[1] The scope of profits imposed in the Republic of Korea and the burden of proof on these profits, if the Philippines corporation operates a business through a permanent establishment in the Republic of Korea (=a taxable authority)

[2] In a case where a party cannot calculate the legitimate amount of tax to be imposed lawfully because he/she failed to submit objective tax bases and materials supporting the tax amount until the closing of argument in fact-finding proceedings (affirmative), and whether the court bears the duty to calculate the reasonable amount of tax ex officio (negative)

[3] The case affirming the judgment below holding that in the case where Gap, the et corporation Gap, entered into a contract with Eul corporation that operated a casino exclusively for foreigners in Korea to recruit and arrange casino customers and receive solicitation fees, and then offered chips to Eul corporation's office's employees at Eul's office's office's office, and the tax authority imposed disposition, such as corporate tax, etc. for each business year on Gap corporation on the ground that the above office is a domestic permanent establishment of Gap corporation's office, the disposition of imposition of corporate tax, etc. was unlawful on the premise that the total amount of the above solicitation fees is the revenue amount attributed to Gap corporation's permanent establishment

[1] Article 7(1) of the Convention between the Republic of Korea and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income provides that “The profits of an enterprise of a Contracting State shall be taxed only in that other Contracting State unless the enterprise runs a business in the other Contracting State through a permanent establishment located in the other Contracting State.” Paragraph (2) of the same Article provides that “If an enterprise runs a business in the other Contracting State through a permanent establishment located in the other Contracting State and runs a business in the other Contracting State, only such an enterprise’s profits may be taxed in that other State.” On the other hand, the burden of proving the existence of tax requirements and the tax base shall accrue to the tax authority.”

Examining the language, text, and purport of the above provisions in light of the aforementioned legal principles, where an Switzerland corporation operates a business through a permanent establishment in the Republic of Korea, only the profits earned by a separate entity independent of the Switzerland corporation that trades the permanent establishment independently from the Switzerland corporation may revert to the permanent establishment and be taxed in the Republic of Korea. As such, the tax authority bears the burden of proof on profits accrued to the permanent

[2] In a case where the parties cannot calculate the legitimate amount of tax to be imposed lawfully because they failed to submit objective tax bases and materials to support the amount of tax until the closing of the arguments in fact-finding proceedings, the entire amount of tax to be imposed shall be revoked. In such a case, the court does not have the duty to identify the amount of tax to be imposed actively by its authority and calculate the amount

[3] The case affirming the judgment below that the disposition of imposition of corporate tax, etc. was unlawful on the ground that, in case where Gap's employees conducted activities in the above office as Gap's domestic permanent establishment and imposed corporate tax, etc. for each business year on Gap's company, on the ground that Gap's employees conducted activities outside of the above office's essential and important business activities, Gap's employees are engaged in activities outside the country, and the amount of revenue belonging to Gap's office which is a permanent establishment in the Republic of Korea among the recruitment fees is limited to the amount of revenue belonging to Gap's office in return for the business performed at Gap's office, since Gap's employees conducted activities as Gap's domestic permanent establishment, Gap's employees are engaged in activities outside the country, and Gap's office is limited to the amount of revenue belonging to Gap's office in the Republic of Korea.

[1] Articles 7(1) and (2) of the Convention between the Republic of Korea and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income / [2] Articles 19 and 27 of the Administrative Litigation Act / [3] Articles 5, 7(1) and (2) of the Convention between the Republic of Korea and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, Articles 91 and 94 of the former Corporate Tax Act (Amended by Act No. 10898, Jul. 25, 2011); Article 13 (see current Article 29) of the former Value-Added Tax Act (Amended by Act No. 11129, Dec. 31, 2011)

[2] Supreme Court Decision 2016Du36116 Decided July 27, 2016 (Gong2016Ha, 1271)

Doo Lbay Lbay Lbd Co., Ltd. (Law Firm Barun, Attorneys signed by et al., Counsel for the defendant-appellant)

Grand Korea Leisure Co., Ltd. (Attorneys Ba-sik et al., Counsel for the plaintiff-appellant)

Samsung Head of Samsung Tax Office (Law Firm Aionion, Attorneys Gangnam-gu et al., Counsel for the defendant-appellant)

Supreme Court Decision 2015Du51415 Decided July 14, 2016

Seoul High Court Decision 2016Nu56051 decided October 20, 2017

The appeal is dismissed. The costs of appeal are assessed against the defendant, including those resulting from supplementary participation.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Determination on grounds of appeal Nos. 1 and 2

(a)Article 7(1) of the Convention between the Republic of Korea and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income provides that "the profits of an enterprise of a Contracting State shall be taxed only in that other Contracting State unless the enterprise runs a business in the other Contracting State through a permanent establishment located in the other Contracting State, unless the enterprise carries on the business as described above." Paragraph (2) provides that "if an enterprise of a Contracting State carries on a business in the other Contracting State through a permanent establishment located in the other Contracting State, it may only be taxed in that other State on the profits of the enterprise, which may accrue to that permanent establishment." In the meantime, where the enterprise of the other Contracting State carries on the business in the other Contracting State through the permanent establishment, it shall be engaged in the same or similar activities under the same or similar conditions, and where it is assumed that the enterprise is a separate enterprise separate from the enterprise, which is the permanent establishment, and the profits expected to be acquired by that permanent establishment shall belong to that Contracting State.

Examining the language, text, and purport of the above provisions in light of the aforementioned legal principles, where an Switzerland corporation operates a business through a permanent establishment in the Republic of Korea, only the profits earned by a separate entity independent of the Switzerland corporation that trades the permanent establishment independently from the Switzerland corporation may revert to the permanent establishment and be taxed in the Republic of Korea. As such, the tax authority bears the burden of proof on profits accrued to the permanent establishment

B. The lower court acknowledged the following facts in full view of the admitted evidence.

(1) On June 30, 2007, the Plaintiff, an et corporation, entered into a so-called “instant contract” contract (hereinafter “instant contract”) with the Plaintiff’s Intervenor, who operated a casino exclusive for foreigners in Korea, and the Plaintiff’s Intervenor, by soliciting and arranging casino customers (Junet; hereinafter “Junet”) and by receiving 70% of the money lost by the customer from the Plaintiff’s Intervenor as a recruitment fee.

(2) From July 2007, pursuant to the instant contract, the Plaintiff recruited tickets for all Asian areas, excluding China, Taiwan, Hong Kong, the Philippines, and Japan. This is a key part of the Plaintiff’s specific activities in accordance with the instant contract. The Plaintiff’s individual recruitment activities conducted through various subordinate ticket business operators in each country most of the individual recruitment activities. In addition, prior to the Plaintiff’s recruitment tickets going to Korea, the Plaintiff received funds from the ticket’s overseas account to the Plaintiff’s Hong Kong account in order to enable the Plaintiff’s Intervenor to play a game in the Plaintiff’s business place, and remitted the money to the Hong Kong account of the Plaintiff’s Intervenor. The Plaintiff was also able to receive or set up a security from the ticket in advance in preparation for the case where the ticket and the ticket were requested to make a loan in the game process, and was also performing the duty of settlement with the ticket and the duty of customer management to attract customers in the future.

(3) In Korea, the Plaintiff had employees in the office (hereinafter “instant office”) of the Plaintiff’s Intervenor’s Intervenor’s Intervenor’s Intervenor’s (hereinafter “instant office”) provided chips to the Plaintiff recruited, or confirmed sales generated in the rolling game operated by the Plaintiff’s Intervenor. The Plaintiff also provided aviation tickets reservation and boarding instruction for the above tickets, provided information from the airport to the Plaintiff’s Intervenor’s business site, and provided hotel and restaurant’s reservation and instruction.

(4) The Plaintiff received solicitation fees from the Plaintiff’s Intervenor (hereinafter “instant solicitation fees”) in return for the foregoing tasks.

C. On the following grounds, the lower court determined that the disposition imposing corporate tax imposed on the entire recruitment fees of this case on the premise that the entire amount of the recruitment fees of this case excluded the value-added tax is the revenue amount attributed to the Plaintiff’s permanent establishment and the disposition imposing value-added tax on the entire recruitment fees of this case on the premise that there is a liability to pay value-added tax (hereinafter collectively

(1) Even if the Plaintiff’s employees’ activities conducted in the instant office constituted the Plaintiff’s essential and important business activities, the Plaintiff’s essential and core business activities are performed overseas, and most of the expenses are spent overseas.

(2) Of the instant recruitment fees, the amount of revenue belonging to the instant office, which is a permanent establishment in the Republic of Korea of the Plaintiff, is limited to the amount of revenue for the business performed by the instant office, and cannot be deemed to include the amount of revenue for various business performed abroad by the Plaintiff.

(3) It is apparent that the instant recruitment fee has the revenue amount to be attributed to the head office of the Plaintiff’s Republic of Korea, and it seems reasonable to do so.

D. Examining the records in accordance with the aforementioned provisions and legal principles, the lower court’s aforementioned determination is justifiable. In so doing, it did not err by misapprehending the legal doctrine on the calculation of revenue amount or estimated taxation belonging to the permanent establishment, nor by failing to exhaust all necessary

2. Judgment on ground of appeal No. 4

A. On the grounds indicated in its reasoning, the lower court determined that the instant disposition based on a different premise was unlawful, since it is difficult to view that the Plaintiff did not pay rollers to the static diskettes, and that the portion of the instant recruitment fees falling under rollers cannot be included in the tax base of corporate tax and value-added tax, on the grounds that the instant disposition based on a different premise is unlawful.

B. The allegation in the grounds of appeal disputing the payment of roller system to the lower court’s judgment is merely the purport of disputing the selection of evidence and fact-finding, which are the exclusive authority of the lower court, and thus cannot be deemed legitimate grounds of appeal. Furthermore, even if the reasoning of the lower judgment is examined in light of the record, the lower court’s determination is justifiable. In so doing, it did not err by exceeding the bounds of the principle

3. Judgment on the third ground for appeal

A. In a case where the parties cannot calculate the legitimate amount of tax to be imposed lawfully because they failed to submit objective tax bases and materials to support the amount of tax until the closing of the arguments in fact-finding proceedings, the entire taxation disposition should be revoked. In such a case, the court does not have the duty to identify the amount of tax to be imposed actively by its authority and calculate the amount of tax to be imposed (see Supreme Court Decision 2016Du36116, Jul. 27, 2016).

B. In the same purport, the lower court was justifiable to have revoked the entire disposition of the instant case on the grounds that there was no evidence to calculate the legitimate tax amount in the instant case, and thus, it did not err by misapprehending the legal doctrine on the scope of revocation of the taxation disposition, or by failing

4. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party, including the portion arising from the participation in the appeal. It is so decided as per Disposition by the assent of all participating Justices.

Justices Min You-sook (Presiding Justice)