Tax Law Doctrine and the “Substantive Taxation Principle”

A recent amendment of Taiwan’s Tax Collection Act added clearer guidance on the “substantive taxation principle” referred to in Article 12-1 of the said Act. According to the legislative explanation given, the article’s amendment was based on “freeing up judicial resources, … , stipulating that, in order to conform to the import of tax law doctrine, tax collection agencies must place the burden of evidence on those that enjoy substantive economic benefits, given the key points of fact.”

Based on “tax law doctrine”, when tax agencies require people to pay taxes, they must always do so according to law. But the forms of economic activity are numerous in the extreme, so in reality one cannot expect the law to regulate explicitly all the details of taxation, great or small, that arise from economic activity. Hence, where the wording of tax laws is in places less than thorough, tax agencies will often invoke the so-called “substantive taxation principle” to investigate facts and decide what tax to impose on economic behavior that twists the intent of tax law language in order to avoid taxes. However, since the “substantive taxation principle” itself has not been given precise legal expression, its implications and extensions have never been clear. When deciding actual tax assessments, it is hard to avoid falling into a certain predisposition to the detriment of the taxpayer, which calls into question whether “tax law doctrine” is violated.

The current version of Article 12-1 in the Tax Collection Act consists of four points, and, judging from what can be seen at least, these may be described as follows:

• The thinking behind the first of the points appears to be based on the explanation given in a Supreme Court letter of interpretation (No. 420), which ruled that “explanations must be rooted in the spirit of tax law doctrine, abide by the legislative intent of the various tax laws, and give due consideration to principles of economic significance and fairness in substantive taxation.” However, it has been ten years already since the above letter was written, during which time the Supreme Court has introduced the spirit of the “economic observation method” and the “substantive taxation principle”, and although one must admit that the court’s stance is in principle worth affirming, when one sees this interpretation being converted directly into legal provisions ten years later, and giving it general and direct application, one may well expect some discussion as to the soundness of this approach. Rules in legal provisions have greater value if they are clear, but the implicit content, logical extension, and mutually subsumed relationships of the “economic observation method”, the “substantive taxation principle” and “fairness principle” have never been made clear. If these three highly evaluative concepts are cited directly as the basis for legal interpretation principles, one fears that expectations of legal stability will be hard to satisfy.
  
  
• The second point in the article has to do with determining what constitutes the key facts for taxation, stipulating that “the basis must be on factual relationships of a substantive economic nature and the ownership or enjoyment of the substantive economic benefits produced.” However, if application of the economic observation method were limitless, nothing would be left of tax law doctrine apart from the name. Hence, under no circumstances should the economic observation method go beyond the scope possible while adhering to the letter of legal provisions, since to do otherwise would clash with tax law doctrine. When tax agencies go about establishing the facts and applying the law, it remains to be seen whether they are good at keeping an open mind and showing proper modesty and restraint. Additionally, to prevent application of this provision from being unlimited, it is worth considering whether the rule under this point should have as a precondition some abuse of the law by the taxpayer, thereby restricting its scope of application.
  
  
• The regulations in the article’s third and fourth points concern the identification of who bears the burden of evidence under the economic observation method, and the taxpayer’s obligation to cooperate, with the understanding that the addition of other rules should be left to progressive legislation. This position deserves affirmation, since, ambiguities over the burden of evidence have emerged in the past from tax litigation and substantive taxation disputes, and we should be able to expect some improvement with points three and four in the article.
  

The relationship in application between tax law doctrine and the substantive taxation principle has long been a sticking point in practical taxation and tax disputes, and the new rules provided by Article 12-1 of the Tax Collection Act have finally taken the first step towards resolving what has so often proven to be a difficult exercise, and all parties concerned must watch closely as the authorities continue groping for ways to balance the interests of taxpayers and tax collectors, and go further to advance the predictability and stability of tax law interpretation.

Eric Tsai is a partner at PricewaterhouseCoopers Taiwan. Please send your comments and questions to:  eric.tsai@tw.pwc.com.

[This article appeared in the Economic Daily in June 22 , 2009.]