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DEEMED INTEREST INCOME IN VIOLATION OF THE LAW
Company A once injected cash into another company in return for new shares in that company (Company B); however, the capital-increase via cash contribution of Company B was ruled to be void by the regulator and Company A could not get its cash back. The National Tax Administration (NTA) asserted that Company A had granted a loan to another company without charging any interest, a deemed interest rate should apply and so Company A should be considered to have received NT$45 million of interest income from extending the loan under Paragraph 2, Article 36-1 of the Income Tax Audit Rules. Disagreeing with the NTA's assessment, Company A engaged Lee and Li to seek administrative remedies.
In the administrative proceedings, Company A argued that the subject case did not fall into the conditions set forth in Article 36-1 of the Income Tax Audit Rules; that under the principle of taxation by law, the NTA could presume that a taxpayer had received interest income only if such presumption was expressly permitted by the law; that since Article 36-1 of the Income Tax Audit Rules was not based on any of the law, the NTA's assessment was in violation of the law; and that as Company A had suffered losses for not being able to get back the cash it had injected into Company B, the NTA's assessment was also against the principle of taxation on capability. While the case was being heard by the High Administrative Court, the Grand Justices held per its Interpretation No. 650 that Paragraph 2, Article 36-1 of the Income Tax Audit Rules is in violation of the principle of taxation by law.
During the administrative proceedings, the NTA claimed that its assessment was based on Paragraph 1 rather than Paragraph 2 of Article 36-1 of the Income Tax Audit Rules. Company A argued that its case did not fall into the situation described in Paragraph 1, Article 36-1 of the Income Tax Audit Rules, and that the two provisions were both in violation of the principle of taxation by law. The judges hearing the case accepted the arguments and held that the NTA's assessment was illegal and should be revoked.
The above case has illustrated that the tax authorities cannot impose tax burdens on taxpayers unless it is expressly permitted by the law, nor can they disregard the principle of taxation by law on the grounds of increasing tax revenue, reducing audit costs or preventing tax evasion.