A Study on Assessment Standards for Each Business Year Income －Focusing on Sequential Deduction when Calculating Assessment Standards－
Asian Tax Journal Vol. 13 No. 4 (2012), pp. 33-61
Abstract
For taxable income, there are income taxes that taxes personal income and corporate taxes that taxes corporate income. When a domestic profit corporation calculates incomes by business year,the assessment standard is calculated by deducting the deficit carried forward, tax－free income,and income tax deductions sequentially from each business year's income. When calculating the assessment standard as stated by sequentially deducting in the order of deficit carried forward, taxfree income, and income tax deductions, it is called sequential deduction. Such sequential deduction has been accepted without criticism when calculating the assessment standard of corporate taxes, and there are very few related rulings on this as well. Therefore, this study aims at verifying whether the sequential deduction method is a rational and feasible calculation system in calculating the corporate tax assessment standard, and whether it is a reasonable legislation according to tax equality and the legal principles on taxes. This study summed up the concepts of deficit carried forward, tax－free income, and income tax deductions that are deducted in that order, and organized deduction methods suitable to the logic of tax laws based on literary resources. Finally, comparative research was conducted with the tax laws and regulations of Japan, US and Germany. Through this result, it was concluded that the current sequential deduction method contradicts the reasoning of tax laws and is a national－treasury oriented regulation that impedes upon tax equality, and hence, must be reformed. First, tax－free income should, according to the definition of the term, not be deducted from each business year's income, and should not be included in income subject to taxation from the beginning like the income tax law. Second, in the case of taxation by calculating the corporate income after converting to each business year for the corporate tax and taxing a single time for income of the complete period that the corporation is in existence, and the deficit deduction method that can be identical to the tax effect are the deficit methods like that of Germany, and there is a need to make reforms on laws so that this deficit carried forward method is recognized as an exception. In this case, the deficit retroactive deduction period should be the same as the period for exercising claim of reassessment, which is three years. Third, the Enforcement Regulation of Corporate Tax Laws Article 5, which prohibits tax－free income and income tax from being received as deficit carried forward, violates the delegated legislation, and thus, regulations for grounds of delegation are necessary. Special purpose companies are only paper companies and simply act as a conduit of income that flows into shareholders, and thus, since there is no reason to defer the company's profits, it would be more reasonable to make deductions after deducting the deficits. However, it would be reasonable for deductions for income on national home leasing of self－managed real estate investment companies and deductions for small & medium businesses that maintain employment to be taken from income before deficit deductions. In conclusion, when calculating corporate tax assessment standards, tax－free income should be excluded from income subject to taxation such as exclusion from gross revenue, and deficit deductions should be revised being of retroactive deduction in principle, and placing its priority after deficit carried forward deductions. Or, deductions should be separated as deducting from income before or after deficit deductions depending on the objective of the legislation and the subject of deductions.
Keywords
- Sequential deductions
- Deficit carried forward
- Tax－free
- Deductions
- Corporate tax assessment standards
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