Newsletter
INCOME TAX ACT AMENDED
The most recent amendments to the Income Tax Act (ITA) took effect on 13 July 2007. The main points are as follows:
．Tax treatment of bond interest income
In the past, interest income from bonds held by individuals was declared and taxed as part of the individual's total annual consolidated income, and was subject to the special tax-free allowance of NT$270,000 per year for savings and investment income. However, in view of the fact that bonds are often traded between interest payment dates, and that individual bondholders are not required to keep ac-counting records, the calculation and assess-ment of individual bondholders' actual bond-holding periods, interest income, and amount of tax withheld are very difficult in practice.
The amended Article 14-1 provides for sepa-rate taxation of interest income from public bonds, company bonds, and financial bonds held by individuals. Such income is no longer to be included in total consolidated income, and is not eligible for the special allowance for savings and investment income. In addition, tax withheld from bond interest income cannot be deducted from the tax payable when an in-dividual files his/her annual income tax return. Because the separate taxation of bond interest income is effective retroactively on 1 January 2007, in order to avoid any tax adjustment after tax filing, the Ministry of Finance (MOF) is purportedly planning to set the tax rate for bond interest income at 10%, which is the same as the current withholding rate for in-terest income.
The MOF has also begun revising the regula-tions that define tax withholding rates for various categories of income. In addition, the legislative intent of Article 14-1 of the ITA also provides that the method for calculating interest income should be expressly defined in the Enforcement Rules of the Income Tax Act.
A profit-seeking enterprise is required by law to keep accounting records; thus, the actual period of bondholding, the amount of interest income derived from such holdings, and the amount of tax withheld from such income can be calculated and assessed on the basis of ac-counting records. Accordingly the amended Article provides that an enterprise's bond in-terest income should be calculated on the basis of the period over which a bond is held, the bond's par value and interest rate, and that tax withheld can be deducted from an enterprise's tax payable declared in its final business in-come tax return. If an enterprise purchases a bond between two interest payment dates and sells it before the next payment date, the en-terprise's gain or loss from the securities transaction should be calculated by deducting the purchase price and the interest income calculated in the manner outlined above from the sales price.
The above amendment merely codifies the current MOF ruling regarding the tax treat-ment of profit-seeking enterprises' interest income from bondholding, and therefore does not change the current tax treatment in prac-tice.
．Tax treatment of gain or loss from hedging transactions by warrant issuers
According to Articles 4-1 and 4-2 of the ITA, the capital gain generated or loss incurred by a warrant issuer from the purchase and sale of marketable securities and derivative financial products approved by the competent govern-mental authorities for hedging purposes should not be included in calculating the gain or loss from issuance of the warrants. Since such hedging transactions associated with the issuance of the warrants are a necessary risk management measure, to observe the princi-ples of attribution of costs to related income, of fair taxation, and of taxation in accordance with ability to pay, and international practice, the new Article 24-2 of the ITA provides that the provisions of Articles 4-1 and 4-2 do not apply to such hedging transactions, and that the gain or loss from such transactions should be calculated together with those from the is-suance of warrants.
But to prevent the issuer from making trading arrangements to convert non-deductible losses from securities or futures trading via its own operating divisions into deductible losses from warrant hedging transactions, Article 24-2 also provides that if such capital loss exceeds the balance of the premium received by the warrant issuer after the costs and expenses of issuance of the warrants are deducted from the premium, the excess shall not be deductible in calculating the gain or loss from issuance of the warrants.
．Limits on non-reporting surcharge and delin-quent reporting surcharge for profit-seeking enterprises that fail to file their annual income tax returns or undistributed earnings state-ments accordingly
Articles 108 and 108-1 of the ITA used to provide that if a profit-seeking enterprise failed to file its annual income tax return or undistributed earnings statements within the prescribed time limits, in addition to its as-sessed tax payable, it should be subject to a non-reporting surcharge of 10% of the tax payable or a delinquent reporting surcharge of 20% of the tax payable. The Articles then prescribed minimum amounts for such sur-charges but did not set reasonable maximum amounts.
In Constitutional Interpretation No. 616, the Constitutional Court declared that this failure to prescribe reasonable maximum amounts of surcharges violated the principle of propor-tionality under Article 23 of the Constitution and was not consistent with Article 15 of the Contribution, which protects the citizens' property rights. As a result, the amended Ar-ticles 108 and 108-1 of the ITA now set the maximum non-reporting surcharge at NT$30,000, and the maximum delinquent reporting surcharge at NT$90,000.