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  • Interpretation
  • No.377【Under Translation】
  • Date
  • 1995/03/31
  • Issue
    • Is the directive issued by the Ministry of Finance, which states to the effect that the income tax levied on any salary repaid in lump sum upon one’s reinstatement should be based on the date of actual payment, constitutional?
  • Holding
    •        The income year for an individual should be determined based on the date of actual income, which is prescribed under Articles 14 and 88 of the Income Tax Act, in reference to the intent of Article 76-1, Paragraph1, thereof.  In other words, the imposition of annual consolidated income tax should be limited to realized income, regardless of whether the cause of income occurs in a particular year.  The Directive Ref. No. (60)-TSYFT-365 issued on June 2, 1971, by the Department of Taxation, Ministry of Finance, explains to the effect that the consolidated income tax levied on the salary repaid in lump sum by the agency the taxpayer served for the period of the taxpayer’s suspension from office for certain reason upon his reinstatement should be based on the date of actual payment and on the aggregate amount of the actual payment. The said directive is in line with the legislative intent of the aforesaid provision of the Income Tax Act and is, therefore, not unconstitutional.
  • Reasoning
    •        Two different methods have been adopted in determining the income year, namely, the cash basis and accrual basis.  There are advantages and disadvantages of both methods.  It is a question of legislative discretion when it is a matter of deciding which method is to be adopted.  The past amendments to the Income Tax Act have never adopted the accrual basis, as is used, in principle, for profit-seeking enterprise income tax (refer to Article 22 of the Income Tax Act, as amended and promulgated on December 30, 1989), for the imposition of income tax for an individual, but instead the date of actual payment to the individual is used as the basis, i.e., the cash basis.  Such contrast is crystal clear after referring to the following provisions of the Income Tax Act: Article 14, Paragraph1, thereof provides to the effect that the gross amount of consolidated income of an individual shall be the aggregate of various categories of income for the whole year; Article 88, Paragraph 1, thereof provides that, for a taxpayer having income of various categories, the tax withholder involved shall withhold tax payable at the time of payment as per the prescribed tax rates or withholding procedures, and pay the tax withheld in accordance with relevant provisions thereof; but Article 76-1, Paragraph 1, thereof provides that the income tax levied on the retained surplus profits of a company shall be calculated based on the tax rate applicable in the taxable year, regardless of the date of actual payment.  Therefore, the levy of the consolidated income tax for an individual depends on whether the income of a particular year is realized. Whoever receives cash or cash equivalent as payment will be subject to taxation.  If such cash or its equivalent is not received for any reason in law or in fact, it will be regarded as income not realized and, as such, will not be counted toward one’s income.  The Directive Ref. No. (60)-TSYFT-365 issued on June 2, 1971, by the Department of Taxation, Ministry of Finance, states, “The income year should be determined based on the date of actual payment.  The consolidated income tax levied on the salary repaid in lump sum by the agency the taxpayer served for the period of the taxpayer’s suspension from office for certain reason upon his reinstatement should be based on the date of actual payment and on the aggregate amount of the actual payment.” The said directive is in line with the legislative intent of the aforesaid provision of the Income Tax Act and is, therefore, not unconstitutional.  In respect of the situation where a public functionary is suspended from his office for statutory cause and does not receive any remuneration or living allowance during the period of such suspension, the remuneration repaid in lump sum for the period of such public functionary’s suspension upon his reinstatement should be distinguished from the circumstances under which a taxpayer may change of his own free will when his income is paid.  Income of the kind is accumulated over a long period of time, and, as is hereby pointed out, whether tax should be levied on the aggregate amount thereof for the income year should be an issue to be addressed later when the Income Tax Act is amended. 
      
    • *Translated by Vincent C. Kuan
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