I. Facts and a summary of the petitioner’s statement
1. Facts
The petitioner sought remedy against the Ministry of Finance’s Central District State Taxation Bureau’s order to pay the difference concerning the over-distribution of shareholder tax credits in 2012. The Taichung High Administrative Court in Judgment 106-Su-49 (2017) (hereinafter referred to as the Disputed Judgment) and the Supreme Administrative Court's ruling 106-Tsai-1645 (2017) (hereinafter referred to as the Disputed Ruling) dismissed the suit. The petitioner believed that Article 114-2, Paragraph 1, Subparagraph 1 of the Income Tax Act as amended and promulgated on May 27, 2009 (hereinafter referred to as the Disputed Provision), applied in the aforementioned judgment and ruling is inconsistent with the Constitution, and, in accordance with Article 5, Paragraph 1, Subparagraph 2, of the Constitutional Court Procedure Act petitioned for interpretation of the Constitution on January 2, 2018.
2. A summary of the petitioner’s statement
The petition is summarized as follows: The petitioner is a profit-making enterprise whose shares are 100% held by shareholders who do not reside in our jurisdiction. According to the Income Tax Act, dividend income is taxed differently depending on whether the recipient is a domestic or foreign shareholder. If a foreign shareholder, whether an individual or a profit-making enterprise, earns income in this country, the income tax will be withheld at source, and the imputation credit system does not apply. Therefore, if a profit-making enterprise makes a calculation error and inflates the shareholder tax credit, the foreign shareholder cannot enjoy the tax credit, even if he or she is allocated a tax credit. The national treasury thus suffers no revenue loss. The petitioner asserts that, as no tax is evaded, no additional tax should have been collected or paid. However, the Disputed Provision does not differentiate between the status of shareholders and between the existence or non-existence of tax evasion, and requires a profit-seeking enterprise to pay taxes on the over-distribution of tax credit to foreign shareholders. The petitioner asserts that this causes double taxation that violates the constitutional guarantees of equality, survival, work, and property rights. The petitioner additionally argues that the Disputed Provision violates the taxation-by-law doctrine under Article 19 of the Constitution and the principle of proportionality under Article 23 of the Constitution.
II. Basis for jurisdiction and trial procedure
According to Article 90, Paragraph 1 of the Constitutional Court Procedure Act, cases that were filed before the amendment took effect on January 4, 2022 but have not been concluded, unless otherwise provided for in the Act, the amended Act shall apply. However, whether the case is admitted for deliberation depends on the provisions of the Act before the amendment took effect. As the current case was filed on January 2, 2018, whether it is admitted for deliberation or not shall be decided on the basis of the provisions of the Act before the amendment took effect. In other words, it is governed by Article 5, Paragraph 1, Subparagraph 2 of the Constitutional Court Procedure Act. The petitioner also appealed against the Disputed Judgment, and the appeal was dismissed by a ruling for failing to satisfy procedural requirements. The final judgment against which the petition is made is therefore the Disputed Judgment. The Disputed Provision is applied by the final judgment as the basis for judgment. Therefore, this petition is consistent with the provisions of Article 5, Paragraph 1, Subparagraph 2 of the Constitutional Court Procedure Act, is accepted for deliberation, and leads to this judgment.
III. The rule to be reviewed (i.e. the Disputed Provision) and its evolution
Article 114-2, Paragraph 1, Subparagraph 1 of the Income Tax Act (i.e., the Disputed Provision), amended and promulgated on May 27, 2009, states: “If a profit-making enterprise falls under any of the circumstances specified herein, the amount of tax credit that should not have been paid shall be paid back by the profit-making enterprise within the time limit...: 1. Violating Article 66-2, Paragraph 2, Article 66-3 or Article 66-4, falsely increasing the account amount of shareholder tax credit... , causing the amount of tax credit allocated to shareholders or members to exceed the amount of tax credit that should have been allocated.” Due to the amendments to the Income Tax Act on the imputation credit system, the provisions on the shareholder tax credit account were deleted from January 1, 2018. The Disputed Provision was therefore revised by the amendment to add “before December 31, 2018", in order to set out the facts to which the Disputed Provision shall apply, and the phrase "at the time of the action" was added to Paragraph 1. The remaining words were not revised, and the amendment took effect on January 1, 2018.
IV. Legal opinions undergirding the holding
1. Principles of review
Those who are similarly situated should be treated equally, and those who are not in similar circumstances should not be treated equally. This is the basic meaning of the principle of equality in the Constitution. In other words, it is a violation of the principle of equality to treat the same things differently without justifiable reasons, or to treat different things without reasonably differential treatment. In addition, the judgment of whether a legal norm meets the requirements of the principle of equality depends on whether the purpose of differential treatment in the legal norm is constitutional and whether there is a certain degree of connection between the classification adopted and the achievement of such purpose. (see J.Y. Interpretation Nos. 593, No. 764, No. 781, No. 782 and No. 783). In legal relationships of tax, the legislature imposes tax-related cooperation obligations on tax debtors or third parties implicated in the audit or collection process. Depending on the type and nature of the cooperation obligations, different rules are formulated. The rules’ classifications and differential treatment, involving the overall planning of national fiscal revenue and the efficiency of audit and collection process, are better decided by the legislature representing public opinion and the relevant administrative agencies possessing professional capabilities. However, the classifications and differential treatment still have to have a legitimate purpose, and there should be a reasonable connection between the classification and the achievement of the purpose, in order to comply with protection of equality under Article 7 of the Constitution (see J.Y. Interpretation No. 745).
2. The judgment of this Court
(1) Legislature imposes a cooperative obligation on profit-seeking enterprises to set up shareholder tax credit accounts, to accurately record amount for such accounts, and to keep receipts. This is necessary to promote public interests and is not prohibited by the Constitution
Dividends distributed by companies established and registered in accordance with the Company Law of the Republic of China, or by foreign companies approved by the government of the Republic of China to operate within the territory of the Republic of China, shall be income from sources in the Republic of China (Article 8, Paragraph 1, Subparagraph 1 of the Income Tax Act). Persons who receive dividend income shall pay income tax in accordance with the Income Tax Act (Article 2, and Article 3, Paragraphs 1 and 3 of the Income Tax Act).
In addition, our country's income tax law adopted an imputation credit system from 1998 to 2017. After profit-seeking enterprises paid the profit-making enterprise income tax in accordance with the Income Tax Act, they distributed the after-tax surplus to shareholders, and then the shareholders included the dividend income or surplus in the tax base for their personal (comprehensive) income tax. In order to prevent income from the same source (dividends or profits) from being repeatedly taxed on different tax entities, the legislature adopted the "imputation credit" to convert the profit-making enterprise income tax paid by profit-making enterprises after payment into the amount of tax credit that can be applied by a shareholder against his or her individual (comprehensive) income tax. Certificates shall be issued by the profit-making enterprise to the shareholder so that the individual shareholder may claim the tax credit when paying the individual (comprehensive) income tax. Therefore, Article 3-1 of the old Income Tax Act (hereinafter referred to as the old Income Tax Act) stipulates: “If a profit-making enterprise pays profit-making enterprise income tax for the year 1998 and subsequent years, unless otherwise provided by this law, when its shareholders or members receive dividends or profits, the amount of tax credit included in the total amount or total surplus may be applied against that year’s tax payable for the individual (comprehensive) income tax.”
Moreover, in order to implement the imputation credit system, the legislature has imposed an obligation on profit-making enterprises to keep shareholder tax credit account, in addition to keeping accounting books, in order to record the tax credit that should be distributed to shareholders in accordance with the law. The amount of tax credit (see Article 66-2 through Article 66-6 of the old Income Tax Act), and such enterprises are required to keep receipts and records sufficient to accurately calculate the amount of the account for inspection by the tax collection authority (Article 66-1 of the old Income Tax Act). In other words, the amount recorded in the shareholder tax credit account directly affects the amount of the tax credit that the profit-making enterprise should distribute to its shareholders. When the profit-making enterprise makes an incorrect entry in its tax credit account, resulting in an over-distribution of tax credit to shareholders, the state may incur revenue losses as a result of each shareholder exercising its right to tax credit when filing for and paying individual (comprehensive) income tax.
In tax-related legal relationships, when the tax object belongs to the tax debtor, such as the aforementioned shareholders who receive dividend income, the tax debtor owes the tax debt to the state. In addition, in the process of completing the tax audit and collection by the tax debtor and the state, if any third parties related to the completion of tax audit and collection are required to cooperate so that the state can obtain accurate tax-related information and maintain tax fairness (J.Y. Interpretation No. 317), reduce audit costs, and improve audit efficiency, it is consistent with the Constitution. Therefore, it is necessary for the legislature to impose on profit-making enterprises the obligation to set up shareholder tax credit account, and to accurately record, and maintain pieces of evidence sufficient to accurately calculate, the amount of the account, in order to assist the country in implementing the imputation credit system.
(2) Various standards for dividend income tax apply to various types of shareholders of a profit-making enterprise, which results in the application of various rules under the imputation credit system.
For individuals who do not reside within the Republic of China, and profit-seeking enterprises that do not have a fixed business place or business agent within the Republic of China (both hereinafter referred to as foreign shareholders), if any type of income stipulated in Article 88 of the Income Tax Act within the Republic of China occurs, they do not have to file annual tax return pursuant to Article 71 of the Income Tax Act. Their income tax payable to the Republic of China shall be withheld by the withholding agent at the time of payment according to the prescribed withholding rate (Article 73, Paragraph 1 of the Income Tax Act). Dividends distributed by a company to foreign shareholders are income stipulated in Article 88, Paragraph 1, Subparagraph 1 of the Income Tax Act, and the income tax payable to the Republic of China shall be withheld by the withholding agent, i.e., the company that pays the dividends, according to the prescribed withholding rate at the time of payment and then paid to the national treasury. (see Article 89, Paragraph 1, Subparagraph 1 of the Income Tax Act).
Furthermore, Article 3-1 does not apply to the tax included in the total amount of dividends or surpluses received by foreign shareholders. However, the ten percent additional profit-seeking enterprise income tax levied in accordance with Article 66-9 and actually paid, and included in the total amount of dividends or surpluses, may offset the tax due on the net amount of dividends or surpluses. (For the years of and after 2015, only half of such additional tax may offset the tax due on the net amount of dividends or surpluses.) This was set out in Article 73-2 of the old Income Tax Act. In addition, as mentioned above, Article 3-1 of the old Income Tax Act are the foundational provision for the imputation credit system in our country. Since Article 73-2 of the old Income Tax Act excludes foreign shareholders from its application, an analysis of the first half of Paragraph 1 of Article 73, Subparagraph 1 of Paragraph 1 of Article 88, and Subparagraph 1 of Paragraph 1 of Article 89 demonstrates that dividends received by foreign shareholders are subject to withholding at source, and the imputation credit system in principle does not apply. The only exception to the principle is the circumstances and scope specified in the proviso of Article 73-2 of the old Income Tax Act. Only “the amount of tax included in the total amount of dividends or surpluses that are ten percent additional profit-seeking enterprise income tax pursuant to Article 66-9 and actually paid,” can foreign shareholders use to offset the withholding tax on the net amount of dividends or surpluses.
In other words, since the right to tax credit on the dividends of foreign shareholders has been excluded by Article 73-2 of the old Income Tax Act, except for the exceptions provided for in the proviso of Article 73-2 regarding the additional levy of profit-seeking enterprise income tax on undistributed earnings, under our tax system, when foreign shareholders pay our income tax, there is no possibility of using such tax credit. Even if the amount recorded on the shareholder tax credit account of a profit-making enterprise is incorrect, and an over-distribution of tax credit for foreign shareholders is possible at first glance, the state suffers no revenue losses due to such errors, with the only exception mentioned above under the proviso of Article 73-2.
The state may suffer revenue losses in the exception provided for in Article 73-2. Article 66-9, Paragraph 1 of the Income Tax Act stipulates that “from the year 1998, if a profit-making enterprise does not distribute its earnings for the current year, an additional ten percent profit-making enterprise tax shall be imposed on the undistributed earnings.” It is a special provision enacted by the legislature “in order to prevent profit-making enterprises from using retained earnings to avoid the tax burden on their shareholders or members, and the revenue losses resulting from the implementation of the imputation credit system should not be borne by taxpayers other than shareholders, Article 1 states that profit-making enterprises shall be levied an additional ten percent profit-making enterprise income tax on the undistributed earnings of the current year starting from 1998" (Legislative Yuan Gazette 86(57): 56-59). Paragraph 1 of Article 66-3 of the Income Tax Act stipulates six subparagraphs for profit-making enterprises to be added to the balance (additional items) of shareholder tax credit account for the current year, among which the additional tax on undistributed earnings is included. Moreover, the competent authority has separately promulgated Article 61-1 of the Enforcement Rules of the Income Tax Act, which stipulates how an additional ten percent of the profit-making enterprise income tax shall be levied on the undistributed earnings included in dividends or surpluses of a profit-making enterprise. The formula for calculating the amount of tax that should be withheld against the net amount of dividends or surpluses distributed by the company shows that this item can be clearly distinguished from other items and calculated separately. This is an exception for the amount of tax credit that can be used by foreign shareholders. If a profit-making enterprise makes an error on the shareholder tax credit account, inflating the amount of tax credit, the state may suffer revenue losses.
(3) Part of the Disputed Provision involves the same treatment given to different things, and it violates the protection of the right to equality to that extent.
The Disputed Provision states that “any profit-making enterprise that falls under any of the following circumstances shall be ordered to pay within a time limit the amount of tax credit that it has over-allocated...: 1. Violation of Article 66-2, Paragraph 2, Article 66-3, or Article 66-4 by inflating the amount of the shareholder tax credit account... causing the tax credit allocated to shareholders or members to exceed the amount of the tax credit that should have been allocated.” The amount of the payment is set to be the difference between the amount "recorded" in the shareholder tax credit account and the amount “should have been recorded.” The legislative intent is “Paragraph 1 specifies that a profit-making enterprise that inflates the balance of the shareholder tax credit account available to shareholders..., when the amount of tax credit allocated to shareholders or members exceeds the amount of tax credit that should have been distributed, the profit-making enterprise shall bear the obligation to make up for the tax that should have been paid...” (Legislative Yuan Gazette, 86(57): 79). “If a profit-making enterprise fails to calculate the tax credit in accordance with... statutes and regulations, resulting in over-distribution of tax credit, it will cause revenue losses for the national treasury and affect the financing of the state...” (Legislative Yuan Gazette, Volume 98, Issue 26, Pages 101 and 102 of the Minutes).
If an error occurs in the shareholder tax credit account of profit-making enterprises, causing the amount of tax credit distributed to a shareholder to exceed the amount that should have been distributed, an individual shareholder inflates the amount of tax credit and thereby reduces the amount of income tax he or she owes to the state. The state may suffer revenue losses and its financing is affected. For those profit-seeking enterprises that violate the cooperation obligation and fail to correctly record the shareholder tax credit account in accordance with the law, resulting in over-distribution of shareholder tax credits, the Disputed Provision requires enterprises that over-distribute tax credit to pay the amount of excess distribution in order to make up for the possible revenue losses and make tax collection efficient. For profit-seeking enterprises whose shareholders are wholly or partly domestic shareholders that may claim tax credits, the purpose of the rule is legitimate and the means adopted are conducive to, and therefore reasonably related to, the achievement of the purpose.
If there is an error in the shareholder tax credit account of a profit-making enterprise whose shareholders are all foreign shareholders, the inflated amount of tax credit available to shareholders does not cause revenue losses to the state, except for the undistributed earnings that are subject to an additional ten percent of the profit-making enterprise income tax. We consider both the legislative intent of the Disputed Provision to avoid “causing revenue losses for the state treasury and affecting the financing of the state,” and the fact that the legislature pursues the goal of enabling the state to obtain correct tax information, maintaining tax fairness, reducing auditing and collection costs, and improving efficiency by imposing cooperation obligations on profit-seeking enterprises. We find that the Disputed Provision does not distinguish whether the shareholders of a profit-seeking enterprise are all foreign shareholders, and, when the amount of the shareholder tax credit account is inflated, requires the profit-making enterprise to pay the difference. The classification adopted by the Disputed Provision is too broad, and it is difficult to say that it is reasonably related to the achievement of the goal of “avoiding revenue losses for the treasury and affecting the financing of the state” and enhancing the efficiency of audit and collection. Different things are treated the same without reasonable differential treatment. To this extent, we find that it violates the protection of the right to equality under Article 7 of the Constitution.
3. Conclusion
In conclusion, the Disputed Provision, except for the above-mentioned exception (in accordance with Article 66-9 of the Income Tax Act, the tax credit resulting from the additional profit-seeking enterprise income tax on undistributed earnings that is actually paid), regardless of whether the inflated amount of shareholder tax credit and over-distribution of tax credits may result in revenue losses for the state, a profit-making enterprise has to pay the difference between the inflated amount of tax credit and the amount it should have been. If all shareholders of the profit-seeking enterprise are foreign shareholders--individuals who do not reside in the territory of the Republic of China, and profit-making enterprises that do not have a fixed place of business or a business agent in the territory of the Republic of China, the aforementioned rule as applied in such circumstance violates the Constitution’s protection of the right to equality. To this extent, the aforementioned rule loses its effect from the day this judgment is announced.
4. Additional explanation
Pursuant to the relevant provisions of the Income Tax Act, profit-seeking enterprises have the cooperation obligations to set up and accurately record shareholder tax credit account and to keep the certificates. If a profit-seeking enterprise fails to fulfill this administrative law obligation, it should be punished. The legislature may consider the characteristics of the matter, the seriousness of the affected legal interests and the desired regulatory effects, and then impose appropriate sanctions. If the principle of proportionality is not violated, such imposition of sanctions is within the scope of legislative discretion.