The meaning of "the return of tax base by improper means", which is the requirement for an unfair underreporting penalty tax prescribed by Article 47-3 (2) 1 of the former Framework Act on National Taxes.

In light of the regulatory system under Article 47-3 of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010; hereinafter the same), the language and content of each subparagraph of Article 27(2) of the former Enforcement Decree of the Framework Act on National Taxes (amended by Presidential Decree No. 22038, Feb. 18, 2010; hereinafter the same), and the legal nature of the penalty tax for underreporting, an additional tax for an unjust underreporting underreporting under Article 47-3(2) of the former Framework Act on National Taxes is one of the reasons why the imposition and collection of taxes is impossible or considerably difficult, and thus, it is understood that the imposition and collection of taxes is considerably more difficult to induce a taxpayer to faithfully report the tax base of national taxes, and thus, it is understood that the purpose of Article 27(2) of the former Enforcement Decree of the Framework Act on National Taxes requires to be “unfair underreporting the tax base for an unlawful underreporting underreporting under reporting that is a requirement for tax evasion under Article 27(3).”

Articles 47-2(2) and 47-3(1)1 of the former Framework Act on National Taxes (Amended by Act No. 911, Jan. 1, 2010); Article 27(2) of the former Enforcement Decree of the Framework Act on National Taxes (Amended by Presidential Decree No. 22038, Feb. 18, 2010); Article 40(1) and (2) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 69(2) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22577, Dec. 30, 201); Article 34(1)1 and (3)1 of the former Enforcement Rule of the Corporate Tax Act (Amended by Ordinance of the Ministry of Strategy and Finance, Feb. 28, 2011)

Gyeongnam Enterprise Co., Ltd. (Law Firm Cho & Lee, Attorneys Cho Jae-ho et al., Counsel for the plaintiff-appellant)

The Director of the National Tax Service

Daejeon High Court Decision 2012Nu3307 decided May 23, 2013

The judgment of the court below is reversed, and the case is remanded to Daejeon High Court.

The grounds of appeal are examined.

1. Article 47-3(1) of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010; hereinafter the same) provides that where the reported tax base falls short of the tax base to be reported under the tax-related Acts, the amount of general under-reported penalty tax equivalent to 10/100 of the amount calculated by multiplying the calculated tax amount by the ratio of the under-reported tax base to the amount of tax to be paid shall be added to the amount of tax to be refunded, or the amount to be deducted from the amount of tax to be refunded. Paragraph (2) 1 provides that where the under-reported tax base exists in an unjust manner, the amount of unfair under-reported penalty tax shall be added to the amount of tax to be paid, or deducted from the amount of tax to be refunded (Article 47-3) of the former Framework Act on National Taxes (amended by Act No. 9911, Jan. 1, 201; hereinafter the same shall apply). Article 47-2(2) of the former Enforcement Decree provides that the tax base of the tax amount to be reduced or exempted from “any” (Article 20.

Meanwhile, Article 40(1) and (2) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010); Article 69(2) main text of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22577, Dec. 30, 2010; hereinafter the same) provides that where the contract period of construction, etc. (referring to the period from the commencement date of construction until the delivery date) is at least one year, earnings and losses for each business year from the commencement date of construction to the business year which includes the date of delivery of the relevant object shall be included in gross income for the pertinent business year based on the construction completion rate (hereinafter “work progress rate”) as prescribed by Ordinance of the Ministry of Strategy and Finance; Article 34(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 10423, Feb. 28, 2011); Article 34(1)1 of the former Enforcement Decree of the Corporate Tax Act shall apply to the total construction progress rate.

2. citing the reasoning of the judgment of the court of first instance, the court below acknowledged the fact that: (a) the Plaintiff, who is engaged in civil engineering business, etc., reported and paid corporate tax for the business year 200 or 2002 or 2002 business years, submitted financial statements that include more than actual earnings for each business year by excessively manipulating the work progress rate prescribed in Article 69(2) of the former Enforcement Decree of the Corporate Tax Act; and (b) the Plaintiff, while reporting and paying corporate tax for the business year 2003 or 2008 business years, submitted financial statements that include less actual earnings for each business year by deducting the amount included in the above excessive earnings by applying Article 69(2) of the former Enforcement Decree of the Corporate Tax Act; and (c) the Defendant underreporting the corporate tax base for the business year 2007 or 2008 business years by improper means, thereby imposing an unfair underreporting penalty tax.

Furthermore, the court below held that even if the plaintiff filed a return on a different date without reducing or omitting the total construction cost for the business year 200 through 2008 without reducing or omitting the total construction cost for the business year 200 or 2008, the tax base report for the business year 200 through 2008 should be deemed as underreporting, and that the plaintiff already knew that when the plaintiff appropriates excessive earnings for the business year 200 or 2002 business year in the subsequent business year, it would have to be less included in the amount of earnings in the subsequent business year, it is reasonable to see that the above insufficient calculation of earnings constitutes an act of manipulating the work progress rate for the business year 200 or 202 business year 20 or 202 business year , and that the plaintiff prepared and announced a false list and the financial statements for the business year 200 or 208 business year 200 or 202 business year 200 or 202 business year 202 business year 200 or 200

3. However, it is difficult to accept such a determination by the lower court for the following reasons.

A. In full view of the regulatory structure of Article 47-3 of the former Framework Act on National Taxes, the language and content of each subparagraph of Article 27(2) of the former Enforcement Decree of the Framework Act on National Taxes, and the legal nature of penalty taxes for underreporting, where penalty taxes are imposed in cases of an unjust underreporting under Article 47-3(2) of the former Enforcement Decree of the Framework Act on National Taxes, where all or part of the facts constituting the basis for calculating the tax base or the amount of national tax are concealed or pretended, it is impossible or considerably difficult to impose and collect taxes, and thus, it is understood that imposing penalty taxes much higher than imposing penalty taxes for underreporting that is not based on the “unfair method” in order to induce taxpayers to faithfully report the tax base. In addition, Article 27(2) of the former Enforcement Decree of the Framework Act on National Taxes, which explicitly provides that the purpose of imposing penalty taxes for underreporting the “unfair method” under Article 47-3(2)6 of the former Enforcement Decree of the Framework Act, which can be deemed as “unfair method” is necessary to constitute an “unfair method of tax evasion” under reporting, etc. Therefore, the application of an unlawful underreporting of tax base.

B. However, according to the reasoning of the lower judgment and the evidence duly admitted by the lower court, the Plaintiff filed a tax base for the business year 2003 through 2008 in a passive manner that deducts the amount excessively included in the gross income for the previous business year, and did not make it difficult to discover the facts requiring taxation or make false facts difficult. The Plaintiff’s excessive operation of the rate for the business year 200 to 2002 business year, thereby making the amount included in the gross income more than the actual income of the business year 200 to 2002 business year, the Plaintiff’s increase in the sales revenue for the pertinent business year, and thereby, there was no outcome of tax evasion such as the avoidance of progressive tax rate or the deduction of losses carried forward, etc.

Examining these circumstances in light of the legal principles as seen earlier, it is difficult to conclude that the Plaintiff’s act of understating the gross income in the business year 2007 and 2008 is carried out as a result of excessive appropriation of gross income by manipulating the work progress rate in the business year 200 or 2002 business year, and it is also difficult to conclude that such act resulted from the purpose of tax evasion. Thus, it is only a general underreporting, and it does not constitute a case of underreporting the tax base by an “unfair method.”

C. Nevertheless, solely based on its reasoning, the lower court determined that the instant disposition was lawful by treating the Plaintiff as underreporting the rate of work progress in the business year 2007 and 2008 and underreporting the tax base in an unjust manner. In so doing, the lower court erred by misapprehending the legal doctrine on the requirements for an unfair underreporting penalty tax under Article 47-3(2)1 of the former Framework Act on National Taxes, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal assigning this error is with merit.

4. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim So-young (Presiding Justice)