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  • Interpretation
  • No.746【Constitutionality of imposing failure-to-pay surcharge and of imposing interests on both unpaid tax and said surcharge.】
  • Date
  • 2017/02/24
  • Issue
    • (1) Both Article 20 of the Tax Collection Act and Article 51, Section 1 of the Estate and Gift Tax Act impose a failure-to-pay surcharge on the taxes payable but not paid on time. Are these provisions unconstitutional?
    • (2) Ministry of Finance Letter of Tai-Tsai-Shui No.790445422 (April 8, 1991) and Letter of Tai-Tsai-Shui No. 811680291 (October 9, 1992) hold that, if a taxpayer files an administrative appeal against the amount of additional taxes payable as determined by the petition decision but does not pay one-half of such taxes until after the payment deadline, a failure-to-pay surcharge shall be imposed for that half of the taxes. Are these two Letters unconstitutional?
    • (3) Article 51, Paragraph 2 of the Estate and Gift Tax Act provides that the interests on the taxes payable and the failure-to-pay surcharges shall accrue from the next day of the payment deadline. Is it unconstitutional?
  • Holding
    •        Article 20 of the Tax Collection Act provides “In the event that a taxpayer is subject to a surcharge for his/her/its failure to pay taxes by the deadline specified by the applicable tax law, a failure-to-pay surcharge in the amount equal to one percent of the amount of the overdue taxes shall be charged for every two days of delay. Where the period of delay exceeds thirty days ….” Further, Article 51, Section 1 of the Estate and Gift Tax Act provides “A failure-to-pay surcharge in the amount equal to one percent of estate or gift taxes payable for every two days of delay shall be imposed on taxpayers who fail to pay the estate tax or gift taxes payable as determined by the tax authorities before the deadline prescribed by Article 30; Where the period of delay exceeds thirty (30) days ….” The aforesaid surcharges are the means employed to urge taxpayers to fulfill their tax-paying obligations within the payment deadline. As such, they do not violate the principle of proportionality under Article 23 of the Constitution; nor do they infringe upon the people’s right to property as protected under Article 15 of the Constitution.
      
    •        Ministry of Finance Letter of Tai-Tsai-Shui No.790445422 (April 8, 1991) and Letter of Tai-Tsai-Shui No. 811680291 (October 9, 1992) mandate a failure-to-pay surcharge be imposed if one-half of additional taxes payable as determined by the petition decision is not paid until after the payment deadline. Such mandate is consistent with Article 20, Article 39, Section 1, Article 39, Section 2, Paragraph 1 of the Tax Collection Act. They are also consistent with Article 51, Section 1 of the Estate Tax and Gift Tax Act. They do not violate the principle of taxation in accordance with the law as required by Article 19 of the Constitution.
      
    •        Article 51, Section 2 of the Estate and Gift Tax Act provides “Interests for the taxes payable and failure-to-pay surcharge stipulated in Section 1 shall accrue daily at the interest rate for one-year term deposit quoted by the Postal Savings and Remittances Office from the next day of the payment deadline to the date of full payment by the taxpayer, and be collected together with the taxes payable and failure-to-pay surcharge stipulated in Section 1.” Imposing interests for the taxes payable but not yet paid does not infringe upon the right to property protected by the Constitution. However, imposing interests for the failure-to-pay surcharge has no rational basis, and, therefore, it is inconsistent with the principle of proportionality, violates the people’s right to property protected by the Constitution, and shall lose its effects from the date on which this Interpretation is announced.
  • Reasoning
    •        The petitioners, Hsia-Sang CHIANG LIN and five others, failed to pay their estate taxes and gift taxes before the payment deadlines as prescribed by the law. The tax authorities imposed failure-to-pay surcharges on one-half of additional taxes payable as determined by the petition (fucha) decisions in accordance with the following laws and regulations: Article 20 of Tax Collection Act provides “In the event that a taxpayer is subject to a surcharge for his/her/its failure to pay the tax by the deadline set out by the applicable tax law, a failure-to-pay surcharge in an amount equal to one percent of the amount of said defaulted tax shall be charged for every two days of delay. Where the period of delay exceeds thirty days ….” (hereinafter referred to as “First Disputed Provision”). Article 51, Section 1 of the Estate and Gift Tax Act provides “A failure-to-pay surcharge in the amount equal to one percent of estate taxes or gift taxes payable for every two days of delay shall be imposed on taxpayers who fail to pay the estate tax or gift taxes payable as assessed by the tax authorities before the deadline prescribed by Article 30; Where the period of delay exceeds thirty days ….” (hereinafter referred to as “Second Disputed Provision”). Ministry of Finance Letter of Tai-Tsai-Shui No.790445422 (April 8, 1991) states “if a taxpayer files an administrative appeal against the petition decision but does not pay one-half of additional taxes payable until after the payment deadline, a failure-to-pay surcharge shall be imposed pursuant to Article 20 of the Tax Collection Act because the relevant tax laws do not provide for an exemption from such surcharge for filing an administrative appeal.” (hereinafter referred to as “First Disputed Letter”). Ministry of Finance Letter of Tai-Tsai-Shui No. 811680291 (October 9, 1992) states, “if a taxpayer does not pay one-half of the additional taxes payable as determined by the petition decision until after the payment deadline, and he/she/it has filed an administrative appeal in accordance with the law, he/she/it shall be imposed a failure-to-pay surcharge for one-half of such additional taxes payable” (hereinafter referred to as “Second Disputed Letter”). Furthermore, the tax authorities imposed interests on both one-half of the taxes payable and the failure-to-pay surcharge in accordance with Article 51, Section 2 of Estate and Gift Tax Act, which provides “Interests on the taxes payable and the failure-to-pay surcharge stipulated in Section 1 calculated at the interest rate for one-year term deposit quoted by the Postal Savings and Remittances Bank shall accrue daily from the next day of the payment deadline to the date of full payment by the taxpayer, and be collected together with the taxes payable and failure-to-pay surcharge stipulated in Section 1.” (hereinafter referred to as “Third Disputed Provision”) After their requests for the refund of failure-to-pay surcharges and accrued interests were denied by the tax authorities, the petitioners filed administrative appeals. Their appeals were rejected. The petitioners then initiated administrative litigations. The litigation on the part of estate tax was dismissed on the merits by the Supreme Administrative Court in its Judgement of Pan Tzi No. 455 (2015) (hereinafter referred to as “Final Judgment No. 1”). Their appeal on the part of gift tax was dismissed on the merits by the Taichung High Administrative Court in its Judgment of Chien Shang Tzi No. 10 (2015) (hereinafter referred to as “Final Judgment No. 2”). The petitioners claimed that the First, Second, and Third Disputed Provisions, as well as the First and Second Disputed Letters, as applied by the “Final Judgment No. 1”, and the First and Second Disputed Letters, as applied by the “Final Judgment No. 2” violated Article 7, Article 15, Article 19, and Article 23 of the Constitution, and they brought these two petitions to this Court for constitutional interpretations. We opined that their petitions meet the requirements set out in Article 5, Section 1, Paragraph 2 of the Constitutional Interpretation Procedure Act, and, therefore, agreed to review both petitions together in one procedure. The reasons for this Interpretation are set out as follows:
      
    • 1. The imposition of failure-to-pay surcharges for the taxes payable but not yet paid after the payment deadline stipulated by both First and Second Disputed Provisions do not violate the principle of proportionality.
      
    •        According to Article 15 of the Constitution, an individual’s right to property shall be protected. In order to make people pay their taxes within the payment deadline and to urge those who fail to do so fulfill their obligations as soon as possible, the State may, through enacting statutes, create additional financial burdens on such taxpayer to compensate for the damages caused by late payment to the fiscal revenue. Since such burdens restricts people’s right to property, they need to be compatible with the principle of proportionality under Article 23 of the Constitution.  As tax law involves the overall planning and estimation of the fiscal revenue of the state, it is better decided by the legislative branch, representing the will of the people, and the executive branch, with fiscal expertise. (see J.Y. Interpretation No. 745). If a tax statute has a legitimate purpose and its means is rationally related to the achievement of that purpose, then the statute is considered compatible with the principle of proportionality under Article 23 of the Constitution.
      
    •        The purpose of raising tax revenue is to meet the needs of public finance and to serve public functions. Article 19 of the Constitution provides “People shall bear the obligation of paying taxes in accordance with the law.” Whether or not taxpayers fulfill their tax-paying obligation within the statutorily prescribed deadline is related to the timely realization of the fiscal revenue of the state, which further affects the implementation of national policy measures, the maintenance of social order, and the advancement of public interests. The stakes are high. (J.Y. Interpretation No. 588) The payment deadlines have to be implemented strictly. The First and Second Disputed Provisions provide that a failure-to-pay surcharge in the amount equal to one percent of estate taxes or gift taxes payable shall be imposed on taxpayers who default on the payment for every two days of delay. The maximum amount of such surcharge shall be fifteen percent of the taxes payable, for a period of thirty days. (Ministry of Finance Letter of Tai-Tsai-Shui No. 811688010 (January 5, 1993)). The purposes of failure-to-pay surcharge are to urge taxpayers to fulfill their taxpaying obligation in a timely manner, and to compensate for the loss of national fiscal revenue caused by the late payment of taxes. Similar to default penalty, the failure-to-pay surcharge is in a sense also a default interest, and different from the failure-to-file surcharge. (J.Y. Interpretation No. 616). The failure-to-pay surcharge has a legitimate purpose and does not violate the Constitution. 
      
    •        For people capable of paying taxes, such failure-to-pay surcharge increases their public-law obligation to pay the government, which does result in economic and psychological burdens. In order to avoid such burdens, taxpayers will have to pay their taxes within the prescribed deadline, or, in the case of default, pay as early as possible. The failure-to-pay surcharge, therefore, does help achieve the aforementioned purposes. Further, if a taxpayer is unable to pay the taxes in full within the prescribed deadline due to a natural disaster, a serious incident, force majeure, or economic disadvantages, or if a taxpayer is unable to pay in cash the full amount of the estate taxes or gift taxes which is three hundred thousand New Taiwan Dollars or more, the taxpayer may apply for permission to make deferred payments or installment payments. (Article 26 of the Tax Collection Act, the Regulation Governing the Taxpayers’ Application for Deferred Payments or Installment Payments, and Article 30, Section 2 of the Estate and Gift Tax Act). Such taxpayers may also apply for substitute payment in kind (Article 30, Section 4 of the Estate and Gift Tax Act). In both scenarios, taxpayers will be exempted from the failure-to-pay surcharge. Therefore, it is evident that the imposition of the failure-to-pay surcharge under the First and Second Disputed Provisions is not too excessive, and is rationally related to the achievement of the purposes. Therefore, the First and Second Disputed Provisions do not violate the principle of proportionality under Article 23 of the Constitution. Nor do they infringe upon people’s right to property protected by Article 15 of the Constitution (see J.Y. Interpretation No. 472).
      
    •        However, with regard to the imposition of failure-to-pay surcharge at one percent every two days, the authorities concerned shall, in due time, review whether the as-applied outcome in a particular case is too harsh as a result of the two-day interval being too short or the interest rate being too high, taking into account the cost of tax collection, the number of people who default on payment, consumer price index, and the economic standard of our people. In addition to the aforementioned adjustment mechanisms, the authorities concerned should also consider whether to amend the law to expressly authorize the tax authorities to weigh the facts and circumstances of particular cases, and, then, to reduce or waive the failure-to-pay surcharge.” (see Article 30 of the Deed Tax Act (qishui tiaoli) and Article 79, Section 2, Paragraphs 2 to 4 of the Customs Act (guanshui fa)).
      
    • 2. The imposition of the failure-to-pay surcharge on one-half of the taxes payable set out by a petition decision as provided for in the First and Second Disputed Letters does not violate the principle of taxation in accordance with the law.
      
    •        Article 19 of the Constitution provides “People shall bear the obligation to pay taxes in accordance with the law,” which means that, whenever imposing a tax-paying obligation on, or offering a preferential tax treatment to, a taxpayer, the state shall set out by a statute the elements of tax, such as the taxpayer, the subject matter of taxation, the attribution of the subject matter to the taxpayer, the tax base, the tax rate, the taxing method, and the date on which the tax becomes payable. However, when applying statutory provisions within their competence, the competent authorities may construe the relevant provisions based on their legal powers. If their construction of law is made in conformity with the principles of the Constitution and the relevant legislative purposes, as well as the general approaches of legal interpretation, such construction is consistent with the principle of taxation in accordance with the law. (J.Y. Interpretation Nos. 660, 693, and 745). 
      
    •        The First and Second Disputed Letters hold that, if a taxpayer files an administrative appeal against the petition decision but does not pay one-half of the additional taxes payable until after payment deadline, a failure-to-pay surcharge shall be imposed for one-half of additional taxes payable according to the law. The phrase “payment deadline” as stated in the First and Second Disputed Letters does not limit itself to the payment deadline set out by the tax statute or the initial tax assessment. As a matter of interpretation, the phrase “payment deadline” also refers to the payment deadline set out by the petition decisions that require additional taxes to be paid. Further, according to Article 39, Section 1, and Article 39, Section 2, Paragraph 1 of the Tax Collection Act, if a taxpayer applies for petition (fucha) in accordance with the law, or files an administrative appeal (suyuan) in accordance with the law against the petition decision within the payment deadline set out by the petition decision while paying one-half of the additional taxes required by the petition decision, such taxpayer may be temporarily exempted from compulsory execution (qiangzhi zhixing). Such exemption is an exception to the general rule that the compulsory execution of an administrative act will not be put on hold simply because of disputing the validity or appropriateness of the administrative act. (Article 93, Section 1 of the Administrative Appeal Act (suyuan fa) and Article 116, Section 1 of the Administrative Litigation Act (xingzheng susong fa)). Therefore, when a taxpayer applies for petition, the compulsory execution will be put on hold and, therefore, the State needs not urge the taxpayer to pay. When a taxpayer does not file an administrative appeal against the petition decision, the petition decision would become final. Since the taxpayer does not pay taxes before the payment deadline set out by the petition decision, there is a need to urge him or her to pay their taxes and, therefore, a failure-to-pay surcharge should be imposed. When a taxpayer files an administrative appeal against the petition decision in accordance with the law, and pay one-half of taxes within the payment deadline, the compulsory execution will be put on hold and, therefore, there is no need to urge him or her to pay. If a taxpayer does not pay one-half of the taxes payable until after the payment deadline, the compulsory execution will not be put on hold and, therefore, a failure-to-pay surcharge shall be imposed for the one-half of the taxes payable. The ruling set out in First and Second Disputed Letters, regarding the imposition of a failure-to-pay surcharge on those not paying one half of the additional taxes payable as determined by the petition decision until after the payment deadline, does not involve the essential terms of taxation, 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. Therefore, the First and Second Disputed Letters are consistent with the legislative purposes of the First and Second Disputed Provisions, and those of Article 39, Section 1 and Article 39, Section 2, Paragraph 1 of the Tax Collection Act. As a result, both First and Second Disputed Letters do not violate the principle of taxation in accordance with the law under Article 19 of the Constitution.
      
    • 3. The imposition of interests on taxes payable but not yet paid as provided in the Third Disputed Provision does not infringe on the right to property as protected by the Constitution. In contrast, the imposition of interests on the failure-to-pay surcharge does violate the principle of proportionality.
      
    •        The Third Disputed Provision provides that the interests calculated at the interest rate for one-year term deposit quoted by the Postal Savings and Remittances Bank shall accrue daily from the next day following the prescribed payment deadline to the day of payment for both the taxes payable but not yet paid and the failure-to-pay surcharge. The nature of such interests is a kind of compensation for the loss caused by late payment (see Article 233, Section 1 of the Civil Code). If a taxpayer files an administrative appeal (suyuan) against the amount of the taxes as determined by the petition (fucha) decision and pays one-half of such taxes, the compulsory execution will be put on hold pursuant to Article 39, Section 2, Paragraph 1 of the Tax Collection Act. In other words, the taxpayer enjoys the benefit of not paying the other half of the taxes on time. The imposition of interests for that other half of the taxes, and the rule that, as stipulated in the Third Disputed Provision, such interests shall become payable when the tax assessment becomes final are consistent with the right to property protected by the Constitution. (see J.Y. Interpretation No. 311). With regard to the imposition of interests for the failure-to-pay surcharge as provided for in the Third Disputed Provision, as the purpose and nature of the failure-to-pay surcharge is to urge taxpayers to pay taxes on time, no “interest” may accrue for such surcharge. In addition, as the nature of the failure-to-pay surcharge includes that of interests accruing for late payment, incurring interests for the failure-to-pay surcharge would account to doubling the amount of the damages arising from the late payment of taxes, for which there exists no rational basis between the means and the end. Such imposition is therefore inconsistent with the principle of proportionality as required by the Constitution, and violates the right to property as protected by the Constitution. This part of the Third Disputed Provision shall, therefore, cease to be effective immediately from the day this Interpretation is announced.
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