The Controversy of Losses Deduction on Enterprise Income Tax under Corporation Merge — The Comparison of Japanese Corporation Tax Act.
Date Issued
2010
Date
2010
Author(s)
Hsu, Hsiu-Yuan
Abstract
Article 39 of the Income Tax Act prescribes that “losses incurred in the operation of business in previous shall not be included in the computation for the current year provided.” However, with some formal requirements, “taxation may be made on its net income after deduction of losses incurred in the preceding ten years as verified and determined by the local collection authority-in-charge.” There is no rule regarding how to deal with losses deduction under corporation mergers. Interpretation by the Grand Justice Meeting of the Judiciary, No. 427 indentified losses deduction as a kind of tax benefits, and therefore whether it should be permitted in the case of corporate mergers falls within the plenary powers of the legislature. However, the government cannot properly assess the amount of the taxpayer’s income without first taking losses deduction into calculation. Inhibiting losses deduction is accordingly equivalent to imposing the tax burden on the part without income. Therefore, losses deduction should essentially be classified as one of the factors in measuring taxpayer’s ability of taxation rather than a kind of tax benefits.
In the Business Mergers And Acquisitions Act, the term “consolidation and merger” refers to an act wherein any and all companies involved pursuant to this Law or any other applicable law are dissolved, and a new company is incorporated to generally assume all rights and obligations of the dissolved companies; or by any company surviving the merger from all the companies involved (merger), with shares of the surviving or newly incorporated company or any other company, cash or other assets as the consideration. Given that this act involves no transaction generating profit or income, the income tax burden levied before and after the merger of corporations must be consistent.
The losses that the dissolved company has not fully deducted are a taxation imposed by the Country on the taxpayer which is beyond his capacity. The dissolved company therefore has a right to reclaim it to the Country. The substance of mergers is integrating the organizations, businesses and assets of two companies, while selecting one of the two as the representative to the original rights and obligations. In light of this, the right of losses deduction attaching to the assets of the dissolved company transfers to the surviving company through the act of merger; hence the surviving company should be allowed to claim the right after the merger.
Although Article 38 of the Business Mergers And Acquisitions Act permits surviving companies to deduct the losses incurred before the merger, two issues still remain unresolved as the provision mandates the amount of losses deduction to be calculated in pro rata of the equities of the surviving company or the newly incorporated company held by each corporate shareholder due to the merger. First, companies using cash or other non-stock assets as the consideration of mergers will not allow claiming the right for loss deduction. Second, companies participating in a merger will not be able to fully deduct all the losses incurred before the merger, and thus are caught in a more disadvantageous status after the accomplishment of a merger.
Merge made in respect of tax benefit but lack of commercial purpose, whether to grant the same tax treatment and how to dive the line from the law or regulation, some proposal amending the law all written in Chapter 5.
Subjects
Income Tax Act. Article 39
Losses deduction
The Price of merger
Objective Operating Net Income Principle
Negative Income
Tax Penalties
Type
thesis
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