Under the current Sales Tax Law, the levy of sales tax combines value-added sales tax and cumulative turnover tax. According to Section 1, Chapter 4, of the Business Tax Act, the former levies sales tax on the difference between a business operator’s input tax and output tax; the latter, on the other hand, levies sales tax on a business operator’s total sales amount according to Section 2, Chapter 4, of the same law. Article 15, Paragraph 1, stipulates that the amount of sales tax payable or overpaid by a business operator will be the difference between the output tax and the input tax in the current tax period. (The output tax is the amount of sales tax to be collected by the business operator at the time of selling goods or services as prescribed by laws or regulations. The input tax is the sales tax paid by a business operator at the time of purchasing goods or services as prescribed by laws and regulations.) A business operator may file a tax return deducting the amount of input tax on purchased goods or services from the amount of output tax on sold goods or services; however, his or her deductible input tax is limited to those sold goods or services which are taxable. Article 19, Paragraph 1, of the Business Tax Act delineates items that shall not be deducted from the output tax; Paragraph 2 prescribes that for business entities engaged solely in the business of exempted goods or services, the input tax shall not be refunded. However, it is difficult to draw a clear distinction between the deductible input tax and that of purchased goods or services of a dual-status business operator whose sales of goods or services provided in Article 8, Paragraph 1, of the same law represent only a portion of his or her business, or that of purchased goods or services of a business operator not to be used for major business or ancillary business uses. In order to reasonably compute the amount of sales tax dues, Article 19, Paragraph 3, of the Business Tax Act authorizes the Ministry of Finance to prescribe the ratios and methods of computation as bases of levying and paying sales taxes with regard to dual-status business entities’ tax exempt goods or services under Article 8, Paragraph 1, of the same law or other non-deductible input taxes because of other provisions of the same law. Such a statutory authorization of levying tax based on special purposes, with concrete contents and clear scope, is constitutional. (See J.Y. Interpretation No. 346)
The “Regulations for the Computation of Sales Tax for Dual-Status Business Entities” issued by the Ministry of Finance Ordinance Tai-Tsai-Shui-Tze No. 7521435, February 20, 1986, were promulgated under the clear and concrete authorization of Article 19, Paragraph 3, of the Business Tax Act, and the adopted proportional deduction method was prescribed with a view to provided convenience of levying and paying sales taxes to both taxpayers and the agencies-in-charge; therefore, the Regulations do not exceed the purpose and scope of the statutory authorization. The value-added sales tax, involving levying techniques, costs and fairness and having its own revolutionary process, levies from the difference (i.e., the added value) between the amount of the sales of goods or services in various stages of production, provision and distribution and the amount of input tax. With regard to how to compute a business operator’s sale tax due, most nations adopt the proportional deduction method; some nations adopt or also adopt the direct deduction method when business entities have complete books and records that are easily examined and computed for the tax purpose and are approved by the competent tax authorities. The above mentioned Regulations were amended by the Ministry of Finance on August 25, 1992, prescribing that beginning on September 1, 1992, if a dual-status business operator has complete books and records of which the actual uses of purchased goods or services are identifiable, he or she may apply to the taxing authority for permission to use the direct deduction method for computing input tax that may be deducted from the output tax based on the actual use of purchased goods and services. The amendment, conferring on the dual-status business operator the option between the proportional deduction method and the direct deduction method, is an improvement which is in response to the development of Taiwan’s sales tax system and which takes reality and fairness into account. The agency-in-charge may promulgate ordinances and regulations under statutory authorizations, and it may add, delete, amend or change its position with regard to those promulgated ordinances and regulations as long as it does so within the scope of the statutory authorization. (See J.Y. Interpretation No. 287) Therefore, the Ministry of Finance’s above-mentioned amendments adding the direct deduction method to the methods of computing sales tax do not render the original proportional deduction method unlawful.
According to Article 1 of the Business Tax Act, the sales tax applies to goods and services sold in and goods imported to the territory of the Republic of China, excluding dividend incomes. The Ministry of Finance Directive Tai-Tsai-Shui-Tze No. 761153919, July 8, 1987, prescribes that dual-status business entities that engage in investment business shall add dividends received during the tax year to the tax-exempt sales items when filing the year-end sales tax return, and pay the tax dues calculated and adjusted following the ratio of input tax and non-deductible output tax provided by the abovementioned Regulations. This Directive only illustrates how a dual-status business operator’s dividend income is to be computed into the legally non-deductible input tax when applying the above Regulations and does not recognize dividend incomes as sales tax taxable; therefore, it is consistent with the Business Tax Act. It is so because if such dividend incomes are excluded from the computation of the non-deductibles, then the input tax on all dividend-related expenditures will be viewed as deductible input tax and be used to deduct payable sale taxes; therefore, all dividend-related expenditures are tax free. Compared to those business entities whose businesses are solely based on investment yet are unable to deduct dividend-related expenditures, the tax-free result of dual-status business entities is unfair and will entice those business entities whose businesses are solely based on investment to sell few taxable goods or services in order to be qualified as dual-status business entities and thus to evade paying tax by having all investment-related input tax sales tax deductible. This is, of course, would not be a fair outcome.
To sum up, the abovementioned Directive issued by the Ministry of Finance illustrating the computation method of dual-status business entities’ sales tax dues is consistent with the purpose and scope of the Business Tax Act and not in contravention to the constitutional mandate of the principle of taxation by law under Article 19 of the Constitution. However, the Directive uses the dividend income as the basis of computing non-deductible input tax and may create a misunderstanding that dividends are sales-tax taxable if it is read literally. Moreover, there are various ways in tax practices to compute the non-deductible ratio; though amendments were made by the Ministry of Finance on August 25, 1992, in order to make taxation more fair and reasonable, further reviews and efforts to make improvements by the agency-in-charge are advised.
*Translated by Professor Spenser Y. Hor.