Article 24, Paragraph 1, of the Income Tax Act stipulates: “The amount of income of a profit-seeking enterprise shall be the net income, i.e., the gross annual income after deduction of all costs, expenses, losses and taxes.” Under Article 4, Paragraph 1, of the said Act, securities transaction tax shall no longer be levied commencing from January 1, 1990. According to Article 42 of the said Act as amended on December 30, 1980, “80% of the investment earnings gained by a profit-seeking enterprise, organized as a company, from its investment in another domestic profit-seeking enterprise, whose business income is taxable, shall not be included in its taxable income.” Relevant costs and expenditure regarding the said investments, in accordance with the legislative purposes of the aforementioned laws as well as the principle of equality, shall not be deducted from other taxable income. In connection with apportionment of the costs and expenditure between taxable income and tax-free income, unless such costs and expenditure can be reasonably and clearly entered as cost of either income and shall be deducted from the income from sale of marketable securities, as both the investment income and the income from securities transactions come from the same cost input, it is difficult to use the cost input as an apportionment basis. In Explanation III in a letter of the Ministry of Finance dated February 8, 1994, Ref. No. (83)-Tai-Finance-Tax- 831582472, the ratio of income is used to calculate the apportionment basis, which conforms to the legislative purpose of the aforesaid articles of law and does not contradict the Constitution. However, since calculation of the costs, expenditure, and losses of a profit-seeking enterprise involves the taxation of the general public, it shall be prescribed by the competent authority under the express authorization of law so as to carry out the legislative purpose of Article 19 of the Constitution.

       Article 24, Paragraph 1, of the Income Tax Act stipulates: “The amount of income of a profit-seeking enterprise shall be the net income, i.e., the gross annual income after deduction of all costs, expenses, losses and taxes.” Under the principle of equality, in case the contributed costs and expenditure regarding taxable income and tax-free income cannot be clearly allocated, the apportionment shall be effected based on the ratio of income. For a profit-seeking enterprise specializing in trading marketable securities, two types of operating revenues are generated from its securities investment. One is the investment income from dividends and bonus of marketable securities held before sale. The other is the income from sale of marketable securities. Under Article 42 of the Income Tax Act, 20% of the investment income received by a profit-seeking enterprise organized as a company from its investment in another domestic profit-seeking enterprise which is not exempt from business income tax shall be taxable, and the related operating costs and interest expenditure shall be allowed to be deducted within such taxable scope. For the remaining 80% tax-free portion, the related operating costs and interest expenditure shall be deducted from investment income. In connection with trading of securities, under Article 4-1 of the Income Tax Act, securities transaction income tax shall no longer be levied commencing from January 1, 1990, and the related operating costs and interest expenditure shall be deducted from income from securities trading. As a result, in the case of an enterprise specializing in trading marketable securities, the operating costs and interest expenditure shall be allotted respectively as cost of investment income and cost of securities trading income. For the apportionment method, unless the costs and expenditure can be reasonably and clearly entered as cost of either income and shall be deducted from the income from sale of marketable securities, as both the investment income and the income from securities transactions come from the same cost input, it is difficult to use the cost input as an apportionment basis. The letter of the Ministry of Finance dated February 8, 1994, Ref. No. (83)-Tai-Finance-Tax-831582472, stated: “III. In connection with the operating costs and interest payments for loans, unless they can be reasonably and clearly entered under specific items, an enterprise specializing in trading of securities shall calculate the expense and interest allocable for sale of marketable securities in proportion to the income from sale of marketable securities, investment returns, interest income from bonds, and other operating revenues, and deduct such from the income from sale of marketable securities.” The calculation of apportionment is based on the ratio of income. This conforms to the legislative purpose of the aforesaid articles of law and does not contradict the Constitution. However, since calculation of the costs, expenditure, and losses of a profit-seeking enterprise involves the taxation of the general public, it shall be prescribed by the competent authority under express authorization of law so as to carry out the legislative purpose of Article 19 of the Constitution. Furthermore, the applicant contended that the fact of taxation occurred in 1990, while the competent authority in charge of tax levy cited the 1994 letter of the Ministry of Finance regarding the calculation method, which violated the principle that the law does not apply retroactively. However, if the interpretation of administrative laws and regulations by the relevant administrative competent aims to interpret the legislative purpose of the laws and regulations concerned, such interpretation shall be applicable upon the relevant laws and regulations taking effect. This has been interpreted per this Yuan Interpretation No. 287, and there is no contradiction with the Constitution. 

*Translated by Dr. C.Y. Huang of Tsar & Tsai Law Firm.