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  • Interpretation
  • No.496
  • Date
  • 1999/12/03
  • Issue
    • Are the Ministry of Finance’s Directive Ref. No. TTSF-2665 dated September 2, 1970, and Letter Ref. No. TTS-770656151 dated May 18, 1988, which provide that “where the non-operating income is less than non-operating losses, such income shall be considered as zero,” unconstitutional?
  • Holding
    •        Article 19 of the Constitution stipulates: “The people shall have the duty of paying taxes in accordance with law,”which means that the people shall have the duty to make tax payment and the privilege to enjoy tax reduction or exemption in accordance with the requirements set forth by law. The tax laws shall be interpreted in accordance with the legislative purpose of each of such laws based on the spirit of the principle of taxation by law, and take into consideration the economic meaning and the principle of equality in connection with substantive taxation. The Ministry of Finance issued a directive Ref. No. TTSF- 26656 dated September 2, 1960, and a letter Ref. No. TTS-770656151 dated May 18, 1988, to amend the calculation formula for deducting and exempting the income tax of the profit-seeking enterprises entitled to the encouragement. The said directive/letter relates to the interpretation of the authority who integrates the relevant provisions of the Act of Encouragement of Investment and the Income Tax Act to facilitate the operation of both the tax levying agency and taxpayer. In the said interpretation, it was stated that “where the non-operating income is less than non-operating losses, the balance shall be considered as zero.” This is to avoid the consequence that the income from non-tax-free products is also exempt from tax so as to conform to the legislative intent that only the income from goods meeting the criteria of encouragement is entitled to tax benefits. However, in connection with related non-operating losses, those that can be directly categorized in a reasonable and clear manner shall be so categorized. If it is difficult to make a distinction, the calculation shall be made based on the ratio of sales revenue from tax-free goods (business) to the sales revenue from taxable goods (business) so as to comply with the principle of taxation fairness. The relevant authorities shall promptly review and amend relevant laws and regulations in accordance with the intent of this Interpretation.
  • Reasoning
    •        Article 19 of the Constitution stipulates that the people shall have the duty of paying taxes in accordance with the law, which means that the people have the duty of tax payment or the privilege of tax deduction or exemption in accordance with the subject of tax payment, tax item, tax rate, tax payment method, and tax deduction/exemption prescribed by law. The laws involving taxation shall be interpreted in accordance with the legislative purpose of each of such laws based on the spirit of the principle of taxation by law, and take into consideration the economic meaning and the principle of equality in connection with substantive taxation. The above has been interpreted per this Yuan Interpretation No. 420. Though the competent authority may make necessary interpretation ex officio for the enforcement of taxation laws, it is a matter of course that the principles of law first mentioned above should be met. 
      
    •        The Act of Encouragement of Investment (becoming void upon expiration on December 31, 1990) was enacted for the purposes of encouraging investment activities and accelerating the national economic development. Tax deduction was adopted as a major encouragement measure to realize the legislative purpose. To ensure that all the productive enterprises and profit-seeking enterprises falling within the encouragement scope are equally benefited, and that improper acquisition of tax deduction/exemption privileges through circumvention of taxes may be prevented, various conditions for the entitlement to the encouragement were prescribed, and only those who meet the encouragement categories and criteria can enjoy the tax deduction/exemption privileges. The Ministry of Finance issued a directive Ref. No. TTSF- 26656 dated September 2, 1960, and a letter Ref. No. TTS-770656151 dated May 18, 1988, to amend the calculation formula for deducting and exempting the income tax of the profit-seeking enterprises entitled to the encouragement. The said directive/letter relates to the interpretation of the competent authority who integrates the relevant provisions of the Act of Encouragement of Investment and the Income Tax Act to facilitate the operation of both the tax levying agency and taxpayer. In the said interpretation, it was stated that “where the non-operating income is less than non-operating losses, the balance shall be considered as zero.”This is to avoid the consequence that the income from non-tax-free products is also exempt from tax, which conforms to the legislative intent of the statute that only the income from goods meeting the criteria of encouragement is entitled to tax deduction/exemption privileges. 
      
    •        As stated in the explanations of the said directive/letter of the Ministry of Finance, with respect to the balance of “non-operating income” less “non-operating losses,” if the “non-operating losses” are more than the “non-operating income,” thus resulting in a non-operating deficit, the balance shall be considered as zero. However, there are numerous non-operating loss items, such as interest expenditure, exchange loss, inventory loss from tax-free goods, or losses resulting from disasters. Therefore, in connection with non-operating losses related to business items, those that can be directly categorized in a reasonable and clear manner shall be specifically categorized. If it is difficult to make a distinction, the calculation shall be made based on the ratio of sales revenue from tax-free goods (business) to the sales revenue from taxable goods (business) so as to comply with the principle of taxation fairness (See this Yuan Interpretation No. 493). The relevant authorities shall promptly review and amend relevant laws and regulations in accordance with the intent of this Interpretation.  
      
    • *Translated by Dr. C.Y. Huang of Tsar & Tsai Law Firm.
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