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MAKING SUBSTANCE-OVER-FORMALITY PRINCIPLE A LAW
The substance-over-formality principle directs the tax authorities to rely on the economic fact rather than the legal formality of a transaction when reviewing the facts of taxation. However, the definition and scope of the substance-over-formality principle were ambiguous before the principle became a law. Thus, disputes over the misapplication of the substance-over-formality principle by the tax authorities mounted in courts.
To resolve disputes between the tax authorities and the taxpayers and to reduce the number of lawsuits, the Legislative Yuan incorporated the substance-over-formality principle into Article 12-1 of the Tax Collection Act on 28 April 2009. Article 12-1 states that when the tax authorities identify the fact of taxation, it should use "substantive economic relationship and the actual beneficial owner of economic benefits" as the basis of taxation. Furthermore, the tax authorities have the duty of proving the tax-payers' obligation to pay tax, while the taxpayers have the obligation of assisting the tax authorities. This law took effect on 15 May 15 2009.
However, said Article 12-1 and its legislative reasoning fail to specify that the sub-stance-over-formality principle should be applied only when the taxpayers abuse the legal formality, leading to unfair taxation. Accordingly, it remains in question whether this law can effectively solve the ongoing problem of the misapplication of the principle.