1. Summary of the parties’ pleadings
(1) Summary of the facts of the underlying case
When filing the profit-seeking enterprise annual income tax return for the year 2010, the applicant and its subsidiary Dragon Steel Corporation made a consolidated declaration under rules for the affiliated companies. The National Taxation Bureau of Kaohsiung, Ministry of Finance, after review, determined that the amount of losses in the preceding ten years that were carried over to the current year (2010) according to the proviso of Article 39, Paragraph 1 of the Income Tax Act should be lowered by “the net amount of dividends” received in 2009 which is excluded from the amount of income under Article 42, Paragraph 1 of the Income Tax Act as amended and announced on December 30, 1997 (hereafter referred to as the 1997 version) (the terms dividends, net amount of dividends, earnings, net surplus earnings in Article 42 of the Income Tax Act are hereafter referred to as “investment income”). The applicant was dissatisfied with the result and sought administrative remedies. In the end, the Supreme Administrative Court Judgment 105-Pan-661 (2016) (hereafter referred to as the final and binding judgment) ruled against the applicant.
(2) Summary of the applicant’s pleadings
The Ministry of Finance Letter Tai-Tsai-Shui-31580 of March 9, 1977 (hereafter referred to as the Disputed Interpretative Letter), applied in the final and binding judgment, restricts the extent to which the applicant’s losses in previous years are carried over to later years according to the proviso of Article 39 Paragraph 1 of the Income Tax Act, in effect taxing the investment income received but excluded from the amount of taxable income in the previous years during which losses occurred, broadening the tax base of profit-seeking enterprise income tax, deviating from the legislative intent of Article 39 of the Income Tax Act, and contradicting the legislative purpose of avoiding double taxation under Article 42 of the Income Tax Act. In addition, the Disputed Interpretative Letter, compared with the Ministry of Finance Letter Tai-Tsai-Shui-18503 of July 6, 1985 (on the subject of gains derived from securities transactions, hereafter referred to as the Ministry of Finance Letter 1985), and the Ministry of Finance Letter Tai-Tsai-Shui-7585901 of September 22, 1987 (on the subject of land transactions income, hereafter referred to as the Ministry of Finance Letter 1987), constitutes differential tax treatment. Therefore, the Disputed Interpretative Letter is inconsistent with the principle of equal protection of law under Article 7 of the Constitution, the principle of taxation by law under Article 19 of the Constitution, and the protection of property rights and the freedom of business under Article 15 of the Constitution.
2. Grounds of Admissibility
According to Article 90, Paragraph 1 of the Constitutional Court Procedure Act (January 4, 2019), except otherwise provided for in that Act, the pending and yet-to-be-concluded cases lodged before the entry into force of the amended Constitutional Court Procedure Act shall be adjudicated following the amended Constitutional Court Procedure Act, but the question of admissibility shall be determined by Article 5, Paragraph 1, Subparagraph 2 of the Constitutional Court Procedure Act (February 3, 1993). According to Article 5, Paragraph 1, Subparagraph 2 of the Constitutional Court Procedure Act (February 3, 1993), persons applying for an interpretation of the Constitution must have suffered illegal infringement of their rights protected by the Constitution and, after initiating litigations according to the law, controversies arise as to whether the statutes or regulations applied by the final and binding judgments or rulings violate the Constitution. As the current application has been pending before this Court since December 26, 2018, its admissibility shall be determined pursuant to Article 5, Paragraph 1, Subparagraph 2 of the Constitutional Court Procedure Act (February 3, 1993). As the current application satisfies the above-mentioned requirements, we will consider its merits.
3. Legal Analysis that Leads to the Holding
(1) Standards of Review
Article 19 of the Constitution requires people to pay taxes in accordance with the law. In other words, when the state imposes a duty to pay taxes upon people or gives people tax benefits, a statute must expressly provide for the elements of taxation such as the subject of taxation, the object of taxation, the relationship between the object of taxation and the subject of taxation, the tax base, the tax rate, the method of paying taxes, and the period during which the taxes have to be paid. When a competent authority applies tax statutes within the scope of its jurisdiction, it may interpret relevant provisions based on its legal competence, if the interpretation is based on standard statutory interpretation methods, consistent with constitutional principles and in accordance with their legislative purposes, there is no violation of the principle of taxation by law (see J.Y. Interpretation Nos. 660, 693, and 700).
(2) The Disputed Interpretative Letter was issued to help competent tax authorities to exercise their jurisdiction to assess according to the proviso of Article 39, Paragraph 1 of the Income Tax Act
The amount of income of a profit-seeking enterprise shall be the net income, i.e., the gross yearly income after deduction of all costs, expenses, losses and taxes, and the losses incurred in the operation of business in previous years shall not be included in the computation for the current year, as expressly set out in Article 24, Paragraph 1, first sentence, and Article 39, Paragraph 1 of the Income Tax Act respectively. However, the proviso of Article 39, Paragraph 1 of the Income Tax Act states that “in the case of a profit-seeking enterprise organized as a company that keeps a complete set of account books, uses the Blue Returns as provided in Article 77 for the years such losses occurred and for the year to which the losses are carried over, or such losses have been duly certified by a certified public accountant and declared within the prescribed period, taxation may be made on its net income after deduction of losses incurred in the preceding ten years as verified and determined by the competent tax authority.” In other words, the proviso of Article 39, Paragraph 1 of the Income Tax Act allows, subject to certain conditions, the “losses incurred in the preceding ten years” to deducted from the annual income (hereafter referred to as net income) in the year to which the losses are carried over (hereafter referred to as the current year), which is an exception to the principle that the income of profit-seeking enterprises shall be computed yearly. The requirements for such an exception to apply include a profit-seeking enterprise organized as a company, keeping a complete set of account books, using the Blue Returns as provided in Article 77 of the same Act in the years such losses occurred and in the year of declaring such losses, or such losses have been duly audited and attested to by a certified public accountant and reported within the prescribed period. However, the concept of “losses incurred in the preceding ten years” is not explicitly provided for in the Income Tax Act and has to be assessed by the competent tax authority before such losses incurred in the preceding ten years can be deducted from the current year’s net income, in order to calculate the amount of the current year’s taxable income. Therefore, the assessment of a profit-seeking enterprise’s “losses incurred in the preceding ten years” by the competent authority is a precondition for determining the amount of taxable income for the year to which the losses are carried over.
When a competent tax authority determines the amount of taxable income for the year to which the losses are carried over according to the proviso of Article 30, Paragraph 1 of the Income Tax Act, it shall first assess the “losses incurred in the preceding ten years.” In addition, the amount shown in the column for “taxable income” on the Notice of Assessment for Profit-Seeking Enterprise Annual Income Tax is the result of the competent authority’s review of the income (or loss) declared by the profit-seeking enterprise and the basis on which the profit-seeking enterprise income tax due for that year is computed, it is not designed for the purpose of offset between profits and losses . Therefore, the “losses incurred in the preceding ten years” that can be deducted from the current year’s net income referred to in the proviso of Article 39, Paragraph 1 of the Income Tax Act are not the sum of the losses incurred by the profit-seeking enterprise and assessed by the competent authority for previous years. To clarify the standard by which the “losses incurred in the preceding ten years” are assessed, the supervisory authority of the tax authorities, the Ministry of Finance, issued an interpretative letter to clarify that the “losses assessed by a competent authority” shall be calculated by first offsetting the investment income not included in the amount of income under Article 42 of the Income Tax Act. The Disputed Interpretative Letter states that in the case of a profit-seeking enterprise organized as a company that, under Article 39 of the Income Tax Act, deducts the losses in the preceding three years from the current year’s net income, the investment income that is excluded from the amount of income under Article 42 of the Income Tax Act shall first be applied to offset the assessed losses. Then the remaining losses may be deducted from the current year’s net income. (Three years was changed to ten years under current regulations by an amendment promulgated on January 21, 2009). The Disputed Interpretative Letter was issued to help competent tax authorities to exercise their jurisdiction.
Therefore, if the Disputed Interpretative Letter does not exceed the possible scope of interpretation of the phrase “losses in the preceding ten years” referred to in the proviso of Article 39, Paragraph 1 of the Income Tax Act, and is consistent with the legislative purpose of that rule, there is no violation of the principle of taxation by law.
(3) The Disputed Interpretative Letter does not exceed the possible scope of interpretation of the “losses in the preceding ten years” as provided for in the proviso of Article 39, Paragraph 1 of the Income Tax Act, is consistent with the legislative intent of the proviso, and, therefore, does not violate the principle of taxation by law, as set out in Article 19 of the Constitution.
The loss carryover, as provided for in the proviso of Article 39, Paragraph 1 of the Income Tax Act, was enacted in light of the heavy burden imposed by the yearly calculation of fluctuating profit-seeking enterprise income, to enhance the competitiveness of businesses and make the tax system fair and reasonable, and considering the correct measurement of the tax bearing capacity and the sustainable operation of businesses (see pages 58-59 of the Government Proposal No. 148 of the First Legislative Yuan Bill-Related Documents Yuan-Tzung-225 of February 20, 1954; page 111 of the Meeting Records, Volume No. 78, Issue No. 104 of the Legislative Yuan Gazette; pages 81-82 of the Meeting Records, Volume No. 98, Issue No. 3 of the Legislative Yuan Gazette). To elaborate further, the proviso of Article 39, Paragraph 1 of the Income Tax Act is an exception to the principle of yearly taxation. To correctly measure the tax bearing capacity of profit-seeking enterprises, it allows profit-seeking enterprises that meet certain conditions, such as complete account books, to deduct losses of previous years in the current year. It therefore adequately relaxes the principle of taxation on a yearly basis and thereby enhances the competitiveness of businesses.
As Article 42 of the Income Tax Act, also implicated by the Disputed Interpretative Letter, states that investment income is not included in taxable income, annual income, or net income, the investment income received for the current year (the year to which losses are carried over), according to the proviso of Article 39, Paragraph 1 of the Income Tax Act, are excluded from the current year’s net income. The investment income that was excluded from the annual income in previous years according to Article 42 of the Income Tax Act is not the foundation upon which the current year’s net income is computed. (According to Article 24, Paragraph 1, first sentence of the Income Tax Act, net income shall be calculated by subtracting all costs, expenses, losses and taxes from the total amount of revenue in the current year.) In other words, the proviso of Article 39, Paragraph 1 of the Income Tax Act concerns the question how to assess the deduction (“the losses in the preceding ten years” as provided for in the proviso of Article 39, Paragraph 1 of the Income Tax Act) for the current year’s net income. Therefore, according to the Disputed Interpretative Letter, even though the assessment of the “losses in the preceding ten years” involves the investment income that is according to Article 42 of the Income Tax Act excluded from the amount of income in the years during which the losses were incurred, these “losses in the preceding ten years” are nevertheless used to offset the current year’s net income for the purpose of assessing the current year’s taxable income. In other words, the “losses in the preceding ten years” do not affect the calculation of the current year’s net income. Hence, the assessment of the “losses in the preceding ten years” in accordance with the Disputed Interpretative Letter does not violate Article 42 of the Income Tax Act by including the investment income of previous years in the amount of the current year’s net income or annual income.
In addition, the legislative intent of Article 42 of the Income Tax Act is not to avoid double taxation of the same object of taxation for the same subject of taxation. For the period during which the profit-seeking enterprise income tax and the comprehensive income tax were imposed separately, the legislative records of Article 42 of the Income Tax Act, as amended on December 30, 1980, state that “the purpose of Article 42 is to avoid duplicate taxation of investment income. …” (see pages 35-36 of the Meeting Records, Issue 102, Volume 69, of the Legislative Yuan Gazette). For the period during which the 1997 version of the Income Tax Act adopted the integrated income tax system, the legislative records of Article 42 of the Income Tax Act state that “regardless of the number of the levels of investment interposed between profit-seeking enterprises, the profit-seeking enterprise income tax is imposed on the investment income only once at the final level of the invested enterprise . As profit-seeking enterprise’s investment income is excluded from the taxable income of the recipient profit-seeking enterprises, the taxes paid associated with such investment income shall be added to the balance of the shareholder tax credit account. When the surplus earnings are distributed to individual shareholders, the individual shareholders shall include the investment income as part of the gross consolidated income and claim the shareholder tax credit...” (see pages 37-38 of the Records for the 57th Meeting, Volume 86 of the Legislative Yuan Gazette).
In addition, the investment income referred to in Article 42 of the Income Tax Act is income received by profit-seeking enterprises. Since such investment income is excluded from the taxable income of the profit-seeking enterprises for the year such investment income was received, and even though the annual profit-seeking enterprise income tax return was determined to produce a loss, the loss does not take into account the investment income and is therefore not the actual operating loss. In addition, when the contribution made by a profit-seeking enterprise to another profit-seeking enterprise is determined to be of a lower value, such realized investment loss can be declared as deductible costs or expenses when filing the annual return for profit-seeking enterprise tax (see Article 99 of the Regulations Governing the Assessment of Profit-Seeking Enterprise Income Tax). Therefore, to correctly measure the profit-seeking enterprise’s actual tax bearing capacity based on actual operating profit or loss, the Disputed Interpretative Letter explains that the investment income in the preceding ten years that are, according to Article 42 of the Income Tax Act, excluded from the amount of income shall first be applied to offset the losses in the preceding ten years. The remaining losses—the actual operating losses of a profit-seeking enterprise—are then assessed as the “losses in the preceding ten years” as set out in the proviso of Article 39, Paragraph 1 of the Income Tax Act. Therefore, the Disputed Interpretative Letter does not exceed the possible scope of interpreting “losses in the preceding ten years”, and fulfills the proviso’s legislative purpose of adequately relaxing the yearly taxation principle to correctly measure the tax bearing capacity . In conclusion, the Disputed Interpretative Letter does not violate the principle of taxation by law under Article 19 of the Constitution.
(4) The Disputed Interpretative Letter is not inconsistent with the legislative intent of Article 42, Paragraph 1 of the Income Tax Act under the integrated income tax system. It therefore does not violate the principle of taxation by law as required by Article 19 of the Constitution.
The Disputed Interpretative Letter helps realize the objectives pursued by the integrated income tax system, effective since January 1, 1998. Article 42, Paragraph 1 of the 1997 version of the Income Tax Act (hereafter referred to as Article 42, Paragraph 1 of the Income Tax Act), which was applied in the underlying case, excludes the investment income received by profit-seeking enterprises from the amount of their taxable income. In addition, the taxes paid are added to the balance at the shareholder tax credit account (kutung ke kouti shui e changhu) so that a profit-seeking enterprise and its individual shareholders are not taxed twice for the same distribution of surplus earnings. These rules seek to achieve the purpose of the integrated income tax system to make the individual shareholders of profit-seeking enterprises bear the ultimate burden of paying taxes on the investment income. Therefore, under the integrated income tax system, only when the investment income received by a profit-seeking enterprise, by means of the distribution of surplus earnings, is distributed to its individual shareholders along with the tax credits can the purpose of the integrated income tax system—to require individual shareholders to pay the higher rate of comprehensive income tax on investment income—be achieved (see Article 5 of the Income Tax Act;. In addition, according to page 283 of the Records of Committee Meetings, Issue 50, Volume 85 of the Legislative Yuan Gazette, when the integrated income tax system was adopted, approximately more than half of the dividend income was earned by the individual shareholders whose marginal rates of individual income tax are 30% and 40%.) Under the premise that profit-seeking enterprises' receiving investment income will necessarily be followed by a distribution of surplus earnings to individual shareholders, and in light of the duplicate tax burden on the paying and receiving profit-seeking enterprises, the labor and costs incurred on both tax authorities and taxpayers during reporting and assessment, and the potential benefits of ultimately taxing the investment income in the hands of the individual shareholders, Article 42, Paragraph 1 of the Income Tax Act under the integrated income tax system still stipulates that the investment income received by profit-seeking enterprises is excluded from their taxable income.
However, profit-seeking enterprises occasionally may incur losses, and if the enterprises that receive investment income incur losses, they can distribute dividends only after making up for the losses in accordance with the law (Article 232 of the Company Act). In other words, for these profit-seeking enterprises that incur losses, the received investment income can no longer be fully distributed to their shareholders. Therefore, without the possibility of distributing the full amount of received investment income as surplus earnings, the purpose of the integrated income tax system that individual shareholders ultimately bear the burden of paying taxes for investment income cannot be achieved, let alone the original intention to impose a higher rate of personal income tax on individual shareholders. In addition, the tax credits for shareholders arise not at the stage when the profit-seeking enterprise receives investment income, but only at the final stage of the invested enterprise when paying profit-seeking enterprise income tax, and are ultimately claimed when individual shareholders bear the tax burden and compute and pay their personal income tax. In other words, for profit-seeking enterprises receiving investment income, the question of whether the investment income includes tax credits does not affect their burden to pay the annual profit-seeking enterprise income tax. However, for the years during which losses are incurred, even though the investment income received by profit-seeking enterprises can no longer be distributed to their shareholders in their full amount, the tax credits for shareholders associated with the investment income may ultimately still be claimed in full by individual shareholders to compute and pay their personal income tax. Therefore, for the years during which a profit-seeking enterprise incurs losses, the functions of the integrated income tax system under Article 42, Paragraph 1 of the Income Tax Act are impaired. Further, when the profit-seeking enterprise later turns a profit and seeks to carry over the previous years’ losses according to the proviso of Article 39, Paragraph 1 of the Income Tax Act, the Disputed Interpretative Letter states that the investment income received during the years when losses are incurred and excluded from the annual income for such years pursuant to Article 42, Paragraph 1 of the same Act shall first offset the losses of such years. The remaining losses may then be deducted from the current year’s net income (the annual income of the year to which losses are carried over). The Disputed Interpretative Letter is consistent with the legislative intent of Article 42, Paragraph 1 of the Income Tax Act under the integrated income tax system. It therefore does not violate the principle of taxation by law as required by Article 19 of the Constitution.
(5) The principle of equal protection of law under Article 7 of the Constitution is not violated among the Disputed Interpretative Letter, the 1985 Interpretative Letter, and the 1987 Interpretative Letter
The Ministry of Finance Letter Tai-Tsai-Shui-18503 of July 6, 1985, and the Ministry of Finance Letter Tai-Tsai-Shui-7585901 of September 22, 1987, which the applicant refers to as the reason why the Disputed Interpretative Letter violated the principle of equal protection of law as provided for in Article 7 of the Constitution, are about matters that are different from the current case. The Ministry of Finance Letter 1985, states that, when a tax authority assesses the losses as provided for in the proviso of Article 39, Paragraph 1 of the Income Tax Act, the gains derived from securities transactions that are temporarily exempt from profit-seeking enterprise income tax do not need to first offset the assessed losses incurred in the previous years. The Ministry of Finance Letter 1987, states that when a tax authority assesses the losses as provided for in the proviso of Article 39, Paragraph 1 of the Income Tax Act, the gains derived from land transactions that are exempt from income tax do not need to first offset the assessed losses incurred in the previous years. The matters touched upon by these two interpretative letters in effect exempt income from tax, but require their own tax rules and achieve their own policy objectives. Therefore, when a tax authority assesses the “losses in the previous ten years” as provided in the proviso of Article 39, Paragraph 1 of the Income Tax Act, the question whether or not to first offset the assessed losses incurred in previous years should be decided in accordance with the relevant rules and policy objectives. As these two interpretative letters by the Ministry of Finance explaining how to assess “losses in the previous ten years” with regard to these two categories of income are about matters distinct from the current case, there is no violation of the equal protection of law as provided for in Article 7 of the Constitution.
In addition, Article 4-1 of the Income Tax Act, which exempts the gains derived from securities transactions from profit-seeking enterprise income tax, was enacted for the purpose of simplifying the procedure of tax assessment (see page 134 of Issue 104, Volume 78 of the Legislative Yuan Gazette), and providing incentives for earning the particular type of capital gains. Moreover, Article 4, Subparagraph 16 of the Income Tax Act exempts the gains from land transactions from income tax because such income is already subject to the land value increment tax (tuti tsengchih shui). (see page 16 of Issue 10, 30th Meeting, Volume 51 of the Legislative Yuan Gazette; page 38 of Issue 14, 30th Meeting, Volume 52 of the Legislative Yuan Gazette). In other words, the legislative intent of Article 4, Subparagraph 16 of the Income Tax Act is to avoid duplicating income taxes (income tax and land value increment tax) on the same object of taxation for the same subject of taxation. Furthermore, both the Ministry of Finance Letter Tai-Tsai-Shui-18503 of July 6, 1985 and the Ministry of Finance Letter Tai-Tsai-Shui-7585901 of September 22, 1987, state that the losses incurred from securities transactions and the losses incurred from land transactions are not losses that can offset the amount of income (see Article 4-1 of the Income Tax Act; Article 8-4 of the Enforcement Rules of the Income Tax Act). Therefore, as the Disputed Interpretative Letter and these two Ministry of Finance letters from 1985 and 1987 interpret different matters, there is no violation of the principle of equal protection of law as provided for in Article 7 of the Constitution.
(6) Conclusion of this judgment
To conclude, the Disputed Interpretative Letter was an interpretation made to help subordinate tax authorities exercise the jurisdiction to assess bestowed by the proviso of Article 39, Paragraph 1 of the Income Tax Act. The interpretation does not exceed the possible scope of interpretation for the phrase “losses in the preceding ten years” provided for in the same proviso, and is consistent with the legislative purpose of adequately relaxing the principle of yearly taxation to correctly measure the tax bearing capacity. Therefore, there is no violation of the principle of taxation by law as set out by Article 19 of the Constitution. There is also no violation of the principle of equal protection of law under Article 7 of the Constitution. However, the proviso of Article 39, Paragraph 1 of the Income Tax Act, despite the principle of yearly taxation, exceptionally allowing profit-seeking enterprises to carry over their losses, is designed for multiple legislative purposes. Therefore, when profit-seeking enterprises seek to carry over previous years’ losses according to the same proviso, whether or not the investment income for the preceding years that was excluded from the amount of income shall first offset those years’ losses, is a decision that may be properly adapted to our nation’s fiscal and economic development goals in various stages. However, the system of loss carryover, as provided for in the proviso of Article 39, Paragraph 1 of the Income Tax Act, is a policy choice that affects our nation’s fiscal, economic, and industrial development and involves people’s tax burden. To avoid doubts, the standards by which the competent tax authorities assess the losses of each year are better set out in statutes or regulations explicitly authorized by statutes.