Taiwan vs Goodland International Limited

Supreme Administrative Court Ruling No. 147 of 109

Date of ruling: 13 February 2020

13 February 109, R.O.C.

Business Tax

The Supreme Administrative Court ruled that the appellant, Fook Chuen Tat Co.

For and on behalf of Zeng Mingzhu

Lawyer Liang Jihui

Central District Bureau of Internal Revenue, Ministry of Finance Appellee

Ruling No. 147 of the year 109 (2020)

 

Cause of Judgment.

 

Song Xiuling for the Appellant

 

The main appeal is dismissed.

The appellant shall bear the costs of the trial of the appeal. Reasons

1. The appeal is unlawful and the appeal is dismissed on the following grounds

1. The appeal against the decision of the High Administrative Court shall not be allowed unless it is contrary to the law, as stipulated in Article 242 of the Administrative Procedure Law. In accordance with the provisions of Article 243, paragraph 1, of the same Law, a judgment is contrary to the law if it is inapplicable or improperly applied, and a judgment is ipso facto contrary to the law if it contains one of the circumstances listed in paragraph 2 of the same Article.

(2) If a party appeals against a decision of the High Administrative Court on the grounds that the decision of the High Administrative Court is inappropriate or improperly applied in accordance with Article 243, paragraph 1, of the Code of Administrative Procedure, the appeal or statement of reasons shall contain specific allegations and shall reveal the provisions of the statute or its contents; in the case of a law other than a written law, the purpose of the law shall be revealed.

In the case of a precedent decision of a supreme court or an interpretation by a judge of the Judicial Yuan, the wording or content of the decision or interpretation shall be revealed. If the grounds are listed in Article 243, paragraph 2, of the Code of Administrative Procedure, the appeal or statement of reasons shall

(3) The appeal or statement of reasons shall reveal the facts in accordance with the provisions of that Article.

If the statement of appeal or the statement of reasons does not comply with this method, or if it does not comply with the provisions of the above-mentioned law, or if it does not relate to the judgment on the legality of the judgment, it cannot be considered that there is a specific allegation that the judgment of the High Administrative Court is contrary to the law, and the appeal cannot be considered legitimate.

2. The facts of the case and the proceedings

The appellant was assessed NT$7,351,024 in back tax based on the following facts.

A. The Appellant sold seven (7) fully automatic hard-shell hollow capsule production machines (FCD-9D2A) (the disputed machines) to the domestic business operator, Ting-Yuan Biotechnology Co.

B. However, the Appellant, through a false trading arrangement with Goodland International Limited (in Chinese: 美地國際有限公司, hereinafter referred to as Mei Di Company), a controlled foreign related party, first exported the disputed machine to overseas (Hong Kong) on 21 April 2014, and then imported the disputed machine from overseas (Hong Kong) to overseas (Hong Kong) in May 2014. In May 2014, the disputed machine was imported from overseas (Hong Kong) to China and delivered to Ting Yuen. As a result, a zero tax rate was applied and the business tax payable was evaded to the extent of RMB7,351,024.

2. The appellant filed an administrative appeal against the assessment of the penalty, which was eventually dismissed by the original judgment, and therefore filed the present appeal.

3. The reasons for dismissing the appellant's penalty revocation action are as follows.

1. The facts underlying the original judgment were as follows

A. The Appellant was engaged in the manufacture of metal lathes, milling machines and drilling machines. On 21 April 2014, the Appellant filed an export declaration declaring the sale of the machine in dispute to Midland and exported it to Hong Kong, reporting a zero-rated sale of $63,210,000.

B. However, after the disputed machine was exported to Hong Kong, it was immediately sold by Midland to Ting Yuen at a price of RMB147,020,489 without being assembled and processed by Midland, and the import was declared to the Customs on 6 May 2014.

The import was declared to the Customs on 6 May 2014.

C. The Appellant was responsible for the education and training of the disputed machine and the warranty for defects, and Midland was a controlled party of the Appellant.

D. It was evident that the Appellant, through the controlled related party transaction, converted sales of $147,020,489 to domestic buyers for export and reported zero-rated sales of $63,210,000, thereby falsely arranging for the omission of taxable sales of $14,702,489 and the evasion of business tax of $7,351,024.

2. The original judgement affirmed that "the disputed machines were not physically processed in Hong Kong and the export declaration of the disputed machines between the Appellant and Midland was not a physical export transaction but a domestic transaction between the Appellant and Ting Yuen" for the following reasons.

A. Zheng Zhong Er was a responsible person of the Appellant's company from 15 February 2012 to 14 May 2017, and was a commercial responsible person under the Commercial Accounting Law, with the obligation to produce commercial accounting certificates based on the facts. Zheng Zhong Er was also the de facto person in charge of Midland Corporation.

B. According to the indictment No. 3296 of the Taiwan Taichung District Prosecutor's Office and the criminal judgment No. 2289 of the Taiwan Taichung District Court, the criminal prosecution and penalties imposed on Zheng Zhong Er for the tax evasion in this case are as follows.

(1).         The facts of the offence found.

(1) The facts of the case are as follows: With the criminal intent to obtain money by fraud, to prepare inaccurate accounting certificates and to evade tax, Zheng Zhong Er, knowing that the appellant's actual sales were to Ting Yuan Company in the Republic of China, with sales of $147,020,489, and that there was no actual transaction with the overseas company Mei Di, made an overseas transaction arrangement and on April 21, 2014, he prepared a declaration in the name of the appellant, No. DA/03/158/ B3641, with sales of US$2,000,000. On April 21, 2014, through an overseas transaction arrangement, the Company filed an untrue export declaration in the name of the Appellant with a sales amount of USD 2,100,000 (equivalent to NTD 63,210,000), and declared the export of 7 units of capsule machines to a US company.

The Company reported to the tax authorities that it had exported $63,210,000 to the Customs and Excise Department.

The Company's sales amounted to NT$63,210,000 and applied for a tax refund of NT$2,565,444, causing the tax inspector to make a mistake and grant a tax refund, and thereby transforming domestic sales into export sales and omitting to report domestic sales, which is detrimental to the correctness and fairness of national tax collection.

(2).         Offences deemed to constitute offences.

Article 71, paragraph 1 of the Commercial Accounting Law, the offence of preparing accounting certificates with knowledge of inaccuracies, Article 47, paragraph 1 of the Taxation and Taxation Law, Article 41, the offence of fraudulent evasion of tax by a person in charge of a company as a tax payer, and Article 33 9, paragraph 1 of the Criminal Law before the amendment, the offence of fraudulently obtaining property.

(3).         Penalty imposed.

8 months' imprisonment, suspended for 3 years.

C. Determination of the fact that Midland is an offshore related party as alleged by the Appellant.

(1).         On March 24, 2002, Ting Yuen entered into a "Contract for the Purchase and Sale of Equipment and Machinery for the Production of Hollow Capsules" with Midland, Inc. for the purchase of seven (7) capsule machines, capsule molds, vibratory sifting machines, glue dip trays, capsule slicer collectors, and glue refill buckets for a total contract amount of $183,954,090.

(2).         On 31 March 102, Midland then entered into a contract with the Appellant for the purchase of seven capsule machines for US$2,100,000 (pages 66-68 of the original Disposition 1), of which the person who signed the contract with Ting Yuen on behalf of Midland was Cheng Chung Yee (i.e. the representative of the Appellant during the period of the dispute), who was the contact person for the transaction between Midland and Ting Yuen.

(3).         According to the certificate of incorporation, the register of directors and the register of shareholders of Mei Di Company, Mei Di Company was established on 28 June 2007 in accordance with the provisions of the Samoan International Company Law. (son of Zheng Zhong Er) 18%, Cheng Yue Hsiu (son of Zheng Zhong Er) 18%, Cai Qingzhu (uncle of Zheng Zhong Er's spouse) 5.65%, Cai Gu Long (son of Cai Qingzhu) 5.46%, Cai Shi (nephew of Zheng Zhong Er) 9.35%, Cai Cheng Zhan (son of Cai Shi) 1.76% and Chong Mei Zheng.

The Appellant's representative during the period in dispute, Zheng Zhong Er, his spouse and his son held a total of 73.6% of the shares.

(4).         In addition, according to the Appellant's 2014-year profit-making business investors' list, the Appellant's shareholders included Zheng Zhong Er and his spouse, Zheng Cai Ying, whose sons, Zheng Yan Chang and Zheng Yue Xiu, were employees of the Appellant.

D. Findings of fact that "the machine in dispute was not physically processed in Hong Kong".

(1).         (1). After comparing the information in the export declaration and bill of lading prompted by the Appellant with the information in the import declaration and bill of lading of Ting Yuen, it was found that the machine in dispute had not been substantially processed in Hong Kong

(1). A comparison of the export declarations and bills of lading prompted by the Appellant and the import declarations and bills of lading of Ting Yuen shows that the machine in dispute was loaded with the same container number and seal number, and the same net weight and quantity of goods from the previous export to the subsequent import.

(2).         Lee Mui Fei, the sales manager of Tullett International Logistics Limited (TIL), which handled the import and export business of the Appellant and Midland, came to the Appellee's authorities for an interview on 10 September 105 and the record of the interview stated that

(A).        (A). The machine in dispute was exported from the port of Taichung to Hong Kong via Wanhai Shipping Co Ltd (Wanhai) in April 2014 at the direction of the Appellant's employee, Hao-Cheng Chang, and a former employee, Ya-Ru Chang, and was designated by HARBOR BRIDGE INT'L LTD (hereinafter referred to as HARBOR BRIDGE) as the consignee of the container at the Hong Kong consignee of TLL

(B).         The Appellant instructed the relevant staff of Harbor Bridge to change the labels (outsourcing labels, not machine labels) and no assembly and processing was carried out.

(C).         The machine in dispute was shipped back from Hong Kong to the port of Keelung in Taiwan via Wan Hai in May 2014.

(D).        The Appellant's employees were in contact with TÜV SÜD from the time of the export to the time of the import of the disputed machine.

(3).         According to the explanatory memorandum dated 26 May 106 of HBC: (A). (A). The Appellant's freight business was undertaken by TLL.

(B).         TLL appointed HBC as the consignee to deliver the four containers subdivided by the machine in dispute to a private warehouse in Hong Kong.

(C).         The containers in dispute arrived in Hong Kong on or about 24 April 2014 and were provided with storage by HBC. The Appellant instructed the staff of HBC to simply change the mark.

(D).        After the private warehouse staff had replaced the upper four containers with new mark heads, the appellant instructed the upper four containers to be shipped back to Taiwan in the name of Midland, and the upper four containers were shipped to Hong Kong All the Way Ltd. on or about 27 April 2014. The four containers were then shipped back to the port of Taiwan in May 2014.

(4).         It is evident from the above that the disputed machine was exported from Taiwan to Hong Kong and then transported back to Taiwan from Hong Kong on the same machine.

The Appellant took the lead in the process, and only changed the headstock during the process, without any actual processing in Hong Kong.

E. The fact that the case was a domestic sale was established as follows

(1).         According to the record of the interview with the Appellee on 23 August 105, Zhang Xiyuan, the general manager of Ding Yuan, the source of the seven capsule machines purchased by Ding Yuan was that they were manufactured by the Appellant, exported from Taiwan to Hong Kong, and then re-imported from Hong Kong to Taiwan to Ding Yuan in the name of Medi Company.

(2).         The appellant was responsible for the subsequent assembly process of the machine in dispute and requested Ting Yuen to sign a contract with Midland instead, and the goods were imported from Hong Kong to Taiwan by the appellant's employees, Zhang Yaju and Zhang Haocheng, in liaison with Ting Yuen, and the appellant provided staff training, installation and operation of the machine and provided warranty for defects.

(3).         According to the acceptance information provided by Ting Yuan, on 22 August 104, Zhang Haocheng, an employee of the Appellant, convened Ting Yuan and the Appellant to discuss and resolve that Ting Yuan should pay the final payment for the four capsule machines after acceptance of the machines. If the appellant does not resolve the matter and if there is an indefinite delay, the appellant will be required to pay 0.3% per week for the delayed delivery of the machine. The Appellant is the actual seller of the disputed machine to Ding Yuan, which should be a domestic sales transaction.

F. The Appellant's claims are not credible for the following reasons.

(1).         The Appellant argued that the disputed machine was sold to a foreign company, Midland, which had an export declaration and was exported goods, but the Appellee had no positive evidence to prove that Midland was under the control of the Appellant, and there was no evidence to prove that the disputed machine was not physically processed in Hong Kong and the Appellee's original penalty was wrong.

(2).         However, to claim a tax refund under Article 39(1)(1) of the Value Added and Non-Value Added Business Tax Act (the "Business Tax Act"), it is necessary that the goods are actually exported.

(3).         In the trial of criminal case No. 2289 of the District Court of Taichung, Taiwan, on December 26, 107, Zheng Zhong Er pleaded: "...... II

The defendant, Zheng Zhong Er, believed that by selling the company's products under false export methods, he could legally save tax after deducting the shipping and warehousing costs.

Now, the Defendant Zheng Zhong Er is deeply repentant and is willing to pay the relevant taxes.

Now, the defendant Zheng Zhong Er has deeply repented and is willing to pay the relevant tax amount, such as "......", and pleaded guilty in court during the criminal trial.

(4).         The Appellee found that from March 2014 to April of the same year, the Appellant only exported on a pro forma basis, without any actual transaction, by means of false exportation.

The Appellant was found to have falsely declared zero-rated sales amounting to RMB63,210,000 and refunded 5% of the sales tax on such sales without any actual transactions, and the Appellee's Feng Yuan Branch approved the payment of RMB7,351,024 in back tax. The Appellant's claim that the Appellee did not discharge its burden of proof in relation to the elements of the rent tax is not supported by the Appellant's counter-evidence.

4. The purpose of the appeal is that the original judgment was unlawful in that it failed to investigate the evidence in accordance with its authority and for the following reasons.

(1) The identification of a controlled foreign affiliate of a profit-making business must meet the requirements of Article 2 of the Regulations Governing the Recognition of Income of Controlled Foreign Enterprises and Article 3 of the Regulations Governing the Irregular Transfer Pricing of Income Taxes of Profit-making Businesses. The so-called related party should be defined as a person under Article 4(2) of the Regulations Governing the Irregular Transfer of Income Taxes from Business Enterprises (incorrectly stated as item 2 in the Statement of Reasons for Appeal). The original decision did not conduct an investigation into why Midland met the statutory requirements for an offshore controlled related party.

The decision was unjustified.

The subject matter of the sales contract between the Appellant and Midland was not the same as that of the sales contract between Midland and Ting Yuen. The decision was that "the parties to the contract of sale between Midland and Ting Yuen were in fact the Appellant and Ting Yuen". Would this result in a contract between Ting Yuen and Mei Tei being split into two parts, one void and one valid, which would be contrary to the law of civil contracts? The original decision did not examine the matter in detail and adopted the same view as the decision on the sanction and the appeal.

The Court of Appeal has adopted the same decision as the decision of the Court of Final Appeal and the decision of the Court of Appeal, which is unjustified and unlawful. V. Having examined

1. the original judgment has made a detailed finding that "Midland in this case is an outside controlled party of the appellant" (see page 10, line 12 to page 11, line 6 of the original judgment).

The appeal alleges that the original judgment failed to conduct an investigation, but does not specify what the original judgment found to be wrong or what specific legal norm was violated. In fact, Article 2 of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises by Profit-making Enterprises, as cited in the appeal, states that

Article 3 and Article 4, paragraph 2, of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises and the Unusual Transfer Pricing Check for Business Enterprises, as cited in the appeal, are all specific to the income tax law and may not be consistent with the judgment of related parties under the business tax law. In addition, in this case, the U.S. and local companies are at least covered by the fact that the income tax of the business is not in compliance with the requirements of Article 3 and Article 4(2) of the regular transfer pricing audit. The method of recognizing the income of a controlled foreign enterprise is based on the premise that there is a difference between domestic and foreign income tax liabilities, and is not related to the determination of related parties under business tax law. It is difficult to argue that the original decision did not apply these provisions and that the application of the law was incorrect or that the reasons for the decision were inadequate.

As to the statement in the appeal that "the factual findings of the original judgment are contrary to the law of civil contracts", the reasoning of the appeal is that "the original judgment is contrary to the law of civil contracts".

It is not clear what the specific breach of the law is, as the argument is brief and vague and lacks a complete legal reasoning.

3. In conclusion, the original decision is clear and detailed and there is nothing that can be said to be unlawful. The grounds of appeal, as set forth in the original judgment, are only general allegations of the application of the law, but not specific allegations of "inapplicability of the law", "improper application of the law", or "the circumstances listed in Article 243, Paragraph 2 of the Administrative Procedure Law". In accordance with the preceding provisions and explanations, the appeal should be considered unlawful.

According to the above conclusion, this appeal is unlawful. In accordance with Article 249, Paragraph 1, Article 104 of the Administrative Procedure Law and Article 95 and Article 78 of the Civil Procedure Law, the decision is as follows

The appeal is lawful.

The People's Republic of China 13 February 2020

Supreme Administrative Court, Fourth Division

 

Cheng Siu Hong, Presiding Judge

Judge Liu Kai-chung

Judge Lin Wenzhou

 

Judges

Judge Lam

Marshal Mae Jun

JABO

in           

The above original certificate and the original     

Original

No         

No difference

13 February 109th Chinese

 

Xu Zi Lan, Clerk

 

Relevant laws and regulations

 

- Administrative Procedure Law, Articles 242, 243, 249 (103.06.18)

- Commercial Accounting Law, Article 71 (103.06.18)

- Taxation Law Articles 41, 47 (106.06.14)

- Criminal Law of the Republic of China Article 339 (105.11.30)

- Civil Procedure Law Articles 78, 95 (106.06.14)