CONTENTS
- 1. Corporate Tax Investigation, the Case at Issue
- 2. The Issue in the Corporate Tax Investigation Case
- - Corporate Tax Investigation, the Lower Court's Determination
- 3. Corporate Tax Investigation, the Supreme Court's Determination
- 4. Corporate Tax Investigation, Daeryun's Strategy
1. Corporate Tax Investigation, the Case at Issue
This corporate tax investigation case is one in which the plaintiff conducted its tax treatment based on the losses and income amounts arising in the course of filing corporate tax returns for prior business years (2008 to 2012), but a legal dispute followed when, after a tax investigation by the National Tax Service, corrections were made to the losses and income amounts.
The plaintiff reported that losses had arisen in the 2008 to 2011 business years and that income had arisen in the 2012 business year.
After conducting a tax investigation, the Busan Regional Tax Office made a downward correction to the loss for the 2010 business year and to the income amount for the 2012 business year that the plaintiff had reported.
As a result, the 2012 business year was revised to one in which a loss had arisen.
The defendant (the Head of the Masan Tax Office) reflected the revised loss details, recalculated the corporate tax base for the 2014 business year, and imposed additional corporate tax on the plaintiff.
The plaintiff, contesting these dispositions of the tax authority, filed a lawsuit relating to the corporate tax investigation.
2. The Issue in the Corporate Tax Investigation Case
The issue in this corporate tax investigation case was whether, where the tax authority made a downward correction of losses without observing the notice and other procedures prescribed by the Corporate Tax Act, so that the taxpayer was not guaranteed an opportunity to exercise its right of defense and to file an objection, the taxpayer may contest the illegality of the preceding downward correction of losses in the objection procedure against the corporate tax imposition disposition for a subsequent business year.
Corporate Tax Investigation, the Lower Court's Determination
The lower court concluded that the tax authority's disposition relating to the corporate tax investigation was lawful and dismissed the plaintiff's claim.
The lower court held that, under the provisions of the amended Corporate Tax Act, only losses fixed through a return or a correction may be deducted as losses carried forward.
It took the view that the plaintiff's additional losses could not be regarded as losses under the latter part of subparagraph 1 of Article 13 of the former Corporate Tax Act (amended by Act No. 9898 of December 31, 2009, before being amended by Act No. 10423 of December 30, 2010; hereinafter the former Corporate Tax Act).
Subparagraph 1 of Article 13 of the Corporate Tax Act, as amended on December 31, 2009, was amended to clarify that deductible losses carried forward are losses fixed through a return or a correction, taking into account that examining the lawfulness of corporate tax imposition for the current business year on the basis of losses from prior business years could undermine legal stability.
Accordingly, the determination was that losses not falling under this provision cannot be deducted as losses carried forward when calculating the tax base for a subsequent business year.
The lower court in the corporate tax investigation case determined that the additional losses asserted by the plaintiff did not meet these requirements and therefore were not subject to deduction.
3. Corporate Tax Investigation, the Supreme Court's Determination
In the corporate tax investigation case, the Supreme Court raised two problems with the lower court's determination.
These were whether the notice procedure relating to the corporate tax investigation had been omitted and the confirmation of the principle governing the scope of the loss deduction.
The Supreme Court found that the lower court erred in determining the matter without examining whether the tax authority had observed the notice procedure under the Corporate Tax Act and related provisions when it made the downward correction of losses.
It pointed out that, under Article 70 of the Corporate Tax Act and the related Enforcement Decree and provisions, when determining or correcting the tax base and amount of tax, the tax authority must notify the taxpayer, and must give notice even where there is no amount of tax payable.
The Supreme Court held that, if the tax authority failed to observe the notice procedure and thereby did not guarantee the taxpayer's exercise of its right of defense or its opportunity to file an objection, the taxpayer may contest the illegality of the downward correction in the objection procedure against the corporate tax imposition disposition for a subsequent business year.
The Supreme Court in principle recognized that, because the additional losses for the 2008 and 2012 business years were not included in the reported, corrected, or determined tax base, those losses cannot be deducted as losses carried forward.
This is because, where the tax authority made a downward correction of losses under the Corporate Tax Act amended on and after January 1, 2010, if the taxpayer did not contest it at the time, the taxpayer cannot deduct it as a loss carried forward in a subsequent business year or assert an error in the downward correction.
However, where the tax authority failed to observe the notice procedure and the taxpayer's right of defense and right to file an objection were not guaranteed, the illegality of the downward correction may be contested in the objection procedure against the corporate tax imposition disposition for a subsequent business year.
The Supreme Court determined that the lower court, which did not examine the notice procedure relating to the corporate tax investigation, overlooked this and failed to conduct the necessary examination.
The Supreme Court found that the lower court, without examining whether the tax authority had observed the statutory notice procedure in the downward correction of the 2010 business year loss, determined that the taxpayer could not contest it.
The Supreme Court concluded that the lower court's misapprehension of the legal principles and incomplete examination affected the judgment, and it determined to the effect that the case should be remanded.
4. Corporate Tax Investigation, Daeryun's Strategy
In a corporate tax investigation, litigation between a company and the tax authority can arise over the basis for assessing tax, excessive tax investigations and tax dispositions, differences in the interpretation of statutes, and disputes over the treatment of particular transactions or expenses.
Tax law is highly complex, and proceeding without professional assistance can be very difficult.
Receiving the assistance of an attorney experienced in such matters during a corporate tax investigation can help protect the company's rights and respond to undue pressure from the tax authority.
Daeryun Law Firm LLP provides corporate tax investigation response strategies tailored to a company's circumstances through 🔗attorneys handling corporate matters and 🔗attorneys handling tax matters with experience in tax litigation, in corporate legal teams, and in matters involving the tax authorities.
