Given the rapid development of the global economy and digital technology, cross-border transaction models have become increasingly complex. It is now common for foreign profit-seeking enterprises to license patents to domestic enterprises in exchange for royalties denominated in foreign currencies. In practice, when paying such royalties, the withholding agent (the domestic enterprise) must convert the foreign currency into New Taiwan Dollars (NTD) based on the prevailing exchange rate at the time of payment, calculate the tax to be withheld according to the applicable rate, and complete the withholding tax filing.
However, if both parties subsequently agree to a partial refund of the remuneration, how should the resulting over-withheld tax be calculated?
The National Taxation Bureau of the Ministry of Finance specifically reminds taxpayers that, in such cases, the refund for over-withheld tax should be calculated by multiplying the “original tax withheld (NTD)” by the ratio of the “refunded foreign currency / original foreign currency paid.” The refund should not be calculated by simply converting the refunded foreign currency into NTD at the current exchange rate and then applying the withholding tax rate. The formula is as follows:
Refundable Tax = Original Tax Withheld (NTD) * (Refunded Foreign Currency Amount / Original Foreign Currency Amount Paid)
Example:
In 2026, Company B (a Japanese offshore enterprise) licensed a patent to Company A (a domestic enterprise) for a fee of JP¥10,000,000. Company A converted this into NT$2,000,000 using the then-current exchange rate of 0.2 ($10,000,000 \times 0.2$), withheld NT$400,000 in tax ($2,000,000 \times 20\%$), and completed the filing. Subsequently, both parties agreed to a partial refund of JP¥500,000. The correct over-withheld tax amount is NT$20,000 [$400,000 \times (500,000 / 10,000,000)$]. However, if Company A incorrectly used the new exchange rate of 0.25 to calculate the refund ($500,000 \times 0.25 \times 20\% = NT\$25,000$), the refund application would be inaccurate.
The Bureau reminds withholding agents to stay informed of relevant regulations and ensure accurate tax calculations. In the event of incorrect or over-withheld taxes, taxpayers may apply for a refund by submitting the original withholding tax payment receipt and supporting documentation to the National Taxation Bureau, or offset the amount against tax payable within the same year. Our firm suggests that withholding agents establish a tax pre-review mechanism or consult with a CPA for trial calculations to ensure compliance and mitigate tax risks.
