According to the tax authorities, a computer software is regarded as a general commodity if it is sold for purchase by downloading through the internet without the need of shifting from seller-oriented to buyer-oriented; a shrink wrap software pressed on CD-ROM; a packaged software which cannot be modified or publicly displayed and is readily available to general users; or a software not customised for individual users, such as Microsoft's Office or operating system.
A software of this kind is deemed a commodity of international trade and will not be subject to any income tax under the Income Tax Act. On the other hand, the provider of a custom-made software developed for a specific purpose is treated as a royalty or remuneration receiver, and is subject to a 20% withholding tax. Such software includes, for instance, a program installed on an internal database for deep learning purpose; a custom-made software developed for the purpose of planning an enterprise resource planning (ERP) system designed to help resource integration.
While quite a number of controversies arose from diverging interpretations regarding in which category a piece of computer software should be classified, in 2021, the Supreme Administrative Court rendered a ruling which is able to shed some light on this tax issue.
The legal representative of a Taiwan-based company received from tax authorities a payment certificate advising him to pay a short-paid duty for the reason that the software that the company purchased is customised and hence is considered to be an intangible asset subject to a 20% withholding tax. Dissatisfied with such determination, the representative filed a series of appeals in an attempt to indemnify against this tax liability. After the case was appealed to the highest court level, in 2021, the Supreme Administrative Court made a final decision that the appellant is obliged to pay all the amount of short-paid duty.
The Supreme Administrative Court held that, instead of categorising a piece of software into standardised or customised software according to the rules set up by the tax authorities based upon Article 8.9 of the Income Tax Act, what should first be addressed is whether or not the profit generated by the foreign seller is in the nature of remuneration or royalty which is subject to a 20% withholding tax according to Article 8.6 of the Income Tax having priority over Article 8.9 of the Income Tax Act in law application order.
In this respect, the Supreme Administrative Court delved into every detail of the facts and circumstances surrounding the transaction between the two parties, and drew a conclusion that the computer software provider is actually a remuneration or royalty receiver and hence is subject to a 20% withholding tax. In the meantime, the Supreme Administrative Court pointed out that it is hardly possible, in the current complicated international trading circumstances, to abruptly categorise a piece of software into standardised or customised software.
Need for review
It is still too early to judge if the above-referenced judgment will affect the current practice adopted by the tax authorities that a foreign software seller shall be levied a tax based on whether the sold software is standardised or not.
However, this case emphasised the need for a careful review of the contract between a computer software provider and a local buyer, and as far as possible, a full communication with the tax authorities in advance, so as to avoid any unnecessary tax supplement liability or penalty.
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