Time of Bad Debt Tax Credit

The bad debt tax deduction can be subtracted from the output tax amount in the taxable period to which the date when the bad debt becomes final and conclusive belongs. If an entrepreneur closes his/her business, the taxable period to which the date when the bad debt becomes final and conclusive belongs is nonexistent.

Article 45 of the Value-Added Tax Act; Article 7 of the Enforcement Decree of the Value-Added Tax Act

Daejeon District Court-2016-Gu Partnership-1839 ( April 19, 2017)

AA

The director of the tax office

2017.06.07

2017.19

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

Cheong-gu Office

The defendant's rejection disposition against the plaintiff on December 13, 2016 against the plaintiff of value-added tax of 8,257,498 is revoked.

1. Details of the disposition;

A. The Plaintiff, while running restaurant business from January 1, 2015 to 000, 000, 000, 000, 009-3, was issued by BBBBB for KRW 89,139,820 on credit-based electronic bills from BBBB for KRW 100,000,00 on credit-based 89,139,820, but the said bills were defaulted on March 10, 2016.

B. On November 21, 2016, the Plaintiff filed a claim for rectification against the Defendant for the refund of value-added tax on the grounds of the confirmation of bad debt pursuant to the bill book book, from KRW 8,257,498, which was 2015 to September 10, 2016. However, on December 13, 2016, the Defendant deemed that, at the time when bad debt becomes final and conclusive, the amount of bad debt cannot be deducted because the Plaintiff was not in the position of the business entity under the Value-Added Tax Act, and dismissed the Plaintiff’s claim for rectification (hereinafter “instant disposition”).

C. On January 31, 2017, the Plaintiff filed an objection against the instant disposition, and filed an appeal with the Director of the Tax Tribunal, but the Director of the Tax Tribunal dismissed the Plaintiff’s request for adjudication on May 19, 2017.

D. Meanwhile, on December 31, 2015, the Plaintiff closed its business.

[Ground of recognition] Unsatisfy, Gap evidence 1 through 7, Eul evidence 1 (including branch numbers for those with a serial number), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The Defendant issued the instant disposition, which dismissed the Plaintiff’s claim for rectification, after deducting the bad debt tax from the bad debt tax amount based on the note book, from the output tax amount in the taxable period of the value-added tax for the second half of 2015, although it is necessary to correct the value-added tax accordingly. However, considering the following: (a) the Plaintiff was unable to expect a default upon a bill issued within the restaurant business period when it received a note; (b) the Plaintiff was not notified that it should maintain business registration by predicting the dishonor after the completion of business; and (c) the Plaintiff’s failure to allow the deduction of bad debt tax due to reasons arising from the discontinuance of business and discontinuance of business as the Plaintiff is against equity, the instant disposition should be revoked.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Under the principle of no taxation without law, the elements of taxation, non-taxation, or tax reduction and exemption shall be avoided, and the interpretation of tax laws and regulations shall not be extensively interpreted or analogically interpreted without reasonable grounds (see Supreme Court Decision 2008Du11372, Aug. 20, 2009).

2) According to Article 3 subparag. 1 and Article 4 subparag. 1 of the Value-Added Tax Act, a person liable to pay value-added tax is an entrepreneur who supplies goods, etc. rather than a person supplied goods, and an entrepreneur is obligated to file a return and pay value-added tax for the taxable period whereto belongs the time of supply of goods, etc., which is not the time of actual payment. If an entrepreneur supplied goods, etc. on credit and fails to receive the price due to reasons such as bankruptcy or bankruptcy, etc., the entrepreneur suffers economic loss as well as the value-added tax paid by the State. In such a case, Article 45 of the Value-Added Tax Act provides for a system for a bad debt tax credit that is calculated by deducting the amount equivalent to value-added tax not paid by the entrepreneur from the other party, i.e., the amount equivalent to the bad debt tax, from the output tax amount to be paid later (see Supreme Court Decision 2006Du13855, Apr. 24, 2008).

3) Accordingly, Article 45(1) of the Value-Added Tax Act provides that where an entrepreneur supplies goods or services subject to the imposition of value-added tax and receives all or part of credit sales or other sales claims (referring to those including value-added tax) from a person who receives the supply due to bankruptcy or compulsory execution or other causes prescribed by Presidential Decree, if bad debts cannot be recovered due to bad debts, an amount obtained by multiplying the bad debts by 10/110 may be deducted from the sales tax amount in the taxable period whereto belongs the date on which the bad debts becomes final and conclusive, Article 87 of the Enforcement Decree of the Value-Added Tax Act provides that "the main sentence of Article 45(1) of the Value-Added Tax Act" and "any other reasons prescribed by Presidential Decree" refer to those recognized as bad debts pursuant to Article 55(2) of the Enforcement Decree of the Income Tax Act and Article 19-2(1)9 of the Enforcement Decree of the Corporate Tax Act provides for the period of taxation under Article 19-2(1)9 of the Enforcement Decree of the Corporate Tax Act and Article 19(3) of the Value-Added Tax Act.

4) The grounds on the date of such determination are as follows: (a) the concept of bad debt is ambiguous and subjective concept; (b) it is likely that a fluctuation in profit or loss can be made without the date when bad debt becomes final and conclusive; and (c) it may be contrary to the equitable taxation principle, etc. Furthermore, the legislation that limited the allowable scope of bad debt tax credit such as the foregoing provision may be justified in that it has the meaning of the purpose of tax credit in question, the reduction in finance resulting from such a limitation and the adjustment of the problem of equity in taxation damage arising therefrom. The south of the taxation-related measures would bring about the outcome of transferring the tax burden of a specific taxpayer who benefits therefrom to other taxpayers, and accordingly would be contrary to the ideology of equality, and thus may reduce the tax awareness of general taxpayers. As seen above, it is permissible to limit the scope to a group in which the legislative body considers such reduction to be the lowest or urgent level in setting a tax exemption subject to reduction or exemption, and to regulate such scope in accordance with changes in social and economic circumstances (see, e.g., Supreme Court Decision 21313Hun-Ba101.

5) Therefore, Article 45 of the Value-Added Tax Act is within the legislative formation right of the legislator, and there are reasonable grounds for different treatment between the person who runs the business and the person who has already discontinued the business. According to the above statutes, the bad debt tax amount can be subtracted from the output tax amount of the taxable period in which the date when the bad debt is determined is determined. In the event that the business is discontinued, inasmuch as the bad debt is a taxable period until the date when the business is discontinued, the taxable period in which the date when the bad debt is determined is determined does not exist, and thus, the bad debt tax amount cannot be deducted

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and it is so decided as per Disposition.