Application of simple expense rate to housing construction and sales business operators

The commencement of the business of the Housing Construction and Sales Business Act is the time of commencing the sale of a house on which the supply of goods is commenced under Article 6 subparagraph 3 of the Enforcement Decree of the Value-Added Tax Act. Therefore, the disposition of exclusion from the application of simple expense rate is legitimate because the revenue of the by

Article 143 of the Enforcement Decree of Income Tax Act

Seoul Administrative Court 2018Guhap79025 global income and revocation of disposition

ARTICLE *

Head of Guro Tax Office

oly 2019.25

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

Defendant’s global income tax amounting to KRW 250,185,550 for the Plaintiff on August 1, 2017, 2013

73,720,910 won or more shall be revoked.

1. Details of the disposition;

A. On May 10, 2012, the Plaintiff completed the business registration of housing construction and sales business jointly with the largest ○○ and Kim Jong-tae.

B. On May 1, 2012, the Plaintiff obtained a construction permit to newly construct a multi-household house with a total floor area of 847.24 square meters and a 13-household scale (hereinafter “instant house”) on the land 54 square meters, Seoul AAAB, 200-ro, and obtained approval for use on October 9, 2012 after commencing the construction on May 6, 2012.

C. When filing a return on comprehensive income tax for the year 2013, the Plaintiff calculated estimated income by applying the simple expense rate pursuant to Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 25193, Feb. 21, 2014; hereinafter the same) on the ground that the amount of income falls short of the amount prescribed in Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 25193, Feb. 21, 2014; hereinafter the same shall apply) and applied the special tax reduction and exemption for small and medium enterprises pursuant to Article 7

D. The director of the Seoul Regional Tax Office, upon conducting a consolidated investigation against the Plaintiff, notified the Defendant of taxation data to the effect that: (i) the Plaintiff is a new business operator who commenced the business in 2013 when the sales revenue amount of the instant house was generated; (ii) the Plaintiff is in excess of the standard amount under Articles 143(4)1 and 208(5)2 of the former Enforcement Decree of the Income Tax Act; (iii) the amount of income should be estimated by applying the standard expense rate rather than the simple expense rate; and (iv) the Plaintiff was not engaged in the construction business; and (v) the Plaintiff was not engaged in the construction business, and thus, (v) the special tax reduction

E. On August 1, 2017, the Defendant issued a correction and notification of KRW 250,185,550 (including household tax) for the Plaintiff’s global income tax for the year 2013 (hereinafter “instant disposition”).

F. The Plaintiff, who is dissatisfied with the instant disposition, filed a request for a trial with the Tax Tribunal on April 6, 2018, but was dismissed on June 29, 2018.

[Reasons for Recognition] Facts without dispute, Gap evidence Nos. 1 through 4 (if there are additional numbers, each number number ; hereinafter the same shall apply), Eul evidence Nos. 1 through 3, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

For the following reasons, the part exceeding KRW 73,720,910 among the dispositions of this case shall be unlawful.

1) As to application of standard expense rate

Pursuant to Articles 5, 27, and 39 of the former Income Tax Act (amended by Act No. 12169, Jan. 1, 2014; hereinafter the same shall apply), the starting date of the housing construction and sales business run by the Plaintiff shall be deemed to be around December 21, 2012, or around May 10, 2012, when the Plaintiff disposes of by-products related to the new house construction and sales market and the income accrues from the Plaintiff’s disposal of by-products, or Article 3(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 29529, Feb. 12, 2019) by analogical application of Article 3(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 29529, Feb. 12, 2019). Therefore, as long as the Plaintiff commenced business in 2012, with respect to global income tax reverted in 2013, the Plaintiff

2) Regarding reduction of and exemption from special tax on small and medium enterprises

Although the Plaintiff did not hold a specialized construction business license, since the Plaintiff constructed the instant housing under the Plaintiff’s financing, management and supervision, it should be deemed that the Plaintiff runs the construction business.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Determination on the application of simple expense rate

A) Under the principle of no taxation without law, a tax law shall be interpreted in accordance with the text of the law, and shall not be extensively interpreted or analogically interpreted without a reasonable reason, barring any special circumstance. However, even according to the language and text of the tax law itself, if its meaning is unclear or if it appears that there is a conflict between the statutes, the court must naturally indicate the true meaning of the language and text at issue through harmonious interpretation between the laws and regulations. In this case, a judge can make a combined interpretation of the laws and regulations within the scope that does not undermine the legal stability and predictability pursued by the principle of no taxation without law (see, e.g., Supreme Court Decision 2007Du4438, Feb. 15, 2008).

Article 1-2 (1) 5 of the former Income Tax Act provides for the definition of "business operator", and Article 19 (1) provides for the imposition of income generated from any type of business as business income. Article 168 (3) provides that Article 8 of the Value-Added Tax Act shall apply mutatis mutandis to a business operator who registers his/her business in accordance with the Income Tax Act, and Article 8 of the Value-Added Tax Act shall not apply to the starting date of the business as provided for in Article 6 of the Enforcement Decree of the Value-Added Tax Act, or the same provision shall apply mutatis mutandis to the starting date of the business. Therefore, it is necessary to examine when the starting date of the business of the former Income Tax Act shall be seen through the combined interpretation of laws and regulations that consider the legislative purport and purpose of the Income Tax Act to the extent that it does not undermine legal stability and predictability.

Therefore, in full view of the language, structure, and purpose of the relevant laws such as the former Income Tax Act and the Value-Added Tax Act, the starting date of business in the business income under the former Income Tax Act shall be also based on the time stipulated in each subparagraph of Article 6 of the Enforcement Decree of the Value-Added Tax Act, which provides for the starting date of business under Article 5 (2) of the Value-Added

① Considering that Article 19(1) of the former Income Tax Act defines “income generated from various types of business, such as agriculture, forestry, fishery, mining, manufacturing, construction, etc.,” as business income, Article 1-2(1)5 of the same Act defines a resident as a business operator, it is reasonable to view that a business is based on the premise that a real income accrues from a business under the former Income Tax Act. Therefore, it cannot be advanced until the preparation of the business, which is the time of provision of goods or services, directly causing income, begins.

② As a result, it is difficult to objectively specify the starting point of the preparation act in terms of not only a considerable irregular and broad range, but also a business operator’s subjective intent or necessity. If the preparation for commencing a new construction and sale business of a building is made earlier than the starting point of the business or the starting or completion point of the building, which is the starting point of the acquisition of the land or the starting or completion point of the building, the starting point of the business of the new construction and sale business of a building would vary depending on the time of the preparation act, the amount of income in the immediately preceding taxable period, which is the premise for applying the simple expense rate under Article 143(4)2 of the Enforcement Decree of the Income Tax Act, may vary depending on the time of the preparation act, and thus, may interfere with the national legitimate exercise of tax collection rights by avoiding

③ Under Articles 1-2(1)5 and 19 of the former Income Tax Act, a resident with income generated through his/her own calculation and responsibility (in independence) and continuous and repeated activity is an entrepreneur. On the other hand, regardless of the existence of profit-making purposes under Article 2(3) of the Value-Added Tax Act, a person who supplies goods or services independently from his/her business is an entrepreneur and becomes a person liable to pay value-added tax. Here, “person who supplies goods or services independently from his/her business” is a person who supplies goods or services in the form of business to an extent that the value-added tax can be created and paid (see Supreme Court Decision 98Du16705, Sept. 17, 199; 9Du16705, Sept. 17, 199). Thus, it is necessary to interpret business income related to the business of the former Income Tax Act uniformly from the commencement of business of the former Value-Added Tax Act, which should not be easily determined in terms of the legal nature of a person liable to pay value.

(4) From this point of view, the former Income Tax Act imposes an obligation on the head of the competent tax office to newly start a business under Article 168 (1) of the former Income Tax Act to make the business registration under the said Act, and the entrepreneur who has made the business registration under the Value-Added Tax Act shall be deemed to have made the business registration under the former Income Tax Act. If the entrepreneur supplies goods or services, it may be deemed that Article 32 (1) of the Value-Added Tax Act provides for the obligation to issue the tax invoice to the person who has received the goods or services, as prescribed by Presidential Decree, also Article 163 (1) of the former Income Tax Act provides for the obligation to prepare an invoice or receipt as prescribed by Presidential Decree and impose the obligation to issue the goods or services

⑤ Article 8(1) of the Value-Added Tax Act, which provides that Article 168(3) of the former Income Tax Act shall apply mutatis mutandis to the registration of business, provides for the term "the starting date of business" in relation to the registration of business, and Article 5(2) of the Value-Added Tax Act provides for the term "the starting date of business" in the first taxable period for a new business operator, and Article 6 of the Enforcement Decree of the Value-Added Tax Act provides for "the starting date of business pursuant to Article 5(2) of the Value-Added Tax Act shall be "the starting date of provision of goods or services"

B) According to the following circumstances revealed by comprehensively taking account of the contents of the relevant statutes and the evidence and the purport of the entire pleadings, the commencement date of the housing construction and sales business run by the Plaintiff shall be deemed the commencement date of the sale of the instant housing, which is the date of commencing the supply of goods under Article 6 subparag. 3 of the Enforcement Decree of the Value-Added Tax Act.

① Article 143(4)1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22580, Dec. 30, 2010) provides that Article 143(4)2 of the former Enforcement Decree shall apply simple expense rate to all the ‘business operators who start a new business in the pertinent taxable period'. Article 143(2)2 of the former Enforcement Decree of the Income Tax Act provides that "business operators, other than those who start a new business in the pertinent taxable period, who start a new business in the pertinent taxable period, fall short of the standard amount." Article 143(4)1 of the former Enforcement Decree of the Income Tax Act amended by Presidential Decree No. 22580, Dec. 30, 2010; Article 143(4)1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22580, Dec. 30, 201; Presidential Decree No. 21500, Feb. 13, 20192>

In addition, Article 143 (4) of the Enforcement Decree of the Income Tax Act, which applies to the commencement of a new business after January 1, 2019 and the portion of income for a three-year period, which is amended by Presidential Decree No. 28637, Feb. 13, 2018, provides that the standard expense rate shall be applied by excluding it from the application of the simple expense rate in cases where the total amount of income for the immediately preceding taxable period is less than the standard amount, as well as the business operator (subparagraph 1) who has commenced a new business in the relevant taxable period, and also the business operator (subparagraph 2)

In light of the amendment history of Article 143 (4) of the Enforcement Decree of the Income Tax Act, the simple expense rate system is a system that intends to minimize the tax payment costs of small-scale small-scale business operators with sufficient capacity to keep records of the disbursement of major expenses required by the standard expense rate system, and the legislators seem to have gradually reduced the scope of business operators subject to the application of the simple expense rate. Furthermore, according to the language and text of the supplementary provision, legislators seem to be able to understand "the commencement of construction, construction business related thereto, and commencement of real estate development and supply business" as separate concepts.

Therefore, considering these legislative intent, in the case of housing construction and sales business that operates a long-term business above a certain scale due to its characteristics, it is necessary to grasp the business commencement at an objective and practical time when the supply of housing subject to sale can be conducted rather than the commencement date which can be left for according to the intention of the business operator.

② The commencement of a business of a housing construction and sales business shall be substantially determined based on the time when the preparation for the business is completed and the preparation for the business becomes available or is capable of performing the original business (see, e.g., Supreme Court Decision 94Nu15905, Dec. 8, 1995). The initial housing construction and sales business is included in real estate sales business in its nature (see, e.g., Supreme Court Decision 2008Du21768, Jul. 22, 2010). The purpose of the business is to sell a house, and it is difficult to deem that a sales business commenced only when the housing was completed.

③ Whether a business income under the Income Tax Act constitutes business income ought to be determined according to social norms, taking into account the existence of the business profit purpose, the scale, frequency, and mode of the business (see, e.g., Supreme Court Decision 91Nu6559, Nov. 26, 1991). However, there is no evidence suggesting that the Plaintiff had objectively expressed his/her intent to engage in the housing construction and sales business for the purpose of earning profit prior to commencement of the sale of the instant housing. The fact that the Plaintiff commenced or completed the instant housing for profit-making purposes alone is difficult to deem that the instant housing was continuously and repeatedly conducted for profit-making purposes, and that the Plaintiff had objective substance as a new housing construction and sales business entity.

C) Therefore, the Plaintiff’s business for new construction and sale of housing does not constitute “business operator whose revenue amount in the immediately preceding taxable period falls short of 36,00,000 won, which is the standard revenue amount in the construction business.” Therefore, in calculating the Plaintiff’s business income for 2013, it shall be estimated by applying standard expense rate pursuant to the main sentence of Article 143(3) of the former Enforcement Decree of the Income Tax Act. Therefore, the Plaintiff’s assertion on this part is without merit.

2) Determination on whether to reduce or exempt special tax on small and medium enterprises

A) Articles 2(3), 7(1)1(g) and 7(2)2 of the former Restriction of Special Taxation Act provide that the tax amount calculated by multiplying the income tax on the income accruing from the relevant place of business by 20/10 shall be reduced or exempted until the taxable year ending on or before December 31, 2014, and the classification of the types of business used in this Act shall be in accordance with the Korean Standard Industrial Classification publicly notified by the Commissioner of the Statistics Korea pursuant to Article 22 of the Statistics Act.

However, according to the former Korea Industrial Classification (amended by the Statistics Korea Notice No. 2015-311, Sept. 24, 2015), which applies in the global income tax taxable period subject to the instant disposition, “the construction business of the main residential building” means the industrial activities of constructing residential buildings, such as independent and multi-households, and apartment houses. On the other hand, the industrial activities of constructing residential buildings by entering into a collective contract for construction of the entire building without directly performing construction activities are classified as “the development and supply business of the residential building (the classification code 68121).”

B) We examine the following circumstances, i.e., Gap evidence Nos. 1 through 6, Eul evidence Nos. 1 and 3, which are acknowledged as comprehensively considering the overall purport of the pleadings, i.e., the construction contractor entered into the building ledger of this case as "Tan Construction Co., Ltd."; ② the plaintiff did not hold a construction business license; ② the plaintiff did not submit any specific data to deem that he had human resources, physical facilities, or capabilities to construct the housing construction of this case under the overall responsibility; ③ according to the report on the performance of withholding tax submitted by the plaintiff; ③ according to the statement of daily income (Evidence No. 5 and 6) the fact that the plaintiff paid some expenses as labor expenses for the daily workers, but it is deemed that the amount falls within the scope of "development and supply of a residential building" under the Korea Standard Industrial Classification; and therefore, it is difficult to deem that the business operated by the plaintiff falls under the construction business subject to reduction or exemption of the special tax amount under the former Restriction of Special Taxation Act.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.