A constitutional complaint filed by companies arguing that tax authorities were unfairly taxing welfare points as earned income due to vague provisions in the Income Tax Act has been rejected.
According to legal circles on June 30, the Constitutional Court consolidated 21 constitutional complaints regarding Article 20, Paragraph 1, Subparagraph 1 of the Income Tax Act and issued a unanimous decision on June 24, ruling that the law is constitutional.
The plaintiffs are companies that have been providing a certain amount of welfare points to their employees annually.
These companies had requested tax authorities to recalculate their income taxes and refund the difference, arguing that welfare points do not constitute earned income subject to taxation under the Income Tax Act. However, their requests were denied.
Following the denial, the companies filed lawsuits to cancel the refusal and requested the courts to file a motion for a constitutional review of the Income Tax Act provision that defines the scope of earned income. After those requests were dismissed, they filed direct constitutional complaints with the Constitutional Court.
Article 20, Paragraph 1, Subparagraph 1 of the Income Tax Act defines the scope of earned income as "salaries, wages, remuneration, stipends, pay, bonuses, allowances, and other benefits of a similar nature received for providing labor."
The companies argued that the phrase "other benefits of a similar nature" is ambiguous. They claimed, "The ambiguity of this provision allows tax authorities to interpret the law in a way that excludes welfare points for public officials from earned income while including those for private sector employees."
However, the Constitutional Court determined that welfare points provided by private companies also fall under earned income as defined by the Income Tax Act.
The Court rejected the companies' arguments, stating, "Benefits of a similar nature refer to all forms of compensation that are in a reciprocal relationship with the provision of labor, regardless of the frequency, form of payment, or name, arising from an employment contract or a similar relationship."
The Court explained that while the scope of "benefits" can be difficult to define, the provision clearly limits earned income to those "received for providing labor," thereby narrowing its scope.
The Constitutional Court further noted that the purpose of using an illustrative legislative format rather than an exhaustive list in the Income Tax Act is to "prevent the avoidance of earned income tax and promote tax equity by including all benefits received in exchange for labor as earned income, regardless of their name or designation."
Consequently, the Court stated, "It is difficult to view the definition of earned income in the provision as excessively abstract or ambiguous, making it hard to predict, nor can it be seen as an unclear concept susceptible to arbitrary interpretation or application by tax authorities." The Court concluded that "it cannot be considered a violation of the principle of clarity in taxation."