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  • Interpretation
  • No.697
  • Date
  • 2012/03/02
  • Issue
    • Is it unconstitutional the Commodity Tax Act provides that in a situation of consign process contract the consigned manufacturer be the taxpayer; and where all machine-made cool drinks be subject to commodity tax?
  • Holding
    •     The provision of Subparagraph 2, Paragraph 1, Article 1 of the Commodity Tax Act (hereafter, the Act) that “Commodity tax is levied upon removal of taxable commodities from the manufacturers’ premises or upon importation. The taxpayers are as follows: … 2. For commodities manufactured on a consign process contract: the manufacturer of the processed taxable goods.” is not contrary to the principle of explicitness of law. However, in a situation where there are several consigned manufacturers for division of works, the legislative body should better consider the division of works, process and all kinds of consign process contracts in the manufacturing process to determine the completion stage of the manufacture of taxable goods so as to identify the consigned manufacturer, and in due course to review and improve the relevant provisions.
      
    •     Paragraph 1, Article 8 of the Act provides that, “The tax rates for all kinds of machine-made cool drinks are as follows: 1. Diluted natural fruit/vegetable juice: taxed on an ad valorem basis at 8%; 2. Other beverage: tax on an ad valorem basis at 15%.” The provision therein related to cool drinks is not contrary to the principle of explicitness of law. In addition, the above provision imposes commodity tax only on machine-made cool drinks, but not on non-machine-made ones, which is not contrary to the principle of equality as set forth in Article 7 of the Constitution. 
      
    •     Ministry of Finance Letter 1990.11.1 Tai-Tsai-Suei No.790367324, which considered a drink based on the quantity of solid content reaching 50%, and Ministry of Finance Letter 1995.11.24 Tai-Tsai-Suei No. 841660961, which considered edible bird’s nest drinks imported or manufactured by enterprises as taxable drinks under Article 8 of Commodity Tax Act, are not contrary to the principle of statutory taxpaying.
      
    •     Subparagraph 1, Article 32 of the Commodity Tax Act, which was amended and promulgated on 1997.5.7 and became effective on 2002.1.1, providing that, “In any of the following circumstances, the taxpayer shall be pursued for payment of taxes and fined from 5 to 15 times the amount of tax evaded: 1. Failing to complete necessary registration in compliance with Article 19, and illegally manufacturing commodities subject to commodity tax.” (which penalty was amended to be 1 to 3 times on 2009.12.30) is not contrary to the constitutional principle of proportionality.
      
  • Reasoning
    •     Article 19 of the Constitution provides that the people shall have the duty of paying taxes in accordance with law. And the legal conditions for taxation should comply with the principle of explicitness of law. However, where the legislation utilizes an indefinite concept of law or other abstract concepts, if the meaning is understandable, and is predictable by the regulated, and could be confirmed through judicial review, it may not be considered as being contrary to the principle of explicitness of law (see J.Y. Interpretation No. 521).
      
    •     Subparagraphs 1, 2, Paragraph 1, Article 2 of the Act provide that, “Commodity tax is levied upon removal of taxable commodities from the manufacturers’ premises or upon importation. The taxpayers are as follows: 1. For commodities manufactured domestically: the manufacturer. 2. For commodity manufactured on a consign process contract: the manufacturer of the processed taxable goods.” Therefore, where taxable goods are manufactured domestically, the manufacturers are the taxpayers. As regards to taxable goods manufactured by consign process contract, the consigned manufacturers are the taxpayers. However, regardless of whether they are self-manufacturing manufacturers or consigned manufacturers, they should, in accordance with Article 19 of the Act, Articles 10 and 15 of the Regulations for the Collection of Commodity Tax (hereafter the Regulations), bear the  obligation cooperation to complete the manufacturer’s registration and product’s registration. After these registrations have been approved by the tax authority, they can then manufacture taxable goods. Further, according to Paragraph 1, Article 17 of the Regulation, the consigned manufacturers may manufacture taxable goods only after they have submitted the consign process contracts to the tax authority for review and the tax authority has approved the same. In addition, according to Article 18 of the Regulations, “Except in cases that follow the provisions in Article 16 herein and where packing specifications are approved under special case status, packed taxable goods shall have the name of the goods as well as the name and address of the manufacturer noted in Chinese on the package.” In respect of the consigned manufacturer as set forth in Subparagraph 2, Paragraph 1, Article 2 of the Act, if there is only one manufacturer completing the manufacturing independently, it is doubtless that this manufacturer should bear the taxpaying obligation. If there are several manufacturers for division of works, with each sequentially engaged in part of the manufacturing process, which is necessary to complete the taxable goods, although the provision of Subparagraph 2, Paragraph 1, Article 2 of the Act does not specify which stage’s consigned manufacturer being the commodity tax taxpayer, it could be ascertained by the specific character and the manufacturing process of the goods. Therefore, Subparagraph 2, Paragraph 1, Article 2 of the Act provides that the consigned manufacturer should be the taxpayer, which is predictable in advance by such manufacturer, and could be confirmed through judicial review, and therefore is not contrary to the principle of explicitness of law. However, in a situation where there are several consigned manufacturers for division of works, the legislative body should better consider the division of works, process and all kinds of consign process contracts used in the manufacturing process to determine the completion stage of the manufacture of taxable goods so as to identify the consigned manufacturer, and in due course to review and improve the relevant provisions.
      
    •     Paragraph 1, Article 8 of the Act provides that, “The tax rates for all kinds of machine-made cool drinks are as follows: 1. Diluted natural fruit/vegetable juice: taxed on an ad valorem basis at 8%; 2. Other beverage: tax on an ad valorem basis at 15%.” Paragraph 3 of the same Article defines only the term “machine-made”, while without defining the term “cool drinks”. However, so called “cool” is a relative concept, and is not necessarily connected to temperature. There are many such drinks on the market, it is impossible for the legislators to list them all in advance. All drinks which have the character that the consumers can open the cap and drink belong to “cool drinks”. This is not unpredictable by the regulated, and is not contrary to the principle of explicitness of law. 
      
    •     All machine-made cool drinks should be subject to commodity tax as expressly specified in Article 8 of the Act. In addition, Paragraph 3 of the same Article provides that, “The so-called “machine-made cold drinks” in the first Paragraph refer to either one of the conditions below: 1. The drinks are made at fixed premises and sealed in bottles (boxes, cans or barrels) using motor-driven or non-motor driven machinery. 2. The drinks are made at fixed premises where the raw materials or semi-finished products of the drinks are made using motor-driven or non-motor driven machinery and loaded into a vending machine for mixture and sale.” The quantity of non-machine made cool drinks, which are mixed and made by hand or tools, is limited on the market. To impose commodity tax on them is not cost-efficient. The situation is different for machine-made cool drinks, which are stuffed and packaged by machine, and mass produced in factories and resold to the consumers. The commodity tax is a single stage sales tax, which is imposed by the legislator on specific categories of goods which are manufactured domestically or imported from abroad. In principle, the target is on the machine-made, mass, and standardized production. The legislative choice to impose tax on cool drinks is based on national economic and fiscal considerations, and is thus not abusive. Therefore, Article 8 of the Act, which imposes commodity tax only on machine-made cool drinks, and not on non-machine made drinks, is not contrary to the principle of equality of Article 7 of the Constitution. 
      
    •     “Other beverage” as defined in Subparagraph 2, Paragraph 1, Article 8 of the Act, does not refer to diluted natural fruit/ vegetable juice under Subparagraph 1, Paragraph 1 of the same Article, or pure natural or condensed fruit or vegetable juice (jus) in conformance with national standards under Paragraph 2 of the same Article. In addition, the Ministry of Finance Letter 1990.11.1 Tai-Tsai-Suei No. 790367324 explained that, “2. For machine-made canned green bean soup, peanut soup etc, according to the principle of this Ministry’s Letters (1983) Tai-Tsai-Suei No. 36286 and (1985) Tai-Tsai-Suei No. 24779, it should be reviewed whether the quantity of solid content reaches 50%; if not reaching 50%, it should be treated as drink, and subject to the commodity tax at the rate of 15%.” (hereafter 1990 Letter; the above Letter (1983) Tai-Tsai-Suei No. 36286 was abolished by the Ministry of Finance Order 2009.10.26 Tai-Tsai-Suei No. 09804564950.) As such, whether machine-made drinks, which contain drinkable and edible liquid and additions, are subject to commodity tax depends on whether such drinks contain “50% solid” or not. These are explanations made by the competent authority based on their competence in order for their subordinate agencies to decide on individual cases. Such standards comply with general concept of the society, and are not contrary to the general principle of interpretation of law, and thus are not contrary to the concept of statutory taxpaying (see J.Y. Interpretation Nos. 635 and 685). In addition, the Ministry of Finance Letter 1995.11.24 Tai-Tsai-Suei No. 841660961 explained that, “edible bird’s nest drinks imported or manufactured by enterprises are taxable drinks under Article 8 of Commodity Tax Act, and are subject to commodity tax according to the law.” This was an explanatory letter issued by the competent authority following the standards of drinks set forth by the above 1990 Letter to decide whether edible bird’s nest drinks are cool drinks or not. The opinion expressed in the Letter complies with general concept of the society regarding cool drinks, and is not contrary to the principle of statutory taxpaying. However, there are a wide variety of drinks, and new products emerge day by day. Whether the deciding standards for cool drinks, which are subject to commodity tax, should be specified in the statute as enacted or in the statutory order of the competent authority as delegated by legislators should be reviewed by the relevant agencies in due course.
      
    •     Subparagraph 1, Article 32 of the Commodity Tax Act, which was amended and promulgated on 1997.5.7 and became effective on 2002.1.1, provides that, “In any of the following circumstances, the taxpayer shall be pursued for payment of taxes and fined from 5 to 15 times the amount of tax evaded: 1. Failing to complete necessary registration in compliance with Article 19, and illegally manufacturing commodities subject to commodity tax.” (which penalty was amended to be 1 to 3 times on 2009.12.30). The above provision bears the nature of penalty for tax evasion imposed on the taxpayer who does not complete the manufacturer’s registration and product’s registration in accordance with the law and who manufactures taxable goods so as to evade tax. The purpose of imposing a penalty of 5 to 15 times the amount of tax evaded is to prevent tax evasion so as to ensure correct taxation. It is not beyond the legislative discretion and is not contrary to the constitutional principle of proportionality.
      
    • Translated by Chun-yih Cheng.
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