Tax Litigation

The main tax risks that a company may face are as follows.

① Errors and underreporting in corporate tax filings
Underreporting of corporate tax due to errors in asset valuation, omission of related-party transactions, exceeding the limit on donations, or omission of expenses can lead to the imposition of additional taxes and to a tax investigation.

② Value-added tax assessment
When errors in applying the zero tax rate, ineligible input tax deductions, omission of sales, or double counting occur, they may lead to additional collection of value-added tax, the imposition of additional taxes, and even a criminal complaint.

③ Failure to withhold at source
Omission of withholding at source when paying wages, service fees, or dividends may give rise to criminal liability for the company's representative or the official in charge of accounting, and omission of withholding tax on foreign corporations may expand into an international taxation issue.

④ International tax adjustment
Violations in transfer-pricing calculations, taxation issues regarding remittances to overseas subsidiaries, and transactions involving tax havens result in the collection of large tax amounts, along with penalty surcharges and liability for violations of international transaction reporting.

⑤ Failure to respond to a tax investigation
Failure to submit materials during a tax investigation, submission of false materials, or failure to respond in the appeal process may result in additional harm, such as a heavy taxation disposition, a criminal complaint, and the spread of tax risk to business counterparts.

This is litigation in which, when a taxing authority has imposed taxes such as corporate tax, value-added tax, or withholding tax on a company and the disposition is deemed unlawful or unjust, the company contests it before the court.

For example, this applies when, in the course of a tax investigation, a company's sales are excessively estimated and taxed, or items that could be treated as expenses are denied so that the tax amount is inflated.

In this litigation, the issue is whether the tax investigation process underlying the assessment, the method of calculating the tax base, and the materials supporting the assessment were lawful under the law and tax statutes.

For the company, if the disposition is revoked, it may obtain a refund of taxes already paid or be relieved of the burden of unpaid taxes.

This is a civil lawsuit that a company files to recover taxes paid as a result of unlawful tax collection by a taxing authority.

For example, when a judgment revoking a previously imposed tax has become final but the refund is delayed or refused, the company may claim before the court the return of that unjust enrichment.

In this case, it is possible to claim the amount already paid together with statutory interest (additional refund payment), and not only the unlawfulness of the disposition itself but also the unlawfulness of the refusal to refund after collection may be at issue.

In addition to imposing taxes, tax authorities may impose a penalty surcharge on a company for violations of tax law, and this is a lawsuit that challenges the unlawfulness of such a penalty surcharge disposition.

For example, where a company has been assessed a penalty surcharge on grounds such as a violation of transfer pricing tax rules or a failure to withhold tax at source, this is a procedure in which the company argues issues such as the unlawfulness of the calculation method, procedural defects, and whether the principle of proportionality was violated, and seeks revocation of the penalty surcharge disposition before the court.

In this lawsuit, the legal basis for the penalty surcharge, the details of its calculation, and the lawfulness of the administrative procedure become the issues at stake.

This is an administrative adjudication procedure in which, before filing an administrative lawsuit, a party requests the Tax Tribunal to revoke or modify a taxation disposition.

Where a taxation disposition has been issued following a tax investigation, a request for a tax tribunal adjudication may be filed within 90 days, and depending on the outcome of the adjudication, the tax may be reduced or the disposition may be revoked.

The procedure is faster and less costly than an administrative lawsuit, and it is common to first explore the possibility of resolving the matter before court litigation through an objection and a request for adjudication.

In recent cases involving the collection of large amounts of tax from companies, there have been many instances in which the Tax Tribunal partially revoked or reduced the assessed tax.

Where a tax statute or an administrative disposition applied in connection with a tax matter is found to infringe fundamental rights under the Constitution, this is a procedure for petitioning the Constitutional Court to adjudicate on its constitutionality.

For example, where there is a statute that improperly permits double taxation or that justifies existing taxation through retroactive legislation, the dispute concerns whether that statute or disposition has infringed property rights, the right to equality, or the principle of the rule of law.

A company may file a constitutional complaint directly, or, during an administrative lawsuit, the court may request adjudication from the Constitutional Court through a referral for constitutional review of the statute.

Please review the key legal points of tax litigation and respond with certainty to your company's tax litigation risks.