CONTENTS
- 1. Overview of the Case Involving False Tax Invoices
- 2. Key Issues in the False Tax Invoice Case
- - The Issue of the Authenticity of the Tax Invoices
- - The Legitimacy of the Imposition of Additional Taxes
- - The Exclusion Period for Assessment
- 3. The Courts' Determination Regarding the False Tax Invoices
- - The Legal Principles Determined by the Supreme Court
- 4. False Tax Invoices, Daeryun's Strategy
1. Overview of the Case Involving False Tax Invoices
The following is an overview of the case involving false tax invoices.
This case arose from a tax invoice issue relating to the transaction structure among the affiliates of the S Food group.
Plaintiff Company 1 (S Food), which produces finished ramen products, received and used raw materials and packaging materials supplied by two other parent companies within the group (Plaintiff Companies 2 and 3).
However, the representative director of S Food and others used the business registration of an already established subsidiary so that, even though the goods were actually transacted by the parent companies, the tax invoices were issued and received in the subsidiary's name.
In this process, the transaction payments were deposited into the subsidiary's account.
When this was discovered in a tax audit, the tax authority took issue with transactions from 2011 through 2017 and additionally imposed value-added tax, corporate income tax, and various additional taxes.
In response, the plaintiff companies, including S Food, filed suit, asserting that the tax dispositions were improper.
2. Key Issues in the False Tax Invoice Case
There are largely three key issues in the false tax invoice case.
The Issue of the Authenticity of the Tax Invoices
The party that actually carried out the transactions was the parent company, yet the tax invoices stated the business registration number of the subsidiary.
The issue was whether such tax invoices could be treated as ‘tax invoices differing from the facts,’ thereby disallowing the input tax deduction and imposing additional taxes.
The Legitimacy of the Imposition of Additional Taxes
If the tax invoices were found to be false, the parent companies could be subject to an additional tax for failure to issue tax invoices and an additional tax for failure to issue itemized tax statements, while the subsidiary could be subject to an additional tax for issuing and receiving fictitious invoices.
The issue was whether such dispositions were legally valid.
The Exclusion Period for Assessment
The period during which a national tax may be assessed is generally five years.
However, where a taxpayer has evaded tax by fraud or other improper means, the period is extended to up to ten years.
Accordingly, whether the ten-year extended exclusion period could be applied in this case was another key issue.
3. The Courts' Determination Regarding the False Tax Invoices
The following examines the courts' determination regarding the false tax invoices.
▶The Lower Courts' Determination
The court of first instance and the appellate court ruled in favor of the plaintiffs.
The court recognized the fact that the parent companies had actually operated the business and had directly filed and paid value-added tax.
Accordingly, it determined that the mere fact that tax invoices had been issued in the subsidiary's name did not make it easy to conclude that they were entirely false.
In the end, the lower courts treated the tax invoices in question as reflecting genuine transaction facts, recognized the input tax deduction, and accordingly determined that the imposition of additional taxes was also improper.
▶The Supreme Court's Determination
Unlike the lower courts, the Supreme Court ruled in favor of the tax authority.
1. The Independence of the Subsidiary's Name
The parent companies and the subsidiary had separate corporate personalities and business registrations.
The Supreme Court determined that this was not merely a matter of borrowing a name, but that, as legally independent entities, there was sufficient potential for the tax authority to be confused.
2. The Purpose of Using the Subsidiary's Name
There was almost no trace of the subsidiary operating a business on its own.
Rather, circumstances were confirmed indicating that the representative director and others had used the subsidiary's name to shift the appearance of revenue for the purpose of embezzling funds.
3. The Effect on Tax Administration
From the tax authority's standpoint, this was assessed as a serious problem that caused confusion as to the substantive party to the transactions and made it difficult to identify the source of taxation.
Accordingly, the Supreme Court viewed the tax invoices issued in the subsidiary's name as ‘tax invoices differing from the facts.’
As a result, it determined that the parent companies could not receive the input tax deduction and had to bear the additional tax for failure to issue tax invoices and the additional tax for receiving false documentary evidence, and that the subsidiary was likewise subject to the additional tax for issuing and receiving fictitious invoices.
4. The Exclusion Period for Assessment
The Supreme Court held that, where tax has been evaded by an improper act, the ten-year exclusion period applies not only to the principal tax but also to the additional taxes for non-filing, underreporting, and failure to pay in good faith.
It also stated that the additional tax for receiving disguised tax invoices is subject to the ten-year exclusion period regardless of whether the principal tax was evaded.
The Legal Principles Determined by the Supreme Court
The following examines the legal principles set forth by the Supreme Court.
▶What Is a Tax Invoice Differing from the Facts?
If the matters that must be stated on a tax invoice (the registration numbers of the supplier and the recipient, the transaction amount, the timing, and so forth) do not match the actual transaction, it is a ‘tax invoice differing from the facts.’
For example, where the company that actually supplied the goods is a different company, but the tax invoice is issued under another company's name, this is regarded as false.
▶Distinguishing a Case of Merely Borrowing a Name from a Case of Actually Conducting Business
-Cases Exceptionally Permitted:
Even if, on its face, the business is registered under another person's (a third party's) name, if that person actually operated the business and supplied the goods, that person may be recognized as the true business operator.
-Cases Not Permitted as a Rule:
However, if the company that actually carried out the transaction and the company stated on the tax invoice are different, this amounts to merely borrowing a name, so the tax invoice is regarded as false and the input tax deduction is not recognized.
▶Standards of Determination
The Supreme Court stated that the actual business operator must be determined by comprehensively examining various factors, such as the following, rather than looking only at the documents.
-The purpose of and circumstances behind using the name
-How the transactions were actually conducted at the relevant place of business
-Who managed the revenue and expenses, and how the funds flowed
-Whether the named party was actually involved in issuing the tax invoices, and whether the named party obtained any benefit
4. False Tax Invoices, Daeryun's Strategy
This precedent concerning false tax invoices was a case showing that, within a corporate group, the act of borrowing a subsidiary's name to issue and receive tax invoices may be determined to be not a matter for formal convenience but a serious unlawful act that causes confusion in tax administration and increases the risk of tax evasion.
In particular, when the name on a tax invoice and the actual business operator do not match, serious disadvantages follow, namely the disallowance of the input tax deduction and the imposition of various additional taxes.
In addition, where an act is assessed as improper, both the principal tax and the additional taxes may be assessed for ten years, so companies need to exercise caution given that the taxation risk is maintained over a long period even for transactions made long ago.
Our firm provides legal support through attorneys experienced in tax matters who have experience responding to investigations by the National Tax Service and tax authorities and experience as in-house counsel at companies and public institutions, working in close collaboration with the firm's tax accountants and certified public accountants on tax audit response, proof of the facts, and the development of litigation strategy.
