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  • Interpretation
  • No.657
  • Date
  • 2009/04/03
  • Issue
    • Are Article 82, Paragraph 3 of the Enforcement Rules of the Income Tax Act and Article 108-1 of the Guidelines for the Audit of Income Taxes on Profit-seeking-enterprises constitutional?
  • Holding
    •     Article 82, Paragraph 3 of the Enforcement Rules of the Income Tax Act (Internal Revenue Code) states: “[T]he unpaid expenses or losses on a profit-seeking enterprise’s account payables that have exceeded two years shall be converted and listed as other revenues until payments are actually made, which shall be listed as non-operating expenditures.”  Article 108-1 of the Guidelines for the Audit of Income Taxes on Profit-seeking Enterprises stipulates: “[T]he unpaid expenses or losses on a profit-seeking enterprise’s business account payables that remain unpaid for more than two years shall be converted and listed as “other revenues” until payments are actually made, which shall be listed as non-operating expenditures upon actual payment.” That profit-seeking enterprises shall convert and list unpaid expenses or losses having exceeded two years from account payables to [the heading of] other revenues under the above-stated regulations so that the income and taxable revenue of that enterprise is increased for the year is obviously not a detailed or technical enforcement issue, and has usurped the authorization of the Income Tax Act, thereby violating the principle of taxation by law under Article 19 of the Constitution. The [provisions in question] should be invalidated no more than one year since the issuance of this Interpretation.
  • Reasoning
    •     Article 19 of the Constitution imposes the duty of the people to pay taxes in accordance with the law. It means that the State must impose tax duty or provide preferential tax deduction or exemption treatment to its people based on laws or regulations having clear authorization of a given law, taken into consideration such conditions as the subject, subject matter, tax base or tax rates. In the event the law authorizes the tax collection authority to promulgate supplemental regulations, such authorization must be clear and specific; the tax collection authority may promulgate other necessary regulations only for matters that concern technical details or secondary issues in the enforcement of the law (see J.Y. Interpretation Nos. 443, 620, 622, 640, and 650). 
      
    •     The front portion of Article 22, Paragraph 1 of the Income Tax Act states: “[T]he accounting of an entity organized as a company shall adopt accrual method.”  Article 24, Paragraph 1 of the Income Tax Act, as amended January 30, 1977, states: “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.”   This is to clearly stipulate by statute the accounting basis upon which the method of calculating net income from the principle of revenue-cost-expenses matching shall be adopted for profit-seeking enterprises organized as companies.  It does not provide that unpaid expenses or losses on a profit-seeking enterprise’s account payables having exceeded two years shall be converted and listed as other revenues, regardless of whether the liabilities are distinguished..  Moreover, given that the conversion of expenses to income involves the structural basis of income tax, the principle of taxation by law shall be applied.
      
    •     The unpaid expenses or losses on a profit-seeking enterprise’s account payables that have exceeded two years shall be converted and listed as other revenues until payments are actually made, which shall be listed as non-operating expenditures.”  Article 108-1 of the Guidelines for the Audit of Income Taxes on Profit-seeking Enterprises stipulates: “[T]he unpaid expenses or losses on a profit-seeking enterprise’s business account payables that remain unpaid for more than two years shall be converted and listed as “other revenues” until payments are actually made, which shall be listed as non-operating expenditures upon actual payment.”  That profit-seeking enterprises shall convert and list unpaid expenses or losses having exceeded two years from account payables to [the heading of] other revenues under the above-stated regulations so that not only the income and taxable revenue of that enterprise is increased for the year but [such increase] is likely to cause tentative financial burden difficult to overcome, thereby affecting the operations of the enterprises, which obviously is not a detailed or technical enforcement issue.  Furthermore, as far as interests are concerned, the limitation of a two-year period imposed by way of administrative regulations does not conform with the statute of limitations under the Civil Code. Although the above-cited provisions were authorized by Articles 121 of the [old] Income Tax Act (as amended on January 29, 1963) and Article 80 paragraph 5 of the [current] Income Tax Act, respectively, those provisions only authorize the governing agency to promulgate enforcement rules to the Income Tax Act and Guidelines [for the Audit of Income Taxes on Profit-seeking-Enterprises], but do not give the Ministry of Finance clear and specific authorization to issue administrative regulations which summarily convert unpaid account payables to other revenues, thereby increasing the tax obligation on profit-seeking enterprises not otherwise found in the statutes (see J.Y. Interpretation No. 650).  Such usurping of authorization under the Income Tax Act violates the principle of taxation by law under Article 19 of the Constitution, and the [provisions in question] should be invalidated no more than one year since the issuance of this Interpretation..
      
    • Translated by Lawrence L. C. Lee
      
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