[1] Requirements for the good faith and non-taxable practice under Articles 15 and 18(3) of the former Framework Act on National Taxes

[2] In a case where a domestic company imposes value-added tax on a transaction for which it provides services to a person designated by the corporation under a supply contract with a foreign corporation with no domestic place of business and which is paid to the corporation by deducting the price from the amount to be paid to the corporation, the case holding that the above disposition is unlawful in violation of the principle of good faith or the principle of prohibition of retroactive taxation by new interpretation since the foreign exchange earnings transaction can be included

[1] In order to establish the good faith principle or non-taxation practice under the provisions of Articles 15 and 18(3) of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010) with respect to the tax and law acts of the tax authorities, it shall be interpreted that there is an objective fact that the tax was not imposed on certain matters over a long-term period, as well as that the tax authorities have known that they are able to impose taxes on certain matters, and that such intent must be externally and explicitly expressed externally or explicitly. The term “construction of the tax law or practice of the national tax administration” under Article 18(3) of the same Act refers to an erroneous interpretation or practice, which is accepted by a general taxpayer who is not a specific taxpayer, but a specific taxpayer, to the extent that it is not unreasonable for the taxpayer to believe such interpretation or practice.

[2] In a case where the tax authority imposed value-added tax on the transaction for which a domestic company provides a service to a person designated by the corporation under a supply contract with a foreign corporation with no domestic place of business and deducts the price from the amount to be paid to the corporation, the case holding that the above disposition is unlawful against the principle of retroactive taxation prohibition under the good-faith or new interpretation of the National Tax Service's general rule 11-26-3 of the Value-Added Tax Act, which provides for the service, etc. to a person designated by a foreign corporation with no domestic place of business, even if the domestic company provides the service, etc. to the person designated by the foreign corporation with no domestic place of business, can be viewed as a interpretation consistent with the purport of Article 26 (1) 1 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 17041 of Dec. 29, 200) and the purport of Article 26 (1) 1 of the same Decree

[1] Articles 15 and 18(3) of the former Framework Act on National Taxes (amended by Act No. 911 of Jan. 1, 2010) / [2] Article 26(1)1 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 17041 of Dec. 29, 200), Article 26(1)1 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 17460 of Dec. 31, 201)

[1] Supreme Court Decision 90Nu10384 delivered on July 27, 1993 (Gong1993Ha, 2442), Supreme Court Decision 99Da22311 delivered on November 27, 2001 (Gong2002Sang, 136), Supreme Court Decision 2001Du1253 Delivered on October 25, 2002 (Gong2002Ha, 2897), Supreme Court Decision 2005Du2858 Delivered on June 29, 2006 / [2] Supreme Court Decision 83Nu409 delivered on December 27, 1983 (Gong1984, 341)

Korea Lao Co., Ltd. (Attorneys Lee Im-soo et al., Counsel for the defendant-appellant)

Samsung Head of Samsung District Tax Office (Law Firm Doll, Attorneys Gyeong-gi et al., Counsel for the defendant-appellant)

Supreme Court Decision 2005Du12718 Decided June 14, 2007

Seoul High Court Decision 2007Nu15799 decided August 28, 2007

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

Article 15 of the former Framework Act on National Taxes (amended by Act No. 9911, Jan. 1, 2010; hereinafter “Framework Act on National Taxes”) provides that “When a taxpayer performs his/her duty, he/she shall faithfully and faithfully perform his/her duty. The same shall apply to a tax official performing his/her duty.” Article 18(3) of the same Act provides that “after the interpretation of tax-related Acts or the practice in tax administration is generally accepted by a taxpayer, any act or computation according to such interpretation or practice shall be deemed lawful, and no tax shall be imposed retroactively by a new interpretation or practice.”

In order to establish the good faith principle or non-taxation practice under the provisions of Articles 15 and 18(3) of the Framework Act on National Taxes with respect to the tax and law relations, the tax authority’s act requires not only an objective fact that there was no tax exemption on certain matters over a long-term period, but also an intent that the tax authority would not impose tax on certain matters with the knowledge that it is able to impose tax on such matters, and such intent is externally or implicitly expressed (see Supreme Court Decision 90Nu10384 delivered on July 27, 1993, etc.). Article 18(3) of the Framework Act on National Taxes provides that “the interpretation of the tax law or the practice of national tax administration accepted by the general taxpayer” refers to a wrongful interpretation or practice that is accepted by an unspecified general taxpayer, who is not a specific taxpayer, without any objection, to the extent that it is unreasonable for the taxpayer to trust such interpretation or practice (see, e.g., Supreme Court Decision 2005Du28588 delivered on June 29, 2006).

According to the reasoning of the lower judgment, the lower court determined that: (a) the Plaintiff’s provision of zero-rate tax to a foreign corporation without a domestic place of business for the purpose of calculating the zero-rate tax rate of 10 to 196 under the former Enforcement Decree of the Value-Added Tax Act by providing zero-rate tax rate of 2 to the Plaintiff, a foreign corporation without a domestic place of business; and (b) the provision of zero-rate tax rate of 1 to a foreign corporation without a domestic place of business for 196 to 201; and (c) the Plaintiff’s provision of zero-rate tax, including zero-rate program installation, should be applied to the Plaintiff’s Central Settlement Account (hereinafter “instant transaction”); and (d) the Plaintiff’s provision of zero-rate tax rate of 1 to non-resident or foreign corporation without a domestic place of business for 1983 to the extent that it would not be subject to the application of the aforementioned provision to the Plaintiff’s basic tax rate of 9-1 to the Plaintiff’s non-resident or foreign corporation.

In light of the above legal principles, the record can be examined, and the general rules 11-26-3 of the basic rules which provide for zero tax rate application even in cases where services, etc. are provided in Korea to a person designated by a foreign corporation without a domestic place of business, etc., can be seen as an interpretation consistent with the purport of Article 26 (1) 1 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 17041 of Dec. 29, 2000 and Article 17460 of the Enforcement Decree of the Value-Added Tax Act) and the purport of Article 26 (1) 1 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 17460 of Dec. 31, 200) at the time of original adjudication is somewhat insufficient

The court below did not err in the misapprehension of legal principles or misconception of facts as to taxation practice as otherwise alleged in the ground of appeal.

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Yang Chang-soo (Presiding Justice)