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AN INTRODUCTION TO THE COURT DECISION ON CASE CONCERNING THE 5-YEAR TAX HOLIDAY
If a company which falls within the scope of the Emerging, Important and Strategic Industries defined under the Statute for Upgrading Industries intends to apply 5-year tax holiday prescribed under the Statute, it should proceed with the following applications: (1) Prior to the commencement of the business expansion by capital increase, apply with the Industrial Development Bureau (IDB) of the Ministry of Economic Affairs (MOEA) for a certificate of the Emerging, Important and Strategic Industries; (2) after the completion of the business expansion by capital increase, apply with the central authority in charge of the relevant business for a certificate of completion; (3) apply with the Ministry of Finance (MOF) for an approval of 5-year tax holiday.
The MOEA published in February 2001 the Rules of Awards for Manufacturing Business and Technical Services Business within the Scope of Emerging, Important and Strategic Business Industries ("February 2001 Rules") to specify the applicability and scope of tax exemption. However, when applying the February 2001 Rules, the tax authorities did not allow the Hi-end Integrated Circuit Design companies which meet the tax exemption requirements to include in the application for tax exemption the revenue generated from their own sales of products which are designed and manufactured in accordance with approved investment plans, hence resulted in numerous disputes between the tax authorities and the taxpayers. Given this, the MOEA announced on December 2, 2001 the amended Rules of Awards for Manufacturing Business and Technical Services Business within the Emerging, Important and Strategic Industries ("December 2001 Rules"), wherein Paragraph 3, Article 5 explicitly provides that tax exemption should apply to the above-mentioned revenue.
In connection to its 2001 capital increase plan, Company A obtained the approval from the IDB in September 2001, the completion certificate from the Science Park Administration in June 2002 and the approval from the MOF in September 2002. However, because the MOF's approval stated that it was based on the February 2001 Rules, the National Tax Administration in Northern Taiwan (NTANT) rejected the application of the December 2001 Rules when reviewing Company A's tax returns of 2002 and 2003 and assessed additional income tax accordingly. Objecting to the assessment, Company A engaged Lee and Li to seek administrative remedy.
On February 19, 2009, the Taipei High Administrative Court rendered its decision on Company A's suit revoking the decision made by NTANT and the MOF's subsequent decision on the administrative appeal, in other words, Company A won the case. The court upheld Company A's claim on the grounds that, an application for 5-year tax holiday needs to go through three stages under three different authorities, i.e., the IDB, the Science Park Administration and the MOF, and before the MOF's approval is granted at the last stage, the application is "pending the conclusion of the process;" as a result, the principle of "application of the newer and the better," stipulated in Article 18 of the Central Standard of Laws and Regulations in case of change in the applicable laws and regulations, applies. The authority on which the application is pending should therefore apply the appropriate laws and regulations in its own capacity. In the subject case, since the MOF issued the approval in September 2002, it should have applied the regulation which was then applicable and effective, i.e., the December 2001 Rules.