a 20% that investment managers will never see, which in effect means managers only receive 80% of the agreed price for their services. For a global equity mandate priced at 40 basis points, for example, that's 8bp going to the taxman every year.

Previously, because Taiwan has bilateral treaties with jurisdictions such as Singapore and the UK, institutional salespeople representing global houses sometimes preferred signing up to mandates on Asia-Pacific equities or global fixed income under their registered entities in Singapore or London. They did so to avoid being taxed by both the home jurisdiction of their investment team and the Taiwanese authorities. (Although the local taxmen are often smart enough to question managers on acts of 'jurisdiction shopping'.)

A successful claw-back of such income should be a handsome boost to any bottom line -- especially for asset managers that have not yet published their 2009 annual report. Just backdate the received refund and, voila, an instant 20% growth to fee income compared to previous years.

However, AsianInvestor drew a blank in its calls to Taiwan's Financial Services Commission (FSC) and the Ministry of Finance seeking clarification on whether the rules can indeed be applied to offshore asset managers and can be interpreted that way.

FSC commissioner Yeh Yin-Hua says tax is outside the regulator's remit and suggested speaking with the Ministry of Finance. At the MoF, this correspondent was passed to four different departments, but to no avail. The last official representing 'international relations' suggests checking back with the FSC.

Views on the matter from sources at asset management firms that have recently received mandates from local institutions are mixed. Apparently, the Labour Pension Fund has communicated with the appointed managers that they should be eligible for refunds from now on, while the Bureau of Labour Insurance and Public Service Pension Fund dispute that notion.

One investment official was quoted as saying the investments are funded by local Taiwanese workers' hard-earned pension money, and foreign investment managers should not be given a free ride. (This salesperson requested anonymity from the client, citing high confidentiality in institutional mandates.)

Other institutional salespeople that are active in Taiwan tell AsianInvestor they are unaware of the change, but would nonetheless welcome such a move.

The 20% withholding-tax question is not drawing much interest, although theoretically it should provide a greater incentive to attract a better mix of asset managers to provide services in Taiwan. There is, therefore, potential for the landscape to change to that effect.

However, for now, confusion appears to rule. Further explanation by the institutional clients and the related authorities is to come.