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  • Interpretation
  • No.703【Depreciation deductions for the capital expenditures for the fixed assets acquired by the hospitals established as non-profit foundations.】
  • Date
  • 2012/10/05
  • Issue
    •        As prescribed by an administrative regulation, hospitals that are affiliated with public interest groups are not allowed to take depreciation deductions if capital expenditures have been previously taken for the full amount for the purpose of qualifying for tax exemption. Does this administrative regulation violate the Constitution?
  • Holding
    •        Point 1, Paragraph 5, Resolutions 1 and 3 of the Letter (han) Ruling Tai Shui Yi Fa No. 841664043, issued by the Taxation Administration, Ministry of Finance, on December 19, 1995, interpreting Article 2, Section 1, Paragraph 8 of the Standards Applicable for Education, Culture, and Public Charity Organizations or Groups on Their Exemption from Income Taxation, state that, if capital expenditures have been taken for the full amount for assets such as buildings and equipment for health care purposes in the year of their procurement, hospitals established as non-profit foundations or as part of such foundations have to deduct the amount of such expenditures from their “income arising from sources other than the sales of goods or services” (xiaoshou huowu huo laowu yiwai zhi shouru), and that such hospitals cannot take any depreciation deductions in the following years. Resolutions 1 and 3 violate Article 19 of the Constitution, which requires that taxation be in accordance with the law; therefore, they should cease to be relied upon on the day this Interpretation is announced.
  • Reasoning
    •        The petitioner claimed that Point 1, Paragraph 5, Resolutions 3 of the Letter (han) Ruling Tai Shui Yi Fa No. 841664043 issued by the Taxation Administration, Ministry of Finance on December 19, 1995 (hereinafter referred to as Disputed Resolution) may be unconstitutional and filed the current petition. The Letter Ruling is the basis upon which the following judgments were rendered: Pan Zi No. 1862 (2007) of the Supreme Administrative Court, Su Zi Nos. 2686 and 3103 (2006), Su Zi No. 2731 (2007), Su Zi No. 2838 (2008), Su Zi No. 1862 (2009),Su Zi No. 1866 (2010), and Su Zi No. 1476 (2011) of the Taipei High Administrative Court (together hereinafter referred to as the Final Judgments). Although the Disputed Resolution was not explicitly cited in the opinion of Su Zi No. 3103 (2006), judging from the legal opinions provided by Su Zi No. 3103 (2006) Disputed Resolution 3 was in effect relied upon by Su Zi No. 3103 (2006) and, therefore, was also reviewed when considering the current petition (see Judicial Interpretation Nos. 399, 582, 622, 675, and 698).
      
    •        When an individual whose rights protected by the Constitution are illegally infringed upon and initiates a litigation to raise the issue of the constitutionality of the statute or  regulation being applied by the final judgments in accordance with Article 5, Section 1, Paragraph 2 of the Constitutional Interpretation Procedure Act, the object of review by this Court is not limited to the law or regulation being challenged within the petition; instead, the object of review by this Court includes the laws or regulations relied upon as the basis of the final judgments that are materially relevant to the petition (see J.Y. Interpretation Nos. 664 and 576). Alleging that Disputed Resolution 3 as applied by Final Judgments may be unconstitutional, the petitioner complied with the procedural requirements for filing a petition. In addition, as the part of Resolution 1 of the same Letter Ruling stating that “the full amount taken as capital expenditure in the year of procurement concerning the activities that are related to the objectives of the establishment of the Education, Culture, and Public Charity Organizations or Groups  shall be subtracted from ‘revenue not arising from the sale of goods or labor services,’” is materially relevant to the attribution of costs in the same manner as is Resolution 3 and, therefore, shall also be subject to review by this Court in this case.
      
    •        Article 19 of the Constitution states that individuals have the obligation to pay taxes in accordance with the law, and it means that when the state levies taxes on, or provides preferential tax treatment to, individuals, the essential terms, such as the taxpayer, the subject matter of the taxation, the attribution between the subject matter and the taxpayer, the tax base, the tax rate, the taxing method, and the date on which the tax becomes payable, among other things, shall be explicitly stipulated by statute. The competent authority interpreting the relevant laws must uphold the constitutional principles and the legislative purposes of the relevant laws, and apply the generally accepted methods of legal interpretation; any decision that exceeds the scope of legal interpretation and increases tax obligations that are not mandated by the law is not permitted by the principle of taxation in accordance with the law under Article 19 of the Constitution (see J.Y. Interpretation Nos. 620, 622, 640, 674, and 692).
      
    •        The first part of Article 24, Section 1 of the Income Tax Act states: “The income of a profit-seeking enterprise is its net profit amount, having subtracted all costs, expenses, losses, and taxes from its gross revenue of the fiscal year.” (This provision was amended on May 30, 2006 by adding a second part to the first paragraph; after the amendment, therefore, the original Section 1 became the first part of Section 1.) In other words, the revenue of a profit-seeking business becomes its net profit, after the subtraction of all costs, expenses, losses, and taxes. Based on the principle of matching income with costs and expenses, only the costs, expenses, losses, and taxes that are incurred for the purpose of producing the revenue may be deductible. For fixed assets with a useful life of two years or longer, the annual depreciable amount shall be considered as costs (see Article 51 of the Income Tax Act) to correctly reflect the costs and expenses for the procurement of fixed assets in each respective year. In essence, as long as a cost or an expense can be directly, reasonably, and clearly attributed to either “taxable income” or “income exempt from taxation,” it should be so attributed, so as to comply with Article 24, Section 1 of the Income Tax Act.
      
    •        The Disputed Resolution 1 states: “When hospitals established as non-profit foundations or as part of such foundations calculate their taxable income in accordance with Article 2-1 (now Article 3) of the Standards Applicable for Education, Culture, and Public Charity Organizations or Groups on Their Exemption from Income Taxation, depreciation deductions shall be taken annually against the assets newly acquired for health care purposes, such as buildings and equipment, under the relevant provisions under the Income Tax Act, mutatis mutandis, and be categorized “the costs or expenses for the sales of goods or the rendition of services.” Should the capital expenditures stated above are related to the activities of the purpose for which the organization was established, the hospital may choose one of two options: to take annual depreciation with deduction from “the income arising from the sales of goods or the rendition of services,” or to list the full amount as “capital expenditures related to the objective of establishment” for the fiscal year of procurement.” The Disputed Resolution 3 states: “If capital expenditures have been taken for the full amount for assets such as buildings and equipment for health care purposes in the year of their procurement, hospitals established as non-profit foundations or as part of such foundations cannot take any depreciation deductions in the following years.” In accordance with Resolutions 1 and 3, if a taxpayer elects to treat the entire amount of the purchase as “capital expenditures related to the objective of its establishment in the year when the purchase was made,” when calculating the taxable income, the amount of such expenditures shall be deducted from the “income arising from sources other than the sales of goods or the rendition of services,” rather than from “income arising from the sales of goods or rendition of services.”
      
    •        Article 4, Section 1, Paragraph 13 of the Income Tax Act provides that if an educational, cultural, public interest, or charitable organization or group (hereinafter referred to as a public interest group) who meets the criteria set out by the regulations promulgated by the Executive Yuan, its own income or the income of its subordinate operations (fushu zuoye zuzhi) shall be exempt from income taxation. Under the authorization of Paragraph 13, the Executive Yuan amended, on December 30, 1994, the Standards Applicable for Education, Culture, and Public Charity Organizations or Groups on Their Exemption from Income Taxation (hereinafter referred to as Standards for Tax Exemption). Article 2, Section 1, Paragraph 8 stipulates: “For any educational, cultural, public charity organization or group that meets the following requirements, its own income or the income of its subordinate operations is exempt from income taxation., except for ‘the income from the sale of goods or rendition of services,’… (8) The expenditures incurred for the activities related to its objective of establishment that do not fall below 80% of the sum of the proceeds that accrued annually for its funds and its other regular income; however, this requirement is waived if, after the investigation done by the relevant government offices, the Ministry of Finance approved the exemption from taxation.” (Paragraph 8 was amended on March 26, 2003 as follows: “The expenditures incurred for activities related to its objective of establishment that do not fall below 70% of the sum of the proceeds that accrued annually for its funds and its other regular income; however, this requirement is waived if, after the investigation done by the relevant government offices, the Ministry of Finance approved the exemption from taxation.”) Paragraph 8 requires that the expenditures must have reached 80% of its revenue to qualify a public interest group for tax exemption. Even if “the income arising from sources other than the sales of goods or the rendition of services” has met the requirement set out by the Standards for Tax Exemption, depreciation deductions must be taken annually against the expenditures for the procurement of buildings or equipment for healthcare purposes and listed as costs and expenses for “the income arising from the sale of goods or the rendition of services” in accordance with the relevant provisions of the Income Tax Act. Such depreciation deductions have to be subtracted from “the revenue arising from the sales of goods or the rendition of services” so that the costs and expenses are accurately calculated. The part of Disputed Resolution 1 that requires, if the full amount of such capital expenditures is treated as “capital expenditures” in the year of procurement, the subtraction of capital expenditures from “the income arising from sources other than the sales of goods or the rendition of services” when calculating the amount of taxable income, and the part of Disputed Resolution 3 that disallows depreciation deductions in the following years, essentially deny the deductibility of the costs and expenses allowed by the first half of Article 24, Section 1. In other words, the administrative regulations promulgated by the Ministry of Finance changes the tax base stipulated by the Income Tax Act passed by the Legislative Yuan, which violates the principle of taxation in accordance with the law, and, therefore, should cease to be applied on the day this Interpretation is announced. It should be noted, however, that as the expenditures incurred by hospitals established as non-profit foundations or as part of such foundations for the procurement of assets for healthcare purpose are, after verification, listed as “the costs  and expenses for the sales of goods or the rendition of services” when calculating “the income arising from the sales of goods or the rendition of services,” and annual depreciation is allowed under the Income Tax Act, when calculating “the income arising from sources other than the sales of goods or the rendition of services,” the same expenditures cannot be listed as capital expenditures in the full amount for the year of procurement and be deducted from "the income arising from sources other than the sales of goods or the rendition of services." In so doing the intent of the front portion of Article 24, Section 1 of the Income Tax Act can be realized and the principle of tax fairness be upheld.
      
    •        The immediate case of whether the law in question is unconstitutional arises from the fact that the Income Tax Act exempts the income of public interest groups from taxation. In order to realize the legislative purpose of encouraging public interest work while taking into account tax fairness, the Executive Yuan, being authorized to promulgate the Standards for Tax Exemption, allows public interest groups to engage in revenue-seeking activities, but explicitly excludes their profits from the scope of their exemption from taxation. In addition, as a mean to urge public interest groups to concentrate their resources on activities that are consistent with the purposes of their establishment, the Executive Yuan caps their profit-seeking income with a certain ratio between expense and income. Such a cap has already caused significant problems for groups whose principal activities are public interest in nature. Take hospitals—the subject matter of this Interpretation—for example. First, they are highly regulated by the relevant government offices over their public interest activities. Secondly, in terms of the sale of goods or the rendition of services, hospitals, whether they pursue public interest or not, compete directly. The cap is, therefore, susceptible to manipulation that adversely affects tax fairness and competition neutrality. The relevant government offices should also review this aspect.
      
    •        With regard to the petitioner’s claim that the Supreme Administrative Court judgment (98) Pan Zi No. 488 (2009) relied on Disputed Resolution 3, and should therefore be part of its petition for constitutional interpretation, this Court finds that the said judgment did not rely on Disputed Resolution 3, and that this part of the petition does not meet the requirements set out by Article 5, Section 1, Paragraph 2 of the Constitutional Interpretation Procedure Act (sifa yuan dafaguan shenli anjian fa), and should, therefore, be dismissed under Section 3 of the same provision.
      
    • ______________________
      
    • * Translated by Chi CHUNG.
      
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