Chapter 3 Profit-Seeking Enterprise Income Tax
Article 27
The year stated in the Act refers to the fiscal year prescribed by Article 23 of the Act.
Article 31
For the amount of income of a profit-seeking enterprise stated in Paragraph 1, Article 24 of the Act, its calculation equation is stated below as an example:
1. Retail Industry:
(1)Gross Sales Revenue- (Sales Return ＋ Sales Allowance) ＝ Net Sales Revenue
(2)Beginning Inventory＋(Purchase - (Purchase Return ＋Purchase Allowance)) ＋
Purchasing Expenses - Ending Inventory ＝ Costs of Goods Sold
(3)Net Sales Revenue - Costs of Goods Sold ＝ Gross Sales Revenue
(4)Gross Sales Revenue - (Sales Expenses ＋ Managerial Expenses) ＝ Operating Income
(5)Operating Income＋Non-Operating Earnings-Non-Operating Loss ＝ Net Income Amount (i.e. the income amount)
2. Manufacturing Industry:
(1)(Beginning Material ＋ Purchased Material - Ending Material) ＋ Direct Labor ＋ Production Expenses ＝ Production Costs
(2)Beginning Work-in-Process Goods in Stock ＋ Production Costs - Ending Work-in-Process Goods in Stock ＝ Finished Goods Costs
(3)Beginning Finished Goods in Stock ＋ Finished Goods Costs - Ending Finished Goods in Stock ＝ Costs of Goods Sold
(4)Gross Sales Revenue-(Sales Return ＋ Sales Allowance) ＝ Net Sales Revenue
(5)Net Sales Revenue-Costs of Goods Sold＝Gross Profit
(6)Gross Profit - (Sales Expenses ＋ Managerial Expenses) ＝ Operating Income
(7)Operating Income＋Non-Operating Revenue-Non-Operating Loss ＝ Net Income Amount (i.e. the income amount)
3.Other Industries Providing Service or Credit:
(1)Business Revenues - Operating Costs＝Business Gross Profit
(2)Business Gross Profit- Managerial or Administrative Expenses ＝ Operating Income
(3)Operating Income ＋ Non-Operating Revenue-Non-Operating Loss ＝ Net Income Amount (i.e. the income amount)
Article 31-1
The face value stated in Paragraph 1, Article 24-1 of the Act is determined by the following rules：
1. Where the coupon rate of government bonds, corporate bonds, and financial bonds obtained by a profit-seeking enterprise was appointed at a fixed rate, the face value shall be the present value computed by discounting at the effective rate. However, in the case that the aforementioned bonds were classified as financial assets of which the change in their fair value shall be recorded as gains or losses in accordance with the Regulations on Business Entity Accounting Handling or the Regulations Governing the Preparation of Financial Reports by Securities Issuers, and which the premium or discount is not amortized at the effective rate, the face value shall be the par value.
2. Where the coupon rate of government bonds, corporate bonds, and financial bonds obtained by a profit-seeking enterprise was appointed at a floating rate, the face value shall be the par value.
The interest rate of bonds stated in Paragraph 1, Article 24-1 of the Act is determined by the following rules：
1. Where the coupon rate of government bonds, corporate bonds, and financial bonds obtained by a profit-seeking enterprise was appointed at a fixed rate, the interest rate shall be the effective rate at the time of acquisition; where each bond is acquired at different time while belongs to the same issuance period, the interest rate is the average effective rate at the time of acquisition. However, in the case that the aforementioned bonds were classified as financial assets of which the change in their fair value shall be recorded as gains or losses in accordance with the Regulations on Business Entity Accounting Handling or the Regulations Governing the Preparation of Financial Reports by Securities Issuers, and which the premium or discount is not amortized at the effective rate, the interest rate shall be the coupon rate.
2. Where the coupon rate of government bonds, corporate bonds, and financial bonds obtained by a profit-seeking enterprise was appointed at a floating rate, the interest rate shall be the coupon rate.
The effective rate specified in the preceding two paragraphs refers to the rate used to discount future cash flows for the duration of the aforementioned bonds to derive their present value which is equal to the carrying value of the bonds on acquisition。
Article 31-2
The interest income of short-term commercial papers that shall be included in the amount of income of the profit-seeking enterprise as stated under Paragraph 3, Article 24 of the Act refers to the amount calculated by multiplying the proportion of the profit-seeking enterprise’s holding period to the duration of the issuance of the short-term commercial papers with the interest income for the portion of the maturity payment amount of the short term commercial papers that exceeds the first sales price. The tax amount calculated in accordance with the withholding tax rate multiplied by the prescribed interest income is allowed as deduction against the amount of the profit-seeking income tax payable for the annual income tax return.
The gains or losses derived from the property transaction whereby a profit-seeking enterprise sells short-term commercial papers as described in the preceding paragraph before the due date shall be the net amount of the sale price minus the purchase price and interest income calculated as described in the preceding paragraph.
The tax amount calculated in accordance with the prescribed withholding rates stated in Paragraph 2, Article 24-1 of the Act refers to the tax amount calculated in accordance with par value, coupon rate and holding period of government bonds, corporate bonds, and financial bonds and in accordance with the prescribed withholding rates.
Article 31-3
Where the government bonds, corporate bonds, and financial bonds obtained by a profit-seeking enterprise are zero coupon bonds, the daily interest shall be calculated first by amortizing the difference between the purchase price of the bonds and the par value over the period throughout the date of the maturity of the bonds, then calculate the interest revenue by multiplying the daily interest with the number of days held by the profit-seeking enterprise; the amount of tax which is allowed as a deduction against the amount of the profit-seeking income tax payable for the annual income tax return shall be calculated by multiplying the tax withheld in accordance with the provision of Subparagraph 2, Article 85-2 by holding period.
Where the government bonds, corporate bonds, and financial bonds obtained by a profit-seeking enterprise includes option rights such as conversion, swap, repurchase or redemption rights, the interest premium shall be included in the amount of the income in the year of receipt; in the case that the bonds were appointed at a coupon rate, the interest revenue shall be calculated in accordance with the holding period, at the par value and the coupon rate of the bonds, the amount of tax which is allowed as a deduction against the amount of the profit-seeking enterprise income tax payable for the annual income tax return shall be calculated in accordance with the prescribed withholding rates.
Article 31-4
The rules prescribed in Paragraph 1, Article 24-2 of the Act that gains or losses derived from the buying or selling of securities or financial derivatives as approved by the competent authority shall be included in the profits or losses resulted from issuing call (put) warrants means that the profits or losses of each call (put) warrants issued by issuer as calculated at the expiration date shall be included in the amount of the income of the profit-seeking enterprise in the year of expiration and taxed accordingly.
Article 33
When the interest for a loan is allowed to be subtracted in accordance with Article 30 of the Act, one shall clearly record the real name and address of the creditor in the account book.
Article 34
In a profit-seeking enterprise operated by sole proprietorship or partnership, the loan borrowed by the proprietor or the partner shall all be considered dealings of capital owners, and shall not be listed as interest.
Article 35
The maximum interest rate standard approved by the tax office as stated in Paragraph 2, Article 30 of the Act is established by the national tax offices under the Ministry of Finance in all districts by referring to the market interest rate in each district, to be further submitted to the Ministry of Finance for approval.
Article 37
The general salary standard stated in Article 32 of the Act is investigated and established by the national tax offices under the Ministry of Finance in all districts during a two-month period prior to the beginning of the fiscal year, and submitted to the Ministry of Finance for approval.
Article 40
The value increased due to expenditure in expansion, replacement, improvement, or repair as stated in Article 34 of the Act refers to the commensurate amount increased because the value of the fixed assets increases compared to the scheduled expected value given ordinary maintenance or repair when received due to expenditure in expansion, replacement, improvement, or repair; the so-called increase of efficiency refers to the fact that the efficiency of the part under expansion, replacement, improvement, or repair reaches 2 years or longer.
Article 42
The amount of income stated in Subparagraph 2, Article 36 of the Act refers to the amount of income approved by the governing tax office, where the donated amount that shall be listed as expenses or losses shall be adjusted according to the approved amount of income in accordance with statutory limits.
Article 42-1
The various penalty fines stated in Article 38 of the Act refer to fines imposed in accordance with various laws and regulations.
Article 43
When a profit-seeking enterprise entrusts another or is entrusted to sell or buy goods, both sides shall reach a written agreement for future reference.
Article 46
The methods of actual cost evaluation stated in Article 44 of the Act are as follows:
1. Where the specific identification method is adopted, the actual cost of the specific inventories serves as the acquisition prices of the inventories.
2. Where the first-in, first-out method is adopted, inventories shall be categorized in light of their nature, where inventories in the same category are separately listed and counted according to the order of the dates when the assets are acquired, with the inventory with the closest date to the year end listed at the forefront. The prices so collected and listed serve as the acquisition prices of the inventories.
3. Where the weighted average method is adopted, inventories shall be categorized in light of their nature, and for those of the same category, in order to come up with the price of each unit, the cost of the inventories of the beginning of the year and of the supplements of the year shall divided by the total quantity.
4. Where the moving average method is adopted, inventories shall be categorized in light of their nature, and, upon acquisition of inventories in the same category each time, the quantity and the acquisition price shall be jointly calculated with the quantity and the acquisition price kept last time in the same category, in order to come up with the average price for each unit. Upon the next time of acquisition, the average price for each unit is calculated according to the same method, using the acquisition price of the unit last acquired and adjusted in the then current year as the acquisition price of the inventories.
5. Where the retail price method is adopted, the price shall be set in advance according to product type, and the cost rate found from the purchasing cost, with the set price for each product times its cost rate to be used as the acquisition price for each unit of the inventories.
Where any of the first-in, first-out method or the moving average method is adopted as the method of inventory evaluation, the continuous inventory system shall be used.
Article 47
Where a profit-seeking enterprise conducts installment payment sales by adopting the gross profit percentage method to calculate losses and profits, its creditor’s right receivable shall not include the bad debts for offset: When the price difference apportion method or the common sales method is adopted, the above rule is also applicable to the price for installment payments recorded on the contract and the creditor's right to the difference on the current sales price.
Article 48
Depreciation methods for fixed assets stated in Article 51 of the Act are as follows:
1. Where the average method is adopted, the balance amount of the fixed asset cost minus the salvage value equally shared according to the years of durability prescribed in the Table of the Service Life of Fixed Assets shall be used to calculate the depreciation amount for each period.
2. Where the fixed-rate progressive decrease method is adopted, the balance amount order of the depreciation amount for each period subtracted from fixed assets for each period shall be used as the basis for calculating depreciation for each time/period, and a fixed percentage shall be used to calculate the depreciation amount.
3. Where the sum-of-years`- digits method is adopted, the balance amount of the fixed asset cost minus the salvage value multiplied by a decreasing fraction where the denominator is the sum of the years` digits of the service life and the numerator is the digit of the year of use in a reverse order shall be used to calculate the depreciation amount for each period. However, the years of the service life shall not be shorter than the years of durability prescribed in the Table of the Service Life of Fixed Assets.
4. Where the production quantity method is adopted, the balance amount of the fixed asset cost minus the salvage value shall be divided by the estimated total production quantity to calculate the depreciation amount per unit of production, and then multiplied by the actual production quantity realized in each period to calculate the depreciation amount for each period. However, the period of the estimated total production quantity shall not be shorter than the years of durability prescribed in the Table of the Service Life of Fixed Assets.
5. Where the working time method is adopted, the balance amount of the fixed asset cost minus the salvage value shall be divided by the estimated total working time to calculate the depreciation amount to be assumed in each unit of working time, then multiplied by the actual working time used in each period to calculate the depreciation amount for each period. However, the estimated total working time shall not be shorter than the years of durability prescribed in the Table of the Service Life of Fixed Assets.
Article 48-1
Where a profit-seeking enterprise adding equipment to prevent water pollution or air pollution shortens the year of durability in accordance with the proviso of Paragraph 2, Article 51 of the Act, it shall submit the certificate issued by the governing industrial authority in conducting final settlement and filing of tax income for the same year to be jointly filed with the governing tax office for approval.
Article 48-10
The measure “to make up the losses incurred in past years” as set forth in Subparagraph 1, Paragraph 2, Article 66-9 of the Act shall mean an action taken by a profit-seeking enterprise to use the undistributed surplus earnings available in the current year to make up the losses to be offset as calculated up to the final settlement date of the previous year in accordance with the Business Entity Accounting Act, Securities and Exchange Act, or other laws used in preparing financial reports; and the term “the losses incurred in the following year as audited and certified by a certified public accountant” shall mean the total amount of after-tax net income (or loss) for the period, adding the amount of other profit items adjusted to the current year’s undistributed earnings other than after-tax net income (or loss) for the period, and deducting the amount of other loss items adjusted to the current year’s undistributed earnings other than after-tax net income (or loss) for the period of a profit-seeking enterprise as audited and certified by a certified public accountant after having audited the financial statements made for that current year by the said profit-seeking enterprise.
The term “dividends or earnings which have been distributed from the earnings gained in the current year” as set forth in Subparagraph 2, Paragraph 2, Article 66-9 of the Act shall be limited to the amount of dividends or earnings distributed of the date of distribution in the fiscal year in which the relevant incomes are derived as defined before the end of the next fiscal year. The term “date of distribution” stated in this Paragraph refers to the base date for profit-seeking enterprises to distribute dividends and bonuses; where the base date for distribution of dividends and bonuses is not decided or the base date for distribution of dividends and bonuses is unclear, the date when the profit-seeking enterprise's shareholder's meeting adopts distribution of dividends and bonuses shall apply.
The terms “legal reserve of surplus earnings,” “legal reserve,” and “public welfare reserve” as set forth in Subparagraph 3, Paragraph 2, Article 66-9 of the Act shall refer to the amount thereof actually set aside in the current year from the operating profits by a profit-seeking enterprise.
In the case the amount of after-tax net income for the period and the amount of other profit and loss items adjusted to the current year’s undistributed earnings other than after-tax net income for the period of a profit-seeking enterprise as audited and certified by a certified public accountant after having audited, prepared, and submitted the annual financial statements by that profit-seeking enterprise is subsequently adjusted by the competent authority per its notice given to the said profit-seeking enterprise, then a correction of the amount of undistributed surplus earnings originally declared in the above-said annual financial statements shall be made by the said profit-seeking enterprise in accordance with the provisions set out in Paragraph 4, Article 66-9 of the Act.
Beginning from 2005 and in each year thereafter, if a profit-seeking enterprise holds any of the mandatory or restricted surplus earnings as specified in Subparagraphs 4 and/or 5, Paragraph 2, Article 66-9 of the Act remaining undistributed prior to the end of the fiscal year following the year such cause of restricted surplus earnings ceases, such part of the undistributed surplus earnings shall be levied on profit-seeking enterprise income tax in accordance with the provisions set out in Paragraph 5, Article 66-9 of the Act.