Need advice pls, re: Independent contracting and Taxes


#1

I am in Taiwan on a visitor’s visa, and have picked up some contracting work with a Taipei company which I do completely via email.

Other than an initial greeting, I have not stepped foot in the company’s offices for training or to do this work. As far as I am concerned, I am an independent contractor doing work via email on my laptop. While I am in Taiwan right now, I could very well be doing this work from anywhere else in the world (and may continue to do so after I’m gone).

The problem that arises is that I am told that the company is obligated to withhold 20% R.O.C. taxes. Whereas, I feel that I should be paid a full a gross amount as an independent contractor, with my own responsibility to make my own tax declarations in the appropriate jurisdictions.

Furthermore, how can taxes be withheld in my name if I don’t have a legal working status here? Is this not contradictory? Does it not also raise problems for my status in the country, as well as any attempt I might want to make to submit a tax declaration down the road to recoup this money?

I would greatly appreciate your advice regarding my situation. Thank you.


#2

According to ROC Income Tax Law, income tax withholding should be made on income for work done in the ROC. Hence, it would appear that since your work is being presented to this ROC company, for use by them, and after presentation it must be deemed acceptable by them, whereupon they authorize salary payment to you, etc. it does indeed appear that this meets the requirements of work done in the ROC. (In a similar manner it could be argued that if you were submitting your completed work to the company’s subsidiary in Pakistan, then that IS NOT work done in the ROC. Of course, if the Pakistan subsidiary wanted to then transfer this “completed work” to the ROC Head Office, that would be their own concern.)

Article 7 of the Income Tax Law says that for those who have resided in the ROC for less than 183 days in the current calendar year, withholding should be made at the 20% rate. This is called the non-resident withholding rate.

For those who have resided in the ROC for over 183 days in the current calendar year, withholding should be made at a lesser rate, generally 10%. This is called the resident withholding rate. Also, if you met the requirement for having withholding done at the residency rate during the last calendar year, you are allowed to carry that status over into the current year. (Note: the terms “resident” and “non-resident” as spoken of in the Income Tax Law have different meanings from the same terms spoken of in the ROC Immigration Law or Foreign Passport Law.)

The other issues you have raised are often sources of confusion to foreigners. Let it suffice to say that the tax authorities care neither about your visa status nor about whether you have a work permit. In part this is because the income tax laws date back to the early 1940’s, whereas the work permit system for foreigners was only instituted in 1992. The tax authorities (Ministry of Finance and all subsidiary agencies) and the work permit authorities (Council of Labor Affairs and other agencies) are not known to exchange any information or do any cross-checking in this regard.

Although it may be a little late now, obviously your best bet when talking to a propsective employer in the ROC about salary payments is to agree on a figure that is “after taxes.” Certainly in the case of shooting a TV commercial, holding a three day seminar, or producing a large quantity of art/graphics for a Taiwanese client, this would be a normal negotiating posture.


#3

First, thank you very much for your detailed replay, and I apologize for my delay in acknowledging it (have had problems reaccessing system as you can see by my new user name).

I must say though that I am still very confused about why witholding taxes should apply to my “freelance/independent” work. Again while my work is “presented to the office”, I am not an employee, am paid per service down with a monthly bill submitted.

In your reply to a 24 Aug post by “Ness & Tom”, you state:

“If you are not actually working on the company premises, and not being supervised by the personnel there, but only taking (or mailing) your completed assignments in, then you do not need a work permit.”

This is clearly my situation, yet you say that since the work is sent back to an office in ROC, taxes apply. In less I am mistaken, this seems to contradict your earlier opinion.

And if it is the case, to clarify, do taxes apply because the work, albeit freelance, is done in ROC? Or because it is submitted to an ROC office?

When I leave Taiwan, I may continue to with this freelance contract via email. It would seem ridiculous to me that I would have to pay taxes from abroad because the work originates in Taiwan (as the client and you seem to suggest).

I would greatly appreciate your further insight on this.

Thank you.


#4

A further question:

How does a Taiwan company distinguish between
a) employment
b) sub-contracted labour
in its “books”.

I would think that the accounting entries or treatment would be quite different between the two.

In a) the parties are treated as “employees” and their services are paid into “Salaries and Bonuses” account etc… Income taxes applicable for these would be treated per normal “salaries”.

In b) contracted labour, all services are or can be treated as a form of “Purchases”. The party providing such services can be either a “sole proprietor” or a “company”.

In either of these cases “salary witholding taxes” are surely not appropiate because a salary as such is not being paid.

Thanks in advance for your clarification.

{cont’d)
I think Hartzel already knows what I am driving at. And of course one cannot be either a sole proprietor or set up a company without either:

i) a work permit/investor permit OR
ii) normal residency rights via PR/citizenship in Taiwan.

(assuming one is trading in Taiwan only)


#5

Regarding the query " . . . do taxes apply because the work, albeit freelance, is done in ROC? Or because it is submitted to an ROC office?" I believe that in this case the answer is BOTH.

Regarding the statement “When I leave Taiwan, I may continue to with this freelance contract via email. It would seem ridiculous to me that I would have to pay taxes from abroad because the work originates in Taiwan (as the client and you seem to suggest).” In my opinion, in order to be fully legal, the company should still be deducting taxes from the reimbursement paid to you, even if you are outside the ROC area. If they do not do so, then I think that they are treating the whole matter as an under the table transaction.

Regarding the query about contracted labor, clearly there is the necessity of a registered legal entity, whether a “sole proprietor” or a “company”, which can issue official receipts, in order for this to be a valid option. However, I don’t believe that the writer has established such a registered legal entity up to this point. Am I mistaken?

As to whether it is contradictory for the tax authorities to require payment on income taxes when the foreigner in question does not have a work permit, this is something which is often confusing to new arrivals. However, I can assure you that it is indeed the case.


#6

In my opinion, this “freelance” writer has no option but be treated as an “employee” and all the consequences of that for tax purposes.

This is because he has to be registered as an approved entity ie. either as “sole proprietor” or “company” (as Hartzel has also pointed out) if he wanted to trade as a normal sub-contractor for tax purposes.

This way of explaining things makes the laws similar to places like Hong Kong and Singapore.

Thanks Richard.

I know in Hong Kong for example, such “employment” of illegals (those without proper work permits) are strictly “under-the-table” business and some companies can get away with it if you offer phoney receipts and in thier books two avenues are open if the amounts involved are small. One is booking it as somethingelse, ie “General Expenses”, payment to XYZ as long as XYZ agrees. (Does the author Leo know a company who would agree to “take” the payment?

Auditors rarely comb everthing with a fine tooth comb esp for SME. The other of course is 100% cash payout. The most important thing about audits of small companies is that they have to look right and you have “to oil” the auditors hand.

In Hong Kong there is no such thing as salary/income witholding tax.

For Taiwan to treat the earnings of this freelance person as "salary-income " would seem to assume that this person is being employed.

Since he cannot be employed legally as an alien without work permit, how can his earnings then be treated as salary ? ? ?
I think such rules are the govt’s way of having your cake and also eating it I suppose.

Now let’s assume that I am the company employing such a freelancing alien, I would be doomed if I recognised his pay-outs as salary because theoretically I am breaking the law by employing an alien without work permits. And Payments to Inland Revenue of the so called Witholding Amounts (20%) would just be the proof to land me into all sorts of more explaining.

But let’s suppose this freelancer is real irresistable and cheap as all illegals generally are, and lets suppose the company employing him is so low-down it is not above breaking the law by employing some temp aliens. Then I thinks you can be sure that it would go the full hog and confuse the illegals even more by saying: “I need to keep a Witholding Tax of 20% because it says so here in the tax law”. Having pocketed the extra 10 or 20% witholding tax I believe the company would then be telling a totally different story in its books. It would try to brush away all traces of ever employing such illegal aliens and it would make all these salary pay-outs seem like they were for other innocent expense payments which shouldn’t be too difficult esp if the aliens were temp employments and one off payments.

Well that’s my opinion. In the “final analysis” I really don’t believe such companies/people esp those hiring “illegals” would be honest and would pay any more tax than they can get away with. Sorry if all this breaks your heart Mr Leo Freelance.


#7

Richard and David, thanks for your replies and insight.

If I understand Richard correctly, the problem is that I am not registered here as a legal contractor/company.

What has confused me, is that in Canada (where I am from), there is no such requirement. Companies there pay me a full gross amount, which I then declare to the government “as an independent contractor” in yearly income taxes.

To me this is a much simpler and fairer process for independent contractors, who can have dozens of clients over the course of they year. I would not want to run after every single client for a tax receipt. In Canaday, you simply keep receipts for all gross payments (ie checks) and make the appropriate declarations.

What I also find strange is that I should have to pay taxes on work that may not be done on the ROC territory. If I am sitting in Canada, doing the work THERE via email, what is the rationale for my owing taxes to the ROC?

While I am no tax expert, the situation here seems to be an impediment to global freelancing.

And David while I certainly appreciate your insight, I have to really reject a scenario you presented:

“But let’s suppose this freelancer is real irresistable and cheap as all illegals generally are, and lets suppose the company employing him is so low-down it is not above breaking the law by employing some temp aliens.”

While such work exists, one must also recognize the new world realities (email, internet) of professionals legitimately doing freelance work across borders with often no presence in the country where the work originates.

I do no consider my work “illegal”, nor is it “irresistible and cheap”. I am a professional with advanced skills. And there is nothing “dishonest” or disreputable in the company’s actions.

In fact, the company went ahead and increased my gross salary 20% so that I will not be penalized by the tax deduction. So on my end, the problem is solved as I am receiving the NET amount that I expected. However, I feel badly for the company having to dish out an extra 20% above what we originally agreed upong.

And frankly, I philosophically disagree with the tax regulations that require them to.


#8

First of all I think I have made a mistake by joining in to this legal discussion. I think the way this legal section of the Oriented forums works is like this: The users like yourself or I pose a “legal” question or questions and let ONE appointed person Richard Hartzell (the lawyer) answer them.

Just one person answering them makes life much easier for everyone. Richard’s answers are also “free” because in most places you will not get such professional answers without paying a lawyer or accountant etc. I think by putting in my point of view, (however experienced and right I may be), I just end up making the “resolution” that much longer, because I also add my own queries and problems in what I have to say.

So Richard this is my last reply to this question and sorry to have “interrupted” your great work. I saw my mistake after I had written and posted my replies. In real life you would not want a second opinion all the time. I am eager for Oriented.com to set up a branch so that I can ask “legal” questions pertaining to life inside mainland China.


#9

Now Mr Leo for the last time:

quote[quote] “Why do I have to be registered as a sole proprietor which is not even a formal company before being able to do work as sub-contractor” . [/quote]

Registering of all taxable entities saves time for Inland Revenue dept (during collection) and their collecting agents. The “difference” is at your year-end they expect you to file an income tax return with financial statements. They also minimise chances of mis-declaring income for many “simple” people who had no intention to cheat - therefore making life easier for the majority. Once registered you can work for infinity+1 number of employing companies.

Why do you ask questions about Taiwan and start comparing them with Canada? This is the reason why I wrote what I did right at the top when I realise I was being an idiot by explaining so many “examples” for you whilst Richard was trying to keep things short. You just need a straight answer to solve your present Taiwan tax problem, agree? Otherwise I think professionals like Richard would probably want to start ‘charging’ and I get irritated when people misunderstand my convoluted answers!

<BLOCKQUOTE><font size="1" face="Verdana, Arial, Helvetica, Geneva">quote[quote]  “What I also find strange is that I should have to pay taxes on work that may not be done on the ROC territory? “[/quote]

I don’t think this is true but I will let Richard answer this for Taiwan.

You see Richard said one thing, which is very important: tax laws are applied by the Inland Revenue Dept, and immigration laws by the Immigration Dept, meaning two separate bodies which do not necessarily have to be consistent. Also I don’t see any impediment to freelancing if everything is legal, up-front etc. as it should be.

Another thing stop thinking I am personally attacking you. I was just hypothesising or illustrating a general what-if case. That is allowed is it not? I also never said YOUR freelancing was illegitimate or cheap and therefore cannot be so offered.

What I WAS implying was I saw a dilemma: An alien is not suppose to work as in “employment” in Taiwan according to the immigration rules. But his “emailing” which is not employment cannot be treated as sub-contracting because he needs to be a registered entity (tax rules), therefore I am led to assume, his work is to be treated as the same as an employee for tax purposes, hence the attempt to apply the withholding tax.

As long as the tax department when taxing this offeror never consults the Immigration dept about the legality or working status of such an “emailer”, the law would seem “consistent”.

In my illustration I said there were many avenues accounting wise for treating your work as NOT a form of personal employment, so avoiding the withholding tax altogether; as your work was plainly not. As you mentioned, you never even set foot in the company ie use any of their equipment: desk chair, PC etc. The fact that the company tried to impose a withholding income tax as in “employment” was also unfair and unreasonable.


#10

This is probably too late to do you any good, but having been in Taipei for 7 years before, I still have a fair number of clients whose offices are located there (I’m in the US at the moment) and I still work for them via e-mail, just as you described, although I’m not physically in Taiwan.

Those clients have also said to me that they want to deduct 20% taxes. In the end, I told them that I am not an individual, but a US company (a sole proprietorship in the US does not require any special registration anyway). They asked me for an “official invoice” which I made up on my laser printer (actually just sent them the document as an e-mail attachment) and presto – Taiwanese accountants were happy and no tax was deducted.

I’m not sure about the exact legality of the situation but it seems fair, since I really am a company in the US (although, as I said above, a sole proprietorship, just me at my desk doing translations and stuff) and I certainly don’t need to pay 20% to Taiwan and then another 28% or whatever it is to the US (plus our famous “self-employment penalty” tax! But that’s another story, and not Taiwan related!)

HTH
Terry


#11

With all due respect, considering his experience, the tremendous work he does in Taiwan’s tangled legal and cultural thicket etc., I think it is unnecessarily confusing of Hartzell to introduce the question of the location of the employer, in determining whether or not work is done in Taiwan. Indeed, it is incorrect. The location of the employer is irrelevant. It is simply a question of where was the employee when the work was done.

I am particularly concerned about this, written by Hartzell in the second post in this discussion:

In a similar manner it could be argued that if you were submitting your completed work to the company’s subsidiary in Pakistan, then that IS NOT work done in the ROC.

With this, Hartzell gets it wrong in one. If the work is done in Taiwan, then it’s done in Taiwan, regardless of whether the employer is on the moon or in Antarctica or in Pakistan.

My guess is quite a few foreign workers in Taiwan are employed by employers outside Taiwan. This instance arises quite commonly in the journalistic field, for example. Many newpapers and magazines have correspondents in Taiwan. The employer is not located in Taiwan, and the employee is paid from outside Taiwan, but nevertheless, such journalists must pay tax, in Taiwan, on the work they do in Taiwan.

One question I have for Hartzell is whether the original inquirer Leo might be able to claim consultancy status, and if so, on what basis this status can be claimed. If this is the case, then presumably the consultant is not salaried but is “retained” for a certain fee, rather like a company might retain the services of a legal counsel (lawyer) or a public relations consultant. Would the 20% rule still apply in such a circumstance? And would other standard rules apply? For example, could one legally work for more than one company in such a role. Normally of course having more than one employer in Taiwan would be illegal (if you are a foreigner, that is).

Of course, even if such subtleties could apply under Taiwan law, another question might be whether the typical Taiwan employer (if there is such a thing) could understand them. My guess is, probably not, or would not have the time and patience to handle the matter. Also my guess is there is a common assumption that although the 20% deduction rule is a blunt instrument, the payor of the tax can always claim a refund at a later date, if they think they have a case. Also, recent hefty penalties against employers for hiring foreigners on an illegal basis, including jail terms, presumably create a situation where an employer will withhold tax as a kneejerk reaction. It is the way to play safe.

I can see that one complication that might arise is if an employee is only working in Taiwan for less than the 183 days. This makes the “normal domicile” outside Taiwan. In most countries, if one is not “normally domiciled” there, the tax is due in the other country, where one is normally domiciled. Commonly this depends on a 180-day rule, whether one maintains accommodation in the other country etc. I believe it also might depend on “reciprocity” agreements between different countries.

Another issue I would like to raise in connection with having an employer outside Taiwan is the rate of exchange. The English version of the tax handbook seems to suggest that the rate of exchange that applies is the rate at the time one was paid. That rate is decided by the Taiwan tax authority. The Taipei tax office on Chungwha Lu is currently making available the official rates of exchange for a variety of currencies, by the month, throughout 2001. Since the Taiwan dollar has fallen significantly against major currencies in this period, foreign tax payers with an employer outside Taiwan might do well to compute Taiwan dollar income on a month-by-month basis. Or that is my understanding. Does anyone know more about this? Has anyone been challenged on this, or has anyone challenged the tax office?

By the way, it seems to me that if the Taiwan dollar continues to fall, then a foreign person in Taiwan, particularly if they have an employer outside Taiwan, might do well to keep the bulk of their salary in a foreign bank. Tax would still be payable on it in Taiwan, of course.

Some banks in Taiwan offer a “foreign currency” account. Nevertheless, my impression is that wherever possible one should avoid having to use banks in Taiwan.

This could be the subject of a separate post, but the service at Taiwan banks seems incredibly slow and inefficient, the security guards blatantly rude when a foreigner enters the bank etc. Some local citizens even seem upset to see a foreigner in a bank, try to figure out the amount of cash one has, read one’s passport etc etc.

One the worst offenders is Citibank. I once tried to transfer money into my account in Citibank, from abroad. They screwed up everything. One Citibank security guard crept up behind me while I was waiting for service, tried to read my passport etc. Result: I no longer bank with Citibank.

Also, be warned, funds transferred to Taiwan may also end up deposited with a bank other than the one where you have your account. You then have to visit the bank in person, with passport etc., collect the funds and then deposit them in your own bank/account. Unbelievable, but true.

Now that many foreign banks, including HSBC (Hong Kong) are offering Internet banking, and funds can be withdrawn internationally through an ATM (which, unbelievable though it sounds was not always the case, as late as 1993 - 94), my advice would be “don’t deal with a Taiwan bank if you do not have to.” It’s always a bad experience.

You may not save money, but you may save a great deal of time and inconvenience if you handle transactions via the Internet. I am now paying my rent in Taiwan from a bank in Hong Kong via the Internet. All I have to do is sit at my PC. So far, so good. But in the meantime, has anyone had any problems with Internet banking? If so, let us know.

Lobogau