Promise of Taxpayer Rights Protection Awaits Tax System Reform

On 6 January 2010, the Tax Collection Act was amended with a special section on the “protection of taxpayers’ rights,” formally declaring that the government attaches importance to the rights of taxpayers. Judging from its contents, the core of the amendment basically consists of three elements: the full expression of tax law doctrine; the idea that tax preferences must be consistent with public policy goals; and the need for taxation procedures to be reasonable and legitimate. However, the protection of taxpayers’ rights in practice, apart from relying on the rational perfection of the tax code, requires an accommodating tax administration system, as well. Based on our many years of observation in the tax profession, we offer the following suggestions for consideration in future tax administration reforms:

Open up the formulation of tax-related directives to public participation

Articles 154 to 157 of the Administrative Procedure Act give citizens the opportunity to participate in formulating laws and regulations. If, likewise, the many directives issued by the Ministry of Finance (MOF) can be opened to participation by the public, we are confident this would boost understanding of the economic nature of different kinds of transaction behavior, legal interpretations and possible impacts.

Respond rapidly to requests for tax law guidance

People are obligated by law to pay taxes, but they also have the right to ask the government to clarify the impact of those taxes. Because transaction models are constantly changing, if investors are unable to grasp the effects and risks that taxes entail, it makes investing more difficult, to the detriment of overall economic development. Although the MOF has set forth procedures for requesting advance legal interpretations, they are only directed towards large transnational investment transactions, and the threshold for their application is set excessively high. On this point, we recommend that the relevant administrative organs greatly relax the standards for using the advance interpretation process, and that they establish a maximum response time as well. Then, if the tax collection agencies do not respond within a certain length of time, they can only give people guidance on their taxes and cannot impose penalties for violating legal requirements. After all, where the administrative organs themselves have not been able to clarify the taxes and exemptions under a particular regulation, how can they expect taxpayers to understand them, and how can they determine that the regulation has been violated and impose penalties? Also, the MOF should not refuse to issue an interpretation just because there is a similar case in the administrative remedy process; otherwise, large numbers of tax dispute cases will be generated, wasting administrative and judicial resources and obstructing efficient government.

Broaden application of Article 48-1 of the Tax Collection Act

Tax law regulations are extremely diverse, and taxpayers are hard pressed to avoid violating tax regulations due to oversight or misunderstanding. For this reason, Article 48-1 has a provision allowing taxpayers who discover underpayment of tax to come forward on their own and make up the amount owed without penalty. However, to encourage taxpayers who did not intend to evade tax to correct their mistakes, and to save on tax collection costs, we recommend that the tax collection agencies not move directly towards a tax violation stance when the taxpayer applies for tax guidance, and that they adopt more liberal standards for judging when the underpayment or omission is revealed voluntarily by the taxpayer.

Greater flexibility needed in tax penalty determination

At present, when the tax collection agencies go about determining penalties in tax violation cases, they do so primarily by consulting the amounts in the MOF-approved reference table for fines and multiples of punishments in tax violation cases, and the rules in “Standards for Reducing or Exempting Fines for Tax Violation.” While there is a provision in the guidelines for using the said table to the effect that audit personnel may reduce penalties in light of extenuating circumstances, in practice it is seldom applied.

Take, for example, the case reported recently involving Giordano and three other apparel companies. The four companies had a difference of opinion with the National Tax Administration over their handling of uniform invoices, and although there was no overall underpayment of business tax and income tax, they were nonetheless given a fine of around NT$500 million, which appeared excessively harsh. Therefore, when the tax collection agencies review fines imposed on taxpayers, we suggest they take into account the circumstances of each case and reduce them whenever appropriate. This way they may satisfy the intent of the Administrative Penalty Act’s Article 18, which calls for consideration to be given to the culpability of the violation in question, its impact and the benefits derived from it.

Review committees need recusal mechanism for members and should invite participation by scholars and impartial outsiders

The review system gives the original disciplinary body the opportunity to reexamine whether the administrative penalties it imposes are legally appropriate and contribute to the goal of conserving judicial resources. Under current review committee rules, however, the all member of the committee are internal staff of the agency, and apart from certain circumstances identified as grounds for recusal in Article 32 of the Administrative Procedure Act, there is still no recusal mechanism as such. Consequently, to keep departmentalism from influencing the outcome and preventing an objective judgment, we advise that those members who originally set a fine should be recused from participating in the decision of the review committee. If, instead, outside scholarly experts and impartial individuals can be invited to participate, they could provide different views and help win the trust of the taxpayers.

Recruitment examination and professional development of tax officers should focus on strengthening their knowledge of the legal system

Most of Taiwan’s tax officials have backgrounds in financial and economic fields, including accounting, finance and taxation, whereas legal backgrounds are comparatively underrepresented. However, the levying and collection of taxes involves a great many legal concepts pertaining to tax law and administrative law. In the future, tax collection agencies can emphasize strengthening literacy in legal matters of this sort when selecting tax personnel through competitive examination and in their professional development. Besides strengthening the tax collection skills of tax officers, this could also deepen their appreciation of the taxpayers’ rights concept. The amount of tax collected should not be used as the basis for evaluating the job performance of tax personnel.

The main purpose of tax collection is to meet the fiscal needs of government, but progress toward reaching revenue targets should not be used as a major indicator of tax personnel’s job performance. This is because tax collection is supposed to be a neutral activity executed in accordance with the law. If tax examiners are held responsible for meeting budget targets, one can hardly expect them to maintain an impartial position in examination cases and take fully into account all facts and evidence advantageous to the taxpayer. As an alternative, to encourage tax personnel to heighten their rigor in audit cases, one may consider making the proportion of cases ending in people seeking administrative remedy a basis for appraising audit personnel performance.

Ease pressure on tax officers from disciplinary investigations

Judging from our own observation, Taiwan’s disciplinary investigations of tax officers seem to have become overzealous, the side-effects of which are that some front-line audit personnel now habitually adopt the most conservative stance in tax case reviews in order to cut their risk of coming under scrutiny for disciplinary problems, and some senior officials and review units do not question the conservative views of their lower-level colleagues. The result, naturally, is a sharp increase in administrative remedy cases, as well as growing doubts among the citizenry over how taxation is administered under the law.

In fairness, if all tax audit personnel could, before laying down a given penalty, undertake a self-examination and ask themselves if they could accept the investigation process and its outcome with equanimity, were they the object of the investigation, then taxpayer interests would no doubt receive a high degree of protection, which would both relieve pressure on judicial resources, make people more willing to make various investments, and generally contribute to economic development. However, the formation of that sort of examination culture begins with reforming tax administration along the lines we have described, and we believe nothing less will be required in order to see concrete results.

This article appeared in the Commercial Times in April 2010.