When filing profit-seeking enterprise income tax returns, profit-seeking enterprises shall evaluate whether the results of their Controlled Transactions are at arm’s-length or determine the arm's-length results of Controlled Transactions in accordance with the Regulations. The Regulations shall also apply when the collection authorities-in-charge conduct investigations and assessments on the Non-arm's-length Transfer Pricing cases.

When profit-seeking enterprises and the collection authorities-in-charge evaluate whether the results of Controlled Transactions are at arm’s-length or determine the arm's-length results of Controlled Transactions based on the preceding Article, the following principles shall be followed:
1. Comparable principle: The results of comparable Uncontrolled Transactions conducted by Unrelated Parties in comparable circumstances are deemed as the arm’s-length transaction results and shall be compared with the results of Controlled Transactions to evaluate whether or not the latter results are at arm’s-length.
2. The adoption of the most appropriate Arm’s-length Method: The most appropriate Arm’s-length Method shall be applied based on the different transaction types and in accordance with the Regulations when determining the Arm's-length result.
3. The Evaluation on a specific transaction basis: The different arm’s-length methods shall, unless such a method otherwise requires, apply to each transaction on a transaction-by-transaction basis. However, if separate transactions are linked or continuous, such transactions should be evaluated together using the most appropriate Arm’s-length Method to determine the Arm's-length transaction result.
4. The using of the current year data:
(1)The Arm's-length result shall be determined based on the data of current year, i.e. the year when the profit-seeking enterprises conduct Controlled Transactions and that of the same year in which Unrelated Parties undertake comparable Uncontrolled Transactions. However, in any of the following situations, the multiple year data covering the current year and previous years can be used:
i.The industry to which the business enterprise belongs has been affected by the business cycles.
ii.Tangible Assets, Intangible Assets and services have been affected by their respective life cycles.
iii.The profit-seeking enterprise adopts the market penetration strategy.
iv.The profit-based method is adopted to determine the arm’s length result.
v.Other circumstances prescribed by the MOF.
(2)If the data of current year mentioned under the preceding Item are the financial statements for the Comparable Uncontrolled Transaction under Article 20 and such data is not available to the profit-seeking enterprise when it files the current year profit-seeking enterprise income tax return, the profit-seeking enterprise may replace such information with the average of three consecutive prior years of comparable Uncontrolled Transactions. In any exceptional situations in the preceding subparagraph, the profit-seeking enterprise may use the consecutive prior year’s data of the comparable Uncontrolled Transactions without current year data.
(3)When the profit-seeking enterprise follows the preceding subparagraph, the collection authorities-in-charge shall adopt the same principle as those used by the taxpayer when investigating and assessing the Non-arm’s-length Transfer Pricing.
5. Use of arm's-length range:
(1)The term "Arm's-length range" refers to a range of Arm's-length results of two or more comparable Uncontrolled Transactions when applying the same Arm's-length Method. If the data of the comparable Uncontrolled Transaction are incomplete for determining the differences between it and the Controlled Transaction, or for making adjustments to eliminate the impacts on the transaction result caused by such differences, the range of between the 25th percentile to the 75th percentile of the Arm's-length result shall be used as the "Arm's-length range".
(2)When using multiple year data in accordance with item 1 of the preceding subparagraph, the Arm’s-length range in item 1 of this subparagraph shall be determined based on the respective average of the multiple year results of the comparable Uncontrolled Transactions.
(3)If the result of a Controlled Transaction falls within the Arm's-length range, the transaction shall be deemed as made on an Arm's-length basis and no adjustment is required. If the result falls outside the Arm's-length range, the transaction result shall be adjusted in accordance with the median of the results of all comparable Uncontrolled Transactions under item 1 or the median of the range constituted by the average of the multiple year results under item 2 of this subparagraph.
(4)If the comparable Uncontrolled Transactions meets one of the following circumstances, leading to a result highly comparable to the Controlled Transactions so as to determine a single reliable Arm’s-length result of the Controlled Transaction, such a result may be used, regardless of the provision of the preceding item (1) to item (3):
i.None of the differences (if any) between a Controlled Transaction and the comparable Uncontrolled Transactions or between the enterprises undertaking those transactions could materially affect the price in the open market.
ii.If there is a material difference of the above Sub-item i, reasonable adjustments could be made to eliminate the material effects of such differences.
(5)If the adjustment, made in accordance with the preceding two items, would decrease tax liability within the territory of the ROC, no adjustment shall be made.
6. Analysis of Reasons for losses: If a profit-seeking enterprise declares loss but its group has a positive result globally, the reason of the loss and the Arm’s-length nature of the transactions between/among it and Associated Enterprises shall be analyzed.
7. Separate evaluation of revenues and expenditures: The receivables of one party of two parties making Controlled Transaction to the other party, and those of the other party to such party, shall be evaluated based on the price when calculating the accrued revenues and expenses of either party separately.
8. Other Arm's-length principles prescribed by the MOF.

The term "comparable circumstances" or "comparable transactions" referred to in Paragraph 1 of the preceding Article means the same or similar circumstances or transactions. When determining whether the circumstances of a profit-seeking enterprise and Unrelated Parties, or its Controlled Transaction and Uncontrolled Transactions made between Unrelated Parties are the same or similar, and the degree to which they are comparable, the determination should be based on the existence of actual economic relationships of transactions and their related interests derived from such economic benefit, and the following factors affecting the price or profits should be considered:
1. Characteristics of the assets or services:
(1)Where Tangible Assets are the objects of the transaction, the physical features of the assets, their quality, their volume of supply, and whether any Intangible Assets are included.
(2)Where Intangible Assets are the objects of the transaction, the form of transaction (such as licensing or sale); the type of assets; the terms of transfer, the stage of development; rights to receive updates, revisions, or modifications; the uniqueness and the period for which it remains unique; remaining economic life; and the anticipated benefits from the use of the assets.
(3)Where services are the objects of the transaction, the nature of the services and whether any Intangible Assets are included.
2. Functions performed, including:
(1)research and development;
(2)product design;
(3)procurement and raw material/supply management;
(4)manufacturing, processing and assembling;
(5)marketing, distribution, inventory management, warranty, advertising, and product services;
(6)transportation and warehousing; and
(7)operative management, accounting, finance, legal, credit, collection, training and personnel management services.
3. Contractual terms, including:
(1)the form of consideration charged or paid;
(2)transaction volume;
(3)scope and terms of after-sale warranties provided;
(4)rights to renew or amend the contract;
(5)the duration of relevant license or contract, and the rights of termination or re-negotiation of the contract;
(6)agreement on provision of auxiliary or supplementary services between the transaction parties;
(7)terms of delivery, such as FOB or CIF; and
(8)terms of credit and payment.
4. Risks assumed, including:
(1)market risks, such as risks of fluctuation in costs, demand, pricing, and inventory level;
(2)risks associated with the success or failure of research and development activities;
(3)financial risks, such as fluctuation in foreign currency rates of exchange and interest rates;
(4)credit risks, such as risks in credit extension and collection; and
(5)product liability risks.
5. Economic and market conditions, including:
(1)the similarity of geographic markets;
(2)the relevant size of each market and its potential of development;
(3)the level of the markets, such as wholesale or retail;
(4)the market share;
(5)the extent of competition in each market, consumer purchasing power, the alternatives available to the buyers and sellers;
(6)government regulations of the market;
(7)status of the industry, such as whether it is an emerging industry or declining industry; and
(8)transportation costs.
6. Business strategies, including:
(1)strategies on innovation and new product development;
(2)risk aversion; and
(3)market penetration strategies.
7. Other factors affecting the degree of comparability.
If there is a substantial difference on the aforesaid factors between the circumstances of a profit-seeking enterprise and Unrelated Parties, or between its Controlled Transaction and a Uncontrolled Transactions made between Unrelated Parties, an adjustment shall be made to the prices or profits in the comparable Uncontrolled Transaction taking into account the impact of such differences; if the impact from such differences could be eliminated after the appropriate adjustments, the Unrelated Parties and Uncontrolled Transactions may be selected as the comparables.
The preceding two paragraphs shall also apply to the situations when the profit-seeking enterprise determines the degree of comparability of its Controlled Transactions with Related Parties and the Uncontrolled Transactions with Unrelated Parties as well as whether such Uncontrolled Transactions with Unrelated Parties can be selected as the comparables.

When profit-seeking enterprises and the collection authorities-in-charge conduct comparability analysis according to Subparagraph 4, Paragraph 1 of the preceding Article, the following steps shall be followed:
1. Identify economically significant risks with specificity.
2. Confirm the allocation of economically significant risks arranged by contract.
3. Through a functional analysis, confirm the actual economic behavior of the participants of the Controlled Transaction, and whether they perform functions of risk assumption and risk management.
4. Based on the evaluation results of the preceding three subparagraphs, analyze whether the participants of the Controlled Transaction abide by the terms of the contract, and whether the advocate of risk assumption actually controls risk and has the financial ability to assume the risk, so as to confirm whether the contractual risk assumption is consistent with the behavior of the transaction parties.
5. If it is confirmed that the advocate of risk assumption does not exercise control over the risk or does not have the financial capacity to assume the risk, then the risk should be allocated to the party exercising control and having the financial capacity to assume the risk. If multiple parties are identified that all exercise control and have the financial capacity to assume the risk, then the risk should be allocated to the party exercising the most control. The other parties performing control activities should be remunerated appropriately, taking into account the degree of the control activities performed.
6. Repricing of the transaction, taking into account the consequences of risk allocation according to the results confirmed in the preceding five subparagraphs. The party assuming a risk should be compensated with an appropriate anticipated return, and the party mitigating risk should be appropriately remunerated.
When evaluating whether the participants of the Controlled Transaction perform functions of risk assumption and risk management according to Subparagraph 3 of the preceding Paragraph, the following judgments shall be made:
1. The following factors shall be considered when judging whether the participants perform functions of risk assumption:
(1)Take on the upside and downside consequences of the risk.
(2)Have the financial capacity to assume risk, which can be defined as access to funding to take on the risk or to lay off the risk, to pay for mitigating the risk and to bear the consequences of the risk if the risk materializes.
2. The following factors shall be considered when judging whether the participants perform functions of risk management:
(1)The capability to actually control risk:
i.the capability to make decisions to take on, lay off, or decline risks, together with the actual performance of that decision-making function, and
ii.the capability to make decisions on whether and how to respond to the risks, together with the actual performance of that decision-making function.
(2)The capability to mitigate risk, that is the capability to take measures that are expected to affect risk outcomes, including measures that reduce the uncertainty or measures that reduce the consequences in the event that the downside impact of risk occurs, together with the actual performance of such risk mitigation.
When profit-seeking enterprises and the collection authorities-in-charge conduct analyses according to the preceding two paragraphs and reprice the transaction based on the consequences of risk allocation, the following provisions shall be followed:
1. Where the participants of the Controlled Transaction provide funding but do not actually control the financial risk associated with the provision of funding or any other specific risk, only a risk-free return could be generally expected.
2. Where the participants of the Controlled Transaction provide funding and actually control the financial risk associated with the provision of funding, but without the assumption of, including the control over, any other specific risk, only a risk-adjusted return on its funding (i.e. the reasonable return of controlling financial risk) could be generally expected.

When profit-seeking enterprises and the collection authorities-in-charge determine the most appropriate Arm’s-length Method as set forth in Subparagraph 2 of Article 7 hereof, the determination shall be made based on the transaction types of Controlled Transactions applying Articles 10 to 13 respectively, and based on the following two criteria:
1. Degree of comparability: The determination shall be made based on the degree of comparability between the profit-seeking enterprise and its Controlled Transactions and the comparables. The factors set forth in the Paragraph 1 of Article 8 shall be taken into consideration; in particular, special attention shall be drawn to the similarities of those specific factors set forth in Paragraph 2 of Article 14, Paragraphs 2 to 4 of Article 15, Paragraph 4 of Article 16, Paragraph 3 of Article 17, Paragraph 7 of Article 18 and Paragraph 2 of Article 19, and the specific assumptions set forth in Paragraph 2 of Article 19-1. The greater the degree of comparability, the higher will be the applicability of the methods.
2. Quality of the data and assumptions: The determination shall be made based on the factors, including: the completeness, accuracy and adequacy of the data collected to identify the differences as set forth in the preceding paragraph, the possibility and appropriateness of making adjustment in accordance with the Paragraph 2 of Article 8 to eliminate such differences, and the reasonableness of the assumptions made. The better quality of the data and assumptions, the higher applicability of the methods will be.

A reallocation of profits by business restructurings shall be consistent with the Arm’s-length principle. The following factors should be considered:
1. Special considerations for risks:
(1)Whether the contractual reallocation of risks between associated enterprises is consistent with the economic substance of the transaction.
(2)Whether the allocation of functions, assets, and risks, and the attribution of profits before and after the restructuring are at arm’s length.
(3)Whether the entity assuming the risk has the capability to exercise control over the risk and financial capacity to assume the risk.
2. Arm’s length compensation for the restructuring itself:
(1)The business reasons for and the expected benefits from the restructuring.
(2)The rights and obligations of the parties before and after the restructuring.
(3)Whether the transfer of profit potential is consistent with the reallocation of the risks.
(4)Whether the compensation for the transfer of tangible assets, intangible assets, and activities involved by business restructuring is at arm’s length.
(5)Whether the compensation for the business restructuring parties about the damage from contract termination or renegotiation is at arm’s length.
3. Arm’s length remuneration for post-restructuring Controlled Transactions:
(1)The comparability analysis done for the controlled transactions after business restructuring to determine the Arm’s-length Method for the aforementioned transactions.
(2)Comparing the relationship between compensation for the restructuring and post-restructuring remuneration.
The collection authorities-in-charge use related documents about business restructuring provided by taxpayers to recognize the actual transactions undertaken. When the economic substance of Controlled Transactions differs from its form, the collection authorities shall make adjustments to the Non-arm's-length transfer pricing cases in accordance with its substance.

When profit-seeking enterprises and the collection authorities-in-charge evaluate whether the allocation of profits by the transaction of Intangible Assets is consistent with the Arm’s-length principle, they shall conduct comparability analysis based on the economic activities involving the development, enhancement, maintenance, protection, and exploitation of Intangible Assets in accordance with Article 8 and Article 8-1; in particular, attention shall be drawn to the degree of contributions of functions performed, risks assumed, and assets used of previous economic activities, and the Arm's-length result shall be determined based on the comparability analysis.
When evaluating Intangible Assets transactions, the following risks shall be particularly considered:
1. risks related to development of intangibles;
2. risks of product obsolescence;
3. infringement risk;
4. product liability risks; and
5. exploitation risks.