RESTRICTIONS ON AMORTIZATION OF COSTS OF OPERATING RIGHTS

11/01/2011

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There is no clear statutory definition of the term "operating rights". Most local civil courts con-strue operating rights as business values derived from business operations. Article 60 of the Income Tax Act allows amortization of costs of intangible assets, including operating rights. In response to disputes between taxpayers and tax authorities over whether the definition of the operating rights in said Article 60 is the same as that stated in the civil judicial decisions, the Ministry of Finance issued a directive in August, stating that because intangible rights such trademarks, copyrights and patents in said Article 60 can be found in the Trademark Act, the Copyright Act and the Patent Act, the operating rights in said Article 60 should be limited to those stipulated in law. The directive has largely limited the enterprises that can amortize the costs of their operating rights.

Currently, only two legislations provide for operating rights: the Statute for Supervision of Private Operation of State-Owned Enterprises and the Rules for Registration of Electricity Enterprises. Under the two legislations, only the private companies that provide essential commodities or services such as electricity, communication, water, and transportation and that have to hand over the business to the government in the future can amortize their costs of operating rights.

The directive may have violated Article 23 of the Constitution for restricting rights in the absence of a law permitting such a restriction; therefore, the directive should be subject to review.