Concerning the calculation of salary income under three provisions of the Income Tax Act (suode shui fa)––(1) Article 14, Paragraph 1, Category 3, Subparagraph 1, (2) Article 14, Paragraph 1, Category 3, Subparagraph 2, and (3) Article 17, Paragraph 1, Subparagraph 2, Section 3-2––salary earners are allowed to deduct from their personal incomes only a fixed amount (ding e) of the Special Deduction Amount for Salary Income (xinzi suode tebie kouchu e). When the necessary expenses exceed the statutory Deduction Amount (fading kouchu e) per year, salary earners are not allowed to deduct necessary expenses either by enumeration or other methods, which is inconsistent with the right to equal treatment under of Article 7 of the Constitution. Accordingly, the relevant authorities should review and amend the Income Tax Act (suode shui fa) and relevant regulations in accordance with this Interpretation within two years from the announcement of this Interpretation.

       The Letter Ruling Tai Cai Shui Zi No. 14917, issued by Ministry of Finance on April 23, 1985 stating that the hourly pay for adjunct teachers at universities and colleges also belongs to the category of salary income, is consistent with Article 19, which requires taxation in accordance with the law, and Article 23 of the Constitution.

       Petitioner (shengqing ren) Chen Ching-Shiou asserted that the compensation for his teaching at a university (daxue renjiao　suode) in 2008 should be categorized as income earned by a practitioner (zhixing yewu suode), and he objected to the administrative assessment made by Taipei City Tax Bureau, Ministry of Finance that categorized his earnings as salary income. The petitioner, therefore, filed a petition for review (fucha). After losing the case, he filed an administrative appeal (suyuan). After the appeal was also dismissed, he initiated administrative court proceedings. When his case was dismissed by judgment Jian Zi No. 236 (2011) of the Taipei High Administrative Court, the petitioner appealed, but the appeal was dismissed by ruling Cai Zi No. 196 (2012) of the Supreme Administrative Court for failing to specify how the appeal judgement was inconsistent with the law. Accordingly, judgment Jian Zi No. 236, rendered by the Taipei High Administrative Court in 2011, should be the final court judgment that brought about this constitutional interpretation. The petitioner asserted that disallowing salary earners to deduct the full amount of their expenses under Article 14, Paragraph 1, Category 3, Subparagraph 1 and Subparagraph 2 of the Income Tax Act (suode shui fa) (hereafter referred to as First Disputed Rule) as applied in the final judgment, and the rule that the hourly pay for adjunct teachers at universities and colleges are uniformly listed as salary income under the Letter Ruling Tai Cai Shui Zi No. 14917 issued by the Ministry of Finance on April 23, 1985 (hereafter referred to as Disputed Letter Ruling) may violate Articles 7, 19, 23 and 165 of the Constitution, and, therefore, he applied for a constitutional interpretation. As the petition satisfied the requirements set out in Article 5, Paragraph 1, Subparagraph 2 of the Constitutional Interpretation Procedure Act, this Court considered its merits (yuanyu shouli). In addition, the Judge for the Yu Division of the Administrative Litigation Panel, Taiwan Taoyuan District Court, when adjudicating case Chien Tze No. 49 in 2012, a case on comprehensive income tax (zonghe suodeshui shijian), considered the fixed amount special deductions (dinge tebie kouchu) set out by Article 17, Paragraph 1, Subparagraph 2, Section 3-2 of the Income Tax Act (suode shui fa), which was amended and promulgated on January 3, 2001 (with subsequent editions, hereafter referred to as Second Disputed Rule) unconstitutional because it fails to allow the deduction of the full amount of expenses incurred by income earners, possibly in violation of Articles 7, 15, and 23 of the Constitution. After suspending the litigation procedure, the Judge for the Yu Division of the Administrative Litigation Panel, Taiwan Taoyuan District Court, applied for a constitutional interpretation pursuant to Judicial Yuan interpretation No. 371, No. 572 and No. 590. As both the First Disputed Rule and the Second Disputed Rule concerned the question of whether the calculation of salary income under the Income Tax Act (suode shui fa) is constitutional, the Judicial Yuan considered the two applications and rendered this interpretation for the following reasons:

1. The First Disputed Rule and the Second Disputed Rule are inconsistent with the right to equal treatment, protected by Article 7 of the Constitution.

       Article 7 of the Constitution stipulates that every individual’s right to equal treatment should be protected. The question of whether a particular legal norm satisfies the requirement of the right to equal treatment depends on whether the purpose for which the legal norm affords differential treatment is constitutional and whether there exists a certain degree of connection between the differential treatment and the fulfillment of the purpose of the particular legal norm. (See Judicial Yuan Interpretation No. 682 and No. 722). Article 13 of the Income Tax Act (suode shui fa) states that the comprehensive income tax of an individual shall be levied on the net amount of his comprehensive income (zonghe suode jing e), which shall be the gross amount of comprehensive income minus the exemption amount and deductions. In order to calculate the net amount of comprehensive income, the legislature considered the sources and nature of various types of income, and set out different rules for costs, deduction of necessary expenses, exemption amount, deductions, etc. (see Articles 4, 14, and 17 of the Income Tax Act). This kind of categorization and differential treatment involves the overall planning and estimation of a state’s fiscal revenue, and, therefore, is better decided by the legislative branch, representing the people, and the executive branch, which is equipped with expertise in fiscal affairs. Such distinctions, however, should be designed to pursue legitimate purposes and should be reasonably connected (heli guanlian) with their purposes so that they are consistent with the principle of objective net value (keguan jingzhi), as required by the ability-to-pay principle (liangneng keshui yuanze). In this sense, such taxation is consistent with the right to equal treatment under Article 7 of the Constitution.

       Among the types of individual income stipulated in Article 14 of the Income Tax Act, income earned by a practitioner (zhixing yewu suode) and salary income are both income earned through the provision of personal services, and, therefore, are similar in nature. Concerning income earned by a practitioner (zhixing yewu suode), Article 14, Paragraph 1, Category 2 of the Income Tax Act (suode shui fa) states that income earned by a practitioner (zhixing yewu suode) includes any income of a practitioner (zhixing yewu zhe) from a professional practice or performance after the deduction of the rental for or depreciation in the value of the place of business, the depreciation of and repair expenses for facilities and equipment, or the costs of medications, supplies, etc. sold to clients, salaries and wages for employees, travel expenses for practicing the profession, and other direct and necessary expenses. Regarding salary income, the First Disputed Rule states that such income includes the salaries and wages of public servants, teachers, military personnel, policemen, employees, and workers of public and private enterprises, in addition to any income earned by persons rendering services. It also specifies that salary income is calculated as the sum of all salaries and wages earned for performing duties or doing work, and that the phrase “salaries and wages” as referred to in the preceding subparagraph shall include salaries (xinjin), stipends (fengji), wages (gongzi), allowances (jintie), annuities (sueifei), cash awards (jiangjin), bonuses (hongli), and all kinds of subsidies (buzhufei).

       Over 5 million families report salary incomes in our country each year, far more than the number of families that report income earned by a practitioner (zhixing yewu suode). Therefore, if competent authorities had to examine each case in which salary income is reported, the administrative costs would be overwhelming. On the other hand, if competent authorities adopt specific deductions in the amount that is almost equal to that of necessary expenses, salary earners do not need to prepare individual books or keep relevant records, and they can claim the specific amount deduction directly for their necessary expenses. Such a Specific Amount Deduction can simplify compliance costs for salary earners as well as auditing costs for the state (shuijuan jizheng). (See the explanation part of the Annex of Letter Ruling Tai Cai Shui Zi No. 1020014746 issued by Ministry of Finance on November 4, 2013.) Hence, the First Disputed Rule and the Second Disputed Rule adopted specific deduction amounts not only to reduce salary earners’ tax burdens (See the Legislative Yuan Gazette, volume 63, No. 95, page 27) but also to reduce auditing costs (shuijuan jizheng). The purpose of the First Disputed Rule and the Second Disputed Rule is, therefore, reasonable.

       As required by the ability-to-pay principle (liangneng keshui yuanze), the tax base for the taxation of income should be the objective net value (keguan jingzhi)––the amount of revenue minus costs and necessary expenses––and not the gross amount of income (suode mao e). This requirement applies to the calculation of all types of income. The statutory deduction amount (ding e kouchu e) is an estimate of total necessary expenses, and, therefore, should also satisfy the requirement. Considering the different degrees of self-sustainability (zili yingsheng) between salary earners and practitioners (zhixing yewu suode zhe) (See Article 11, Paragraph 1 of the Income Tax Act), competent authorities may reasonably provide different categories and ceilings for the necessary expenses that are deductible. However, to balance consideration of both the reduction of auditing expenses (shuijuan jizheng) and the ability-to-pay principle, the current law allows a practitioner (zhixing yewu zhe) to subtract necessary expenses in accordance with their category and amounts when calculating the income earned by a practitioner (zhixing yewu suode). See Article 14, Paragraph 1, Category 2 of the Income Tax Act (suode shui fa), Chapter 4 of the Regulation Governing the Assessment (chahe banfa) of Income Earned by a Practitioner (zhixing yewu suode), Practitioner (zhixing yewu zhe) Cost Standard (feiyong biaozhun) issued by the Ministry of Finance each year. In contrast, the First Disputed Rule and Second Disputed Rule only allow the deduction of a fixed amount (ding e kouchu) for the calculation of salary income. They do not allow salary earners to itemize or deduct necessary expenses in any other manner when the necessary expenses exceed the statutory deduction amount in the taxable year, which creates obvious differential treatment. Such differential treatment is not necessarily connected with the question of whether salary earners are able to sustain themselves (zili yingsheng). In addition, the current Special Deduction Amount for Salary Income (xinzi suode tebie kouchu e) is too simple as it fails to account for differences in the necessary expenses incurred by different salary earners, and, therefore, disadvantageous (buli) differential treatment may indeed occur for the salary earners that have to incur obviously higher necessary expenses when required by the nature of their work. This result violates the principle of objective net value (keguan jingzhi) required by the ability-to-pay principle (liangneng keshui yuanze). Hence, there is no rational connection between the differential treatment of the First Disputed Rule and the Second Disputed Rule, on the one hand, and the purpose it aims to achieve, on the other. It is, therefore, inconsistent with the right to equal treatment under Article 7 of the Constitution, and the relevant authorities should review and amend the Income Tax Act (suode shui fa) and relevant regulations in accordance with this Interpretation within two years of its announcement.

2. The Disputed Letter Ruling is consistent with Article 19 and Article 23 of the Constitution.

       Competent authorities apply tax laws within the sphere of their competence and clarify the meanings of such laws on the basis of their statutory competence. If their applications and clarifications are consistent with constitutional principles and the relevant legislative intent and made with widely used methods of legal interpretation, then such applications and clarifications are consistent with the constitutional requirement that taxation be done in accordance with law. (See Judicial Yuan Interpretations No. 607, No. 615, No. 625, No. 635, No. 660, No. 674, No. 685, and No. 693). The Disputed Letter Ruling states: “(3) When public and private organizations (gong si jiguan), associations (tuan ti), enterprises (shi ye), and schools of various levels (ge ji xuexiao) invite lecturers (shouke renyuan) to plan the curriculum (kai ke) or deliver training classes (xun lian ban), speeches (jiang xi hui), and other similar activities, the hourly pay earned by such lecturers is characterized as salary income under Article 14, Paragraph 1, Category 3 of the Income Tax Act (suode shui fa). Such lecturers are not required to be professors (including associate professors, lecturers [jiang shi], teaching assistants [zhu jiao]) or teachers [jiao yuan].” The rule that the hourly pay for adjunct teachers at universities and colleges also belongs to the category of salary income was made by the Ministry of Finance as the competent authority to clarify the meaning of the phrase “salary income” through common methods of legal interpretation and within the sphere of its competence. Such clarification is consistent with the legislative intent of the First Disputed Rule, helps resolve possible problems in its application, and guides the offices that are legally obliged to withhold taxes as well as tax authorities. This clarification simplifies auditing costs but does not add any tax obligations not provided for by law. Therefore, it is consistent with Article 19 of the Constitution, which requires taxation in accordance with law, and Article 23 of the Constitution.

       In order to realize the principle of fair taxation and reasonably allocate the tax burden of our nation, relevant government offices should thoroughly review whether the current categorization of income types is reasonable, whether the methods of calculating the various types of incomes are reasonable, whether the costs and direct, necessary expenses (including types and amount) that are deductible are too broad (kuanfan), whether there should exist a ceiling for the various expense benchmarks (feiyong biaozhun) applicable to different types of professions, and, in particular, whether the tax incentives are cost-effective (guo yu fulan).