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DUAL-STATUS BUSINESSES MAY CALCULATE BUSINESS TAX BY DIRECT DEDUCTION METHOD
A business entity is termed a "dual-status busi-ness entity" if its income from its core business is subject to business tax, but it also has other in-come from business in goods or services that are exempt from business tax under Article 8 Para-graph 1 of the Business Tax Act, such as share dividend income derived from investments of company funds. A dual-status business entity's expenditure statement for business tax purposes will include items on which the amount of tax paid cannot be offset against the amount of tax due on items in its income statement.
Therefore, when a dual-status business entity files for business tax, the proportion of tax paid on expenditures that cannot be deducted from tax due on income should be calculated as the pro-portion of its net total sales accounted for by its net tax-exempt sales, in accordance with the Regulations for the Computation of Business Tax for Dual-Status Business Entities.
But if the business entity's accounting records are sufficiently complete to allow its actual use of the goods, services, or imported goods that it has purchased to be clearly distinguished, then it may use the "direct deduction method", i.e. it may calculate the amount of the tax paid on its expenditures that may be deducted from the tax due on its income according to the actual use of the goods and services purchased. In this way it may avoid overpayment of tax if the proportional method results in a higher proportion of non-deductible expenditure.
However, in the past, before adopting the direct deduction method a business had to make prior application to the tax collection authorities, and after receiving approval could not again change the method used for a period of three years. This restriction had an adverse impact on businesses in that if a business entity found that the propor-tional method was less favorable to it, it could not immediately switch to the direct deduction method.
On 21 December 2006, the Ministry of Finance announced amendments to the Regulations for the Computation of Business Tax for Dual-Status Business Entities. The amended Articles 8-1, 8-2 and 8-3 expressly provide that if a dual-status business entity's accounting records are complete, so that its actual use of purchased goods, services, or imported goods may be clearly distinguished, then it may adopt the direct deduction method without needing to apply for prior approval. This will avoid such businesses paying excess tax while waiting for the tax col-lection authorities to complete their approval procedures. However, after adopting the direct deduction method, a business may not apply to switch back to the proportional method within three years.