Seocho 2014west 619 ( May 24, 2016)

Expenses for ordinary research and development disbursed before the game release constitute common expenses indirectly related to all domestic and foreign projects.

In light of the nature of the online game business performed by the Plaintiff, the purpose of research and development expenses, the peculiarity of research and development of game programs, and the profits that the Plaintiff can gain through such research and development, it is reasonable to view that the expenses incurred before the game in question out of the research and development expenses in this case constitute common expenses indirectly related to all domestic and foreign businesses.

Article 57 (Foreign Tax Credit, etc.)

2016Guhap72921 Revocation of Corporate Tax Imposition, etc.

(state) KONAAA

BB Head of tax office et al.

March 14, 2018

April 27, 2018

1. All of the plaintiff's claims are dismissed.

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

Cheong-gu Office

The Plaintiff’s refusal to rectify the amount of corporate tax stated in the “attached Form 1” column for the business year in which Defendant BB director of the tax office rendered September 11, 2013, and the disposition of imposition of additional tax (including KRW 102,713,01,00) by DefendantCC Head of the tax office on May 2, 2014 shall be revoked, respectively.

1. Details of the disposition;

A. The Plaintiff, a company mainly engaged in the game program development business and the game service business, operated the game program directly developed at its own expense (hereinafter referred to as “self-production game program”) or the game program that acquired the right to use through the Internet through a contract with another game development business entity (hereinafter referred to as “independent game program”). Meanwhile, the Plaintiff did not have a permanent establishment in a foreign country related to his/her overseas business.

B. From 2009 to 2012, the Plaintiff established a 30 game program development plan and started its development. Among them, the development of the 17 game program was suspended during the process, the operation of the 17 game program was completed, but the sales of the service was complete, and the service was completed, and the 7 game program was able to create revenue through the domestic service. Moreover, some of the game programs began in a foreign country and generated income from overseas.

C. The Plaintiff determined that the cost of the development of its own game program does not constitute an intangible asset to be recognized as an asset for accounting purposes, and recognized the total amount as the cost at the time of disbursement. At the time of reporting and paying corporate tax for each business year 2009 or 2012, the above accounting cost was appropriated as the loss at the time of disbursement.

D. Meanwhile, the former Corporate Tax Act (amended by Act No. 12850, Dec. 23, 2014; hereinafter the same applies) provides for a foreign tax credit system where the amount of foreign corporate tax may be exempted from taxation on overseas source income by deducting the amount of foreign corporate tax from the amount of corporate tax (excluding the amount of corporate tax on capital gains on land, etc.) for the pertinent business year from the amount calculated by multiplying the amount of corporate tax for the pertinent business year by the ratio (the ratio prescribed by Presidential Decree where tax is exempted or exempted pursuant to the Restriction of Special Taxation Act or any other Act) of income generated from overseas to the tax base for the pertinent business year (hereinafter referred to as "amount of foreign corporate tax credit") (see Article 57(1)). In addition, the "foreign source income amount" under the aforementioned provision shall be calculated by deducting the total amount of income generated overseas (hereinafter referred to as "amount of income generated from overseas sources") in accordance with the concept of income under Article 14(1) of the former Corporate Tax Act from the total amount of income generated overseas (hereinafter referred to the aforementioned maximum amount of income).

Tax credit limit amount

0

The corporate tax amount for the concerned business year

】

Income from overseas sources in the business year concerned;

Tax base amount for the business year

* Total amount of income generated in the business year concerned = Total amount of income generated in a foreign country - total amount of related deductible expenses

E. Accordingly, in order to report and pay corporate tax for each business year of 2009 or 2011, the Plaintiff did not deduct the total amount of expenses related to the income from overseas source in calculating the income amount from overseas source and set the income amount from overseas source as the income amount from overseas source as it is, and calculated the limited amount of foreign tax credit on the basis of this.

F. However, in the previous report of corporate tax for each business year, the Plaintiff erroneously calculated corporate tax for each business year of 2009 to 2011 on the royalty paid to an external producer with respect to the external game program due to the error in the timing of attribution of deductible expenses (the grounds of reduction). In addition, in calculating the foreign source income amount, which is the premise for calculating the limit of foreign tax credit, the Plaintiff identified that the foreign source income amount was excessively deducted due to the wind that does not deduct the total amount of deductible expenses related to the foreign source income from the foreign source income amount, as the foreign source income amount is greater than the actual amount of deductible expenses (the grounds of increase). In this case, the total amount of deductible expenses to be deducted from the foreign source income amount due to the reason of increase identified by the Plaintiff are as follows.

Since copyright fees to be paid to domestic and foreign game development enterprises in connection with overseas game sales, personnel expenses of overseas business organizations, etc. are direct expenses related to overseas source income, they should be included in the total amount of deductible expenses related to overseas source income.

Common expenses related to all domestic and foreign source income shall be divided in proportion to the ratio of the amount of foreign source income to the total amount of the plaintiff's total amount of income, and such divided amount shall be deemed expenses indirectly related to the overseas source income and included in the total amount of the deductible expenses related to the overseas source income.

G. The Plaintiff re-calculated the corporate tax for each business year of 2009 through 2011 by taking account of the above grounds for reduction and the reason for increase. As a result, the corporate tax for each business year of 2009 is KRW 1,224,378,705 out of the existing tax amount of KRW 21,386,962,151, and corporate tax for each business year of 2009; KRW 6,336,176,314 out of the existing tax amount of KRW 38,615,06,06,540; and KRW 7,171,872,924,177 out of the existing tax amount of KRW 29,872,924,177, and KRW 7,171,803,619 from April 1, 2013.

H. Defendant BB head of the tax office found that the period of attribution of the Plaintiff’s royalty paid to an external producer upon the Plaintiff’s request for correction was erroneous, resulting in the computation of the excessive corporate tax for each business year of 2009 to 2011. However, as a result of the review of the Plaintiff’s above reasons for increase reported, he concluded that the said increase should be increased more than the Plaintiff’s return for the following reasons.

○ The Plaintiff identified research and development costs of the game program that caused foreign source earnings (hereinafter “research and development costs of the game program in the event of foreign withdrawal”) as the costs related to foreign source earnings. However, the costs of each game program that was withdrawn only in the Republic of Korea and did not reach the completion of the game program and each of the research and development costs of the game program suspended in the event of withdrawal in a foreign country (hereinafter “game program”) are common costs related to the domestic and foreign source earnings, so the costs are also included in the total amount of the deductible expenses that should be deducted from the foreign source earnings in proportion to the ratio of the domestic source income and the foreign source income. The Plaintiff recognized only the research and development costs of the game program in the event of withdrawal in a foreign country as the deductible expenses related to the foreign source income, and the foreign source earnings of the game program in the event of withdrawal in a foreign country did not be deducted from the foreign source income at all. As a result, the Plaintiff’s increase in the amount of the above foreign source income to the maximum amount of the corporate tax for each business year to be calculated.

I. Defendant BB director of the tax office acknowledged the Plaintiff’s grounds for reduction as above; however, upon recognizing the above grounds for reduction more than the Plaintiff’s report, 975,138,360 won as to corporate tax for the business year 2009, Sept. 11, 2013; 5,179,357,536 won as to corporate tax for the business year 2010; 5,634,210,200 won as to corporate tax for the business year 201, and rejected the Plaintiff’s remaining request for correction.

(j) On May 24, 2016, the Plaintiff filed a request for a trial with the Tax Tribunal by dissatisfied with the above rejection disposition by Defendant BB director. The Tax Tribunal stated that the entire research and development expenses of this case constitute common expenses related to domestic and foreign source income amount. However, in the pro rata of common expenses, Defendant BB director applied the proportion between the Plaintiff’s total domestic and foreign source income amount, while the Tax Tribunal rendered an order to re-examine the Plaintiff’s domestic and foreign source income amount through its own game program to Defendant BB director on the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of the pro rata of foreign source income amount.

(k) On the other hand, in the same determination as Defendant BB director, the director of the tax office investigated the Plaintiff’s report and payment details of corporate tax for the business year 2012, and as a result, the director of the tax office and the director of the tax office identified the entire research and development costs of the instant case as common expenses related to the income from sources in Korea and abroad. Accordingly, in calculating the income amount from overseas sources, “in calculating the income amount from overseas sources,” the director of the tax office deducts the Plaintiff from the total research and development costs of the instant case by applying the Plaintiff’s self-production game program’s ratio of income from sources in Korea and abroad to the total research and development costs. On May 2, 2014, the director of the tax office imposed corporate tax on the Plaintiff on May 2, 2012 (including KRW 1,143,371,780 (including KRW 102,713,019).

(l) The Plaintiff filed an appeal with the Tax Tribunal on July 18, 2016 against the above increase and imposition by the Director of the Tax Tribunal, but the Tax Tribunal dismissed the Plaintiff’s appeal.

[Ground of recognition] Facts without dispute, entry of Gap evidence 1 through 5 (including branch numbers, hereinafter the same shall apply) and the purport of whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. The plaintiff's assertion

Among the research and development costs of this case included by the Plaintiff in deductible expenses in the business year 2009 to 2012, research and development costs for the game program in Korea are costs related to domestic source income, and they cannot be deducted from the amount of foreign source income because they cannot be common expenses related to all domestic and foreign source income. On the other hand, the Defendants considered research and development costs for the game program in Korea as common expenses related to all domestic and foreign source income in Korea and deducted them from the amount of foreign source income in accordance with the division of common expenses related thereto, and recognized the Plaintiff’s request for correction of corporate tax for the business year 2009 to 2011 and the amount of foreign tax credit less than the amount of corporate tax return and payment for the business year 2012. In addition, the Defendants treated all domestic and foreign source income as common expenses related to the domestic and foreign source income, and deducted some of them from the relevant foreign source income for the relevant business year, and determined differently from the relevant expenses related to the relevant foreign source income for the pertinent business year.

In this point, each of the instant dispositions by the Defendants is unlawful.

B. Relevant statutes

Attached Form 2 shall be as shown in attached Table 2.

C. Determination

1) Relevant legal principles

A) Article 57(1)1 of the former Corporate Tax Act provides that the amount of foreign corporate tax may be deducted from the amount of corporate tax for the pertinent business year in order to adjust international double taxation, and provides that “the limit of deduction shall be the amount calculated by multiplying the amount of corporate tax for the pertinent business year by the ratio of the amount of income generated from overseas sources to the tax base for the pertinent business year,” and allow the deduction of the amount of foreign corporate tax only within the scope of the amount of corporate tax to be paid to the Republic of Korea on income generated from overseas sources. This is intended to prevent the occurrence of foreign corporate tax if the amount of foreign corporate tax is allowed to be fully deducted from the source country where the income generated from overseas sources is located in Korea.

In light of the language and purport of Article 57(1)1 of the former Corporate Tax Act, and Article 14(1) of the former Corporate Tax Act provides that income for each business year of a domestic corporation shall be the amount calculated by deducting the total amount of losses incurred during the pertinent business year from the total amount of gross income accrued during the pertinent business year without asking whether the source is a domestic or a foreign country or not. In determining the maximum amount of foreign tax credit pursuant to Article 57(1)1 of the former Corporate Tax Act, “overseas source income” shall be calculated by deducting the total amount of losses incurred by the domestic corporation from the total amount of gross income accrued overseas in the pertinent business year from the domestic corporation’s source to the source of the income generated during the pertinent business year. This also applies where a domestic corporation bears corporate tax calculated by multiplying the amount of income generated from overseas by a specified withholding tax rate (see, e.g., Supreme Court Decision 2014Du5613, Mar. 26

B) In calculating the limit of foreign tax credit, if there are various allowances, reserves, or common expenses for the entire domestic and foreign business, which are included in deductible expenses for the calculation of the amount of tax base of a corporation for the pertinent business year in calculating the amount of tax base, the amount related to the business of a foreign branch shall be appropriately divided depending on the cause of such occurrence and calculated as deductible expenses of the relevant foreign branch (see, e.g., Supreme Court Decisions 86Nu219, Feb. 24, 1987; 2007Du21587, Feb. 24, 2011).

C) Article 94(15) of the Enforcement Decree of the Corporate Tax Act amended by Presidential Decree No. 24357, Feb. 15, 2013 provides that the provisions on the calculation of income from overseas sources shall apply mutatis mutandis to the calculation of income amount for each business year, especially to the calculation of the income amount from overseas sources, which is a premise for the calculation of the credit limit amount of income from overseas sources, if there is any amount, directly or indirectly, corresponding to the amount of income from overseas sources as deductible expenses for the business year concerned. The above provision shall be deemed to have been naturally interpreted in light of the purport of the aforementioned formula of the credit limit amount of income from overseas sources. Thus, in calculating the credit limit amount of income from overseas sources in the business year prior to the above amendment of the Enforcement Decree, the amount of income from overseas sources should be calculated by subtracting the total amount of expenses related to the income from overseas source sources, and if both domestic and foreign source income and deductible expenses are directly or indirectly related to each business year, the amount of

On the other hand, the deductible expenses refer to losses or expenses incurred in connection with the business of the corporation which are generally accepted as ordinary or directly related to profit (Article 19(2) of the former Corporate Tax Act), and as seen earlier, the income is defined as subtracting the total amount of deductible expenses from the total amount of gross income. Thus, the income can be explained as deducting losses or expenses incurred in connection with the business of the corporation from the total amount of gross income.

Ultimately, it is reasonable to understand that income from overseas sources, which is a premise for calculating the limit of foreign tax credit amount, is the amount obtained by subtracting expenses, etc. paid in connection with overseas business activities from income accrued overseas.

D) If so, it is reasonable to specifically determine whether expenses, etc. incurred in relation to business activities are reasonable and reasonable in relation to overseas source earnings. First, in cases where a certain domestic or foreign income is directly related to a specific domestic or foreign income, such expenses, etc. should be reflected only in the calculation of income corresponding to the source. Likewise, the expenses related to one of the national or foreign business activities should be reflected only in the calculation of the income amount of the relevant source.

On the other hand, where expenses incurred in relation to business activities are expenses not directly related to specific domestic and foreign income or domestic and foreign business activities, it shall be determined whether the expenses are reasonably related to the foreign source income in comprehensive consideration of the nature of the business performed by the relevant corporation subject to taxation, the details of overseas source income of the relevant corporation, the method of creating profit therefrom, the purpose and characteristics of the relevant expenses, and the details of profit that can be gained from the expenditure.

In addition, in calculating the amount of income of a domestic corporation for each business year, "where the corporation applies corporate accounting standards or practices generally recognized as fair and reasonable in relation to the business year of accrual of earnings and losses and the acquisition and evaluation of assets and liabilities, or continues to apply such practices, except as otherwise provided for in this Act and the Restriction of Special Taxation Act, it shall comply with the corporate accounting standards or practices." Thus, the relevant corporation's accounting of expenses incurred in relation to the accounting and profits accrued therefrom may be an important reference to the aforementioned judgment.

E) On the other hand, in the case of expenditure expenses having common relations with domestic and foreign source earnings, such expenses shall be distributed in accordance with reasonable standards and deducted from foreign source earnings. Whether they have been distributed according to reasonable standards should be determined by comprehensively taking into account the purpose and characteristics of the relevant expenditure expenses, whether they have accrued from the disbursement in the pertinent taxable year, the number of sales by domestic and foreign country, and the accounting practices of the pertinent corporation, etc.

2) Determination

Examining the following circumstances in light of the aforementioned legal principles, which can be seen by adding the whole purport of the pleadings to each of the statements in evidence Nos. 4, 5, 8, 9, and 12, the part of the research and development expenses of this case determined as deductible expenses related to overseas source earnings is recognized as expenses having reasonable relations with the Plaintiff’s overseas source earnings, and the method of allocating the research and development expenses to deductible expenses related to the Plaintiff’s overseas source earnings is also reasonable. Therefore, each of the instant dispositions by the Defendants is lawful.

A) Reflection of the Plaintiff’s project and the instant research and development costs

As examined below, in light of the Plaintiff’s nature of online game business, purpose of research and development expenses, peculiarity of research and development of game programs, and profit-making activities that the Plaintiff can gain through such research and development, it is reasonable to deem that the expenses incurred before the withdrawal of the game in question constitute common expenses indirectly related to both domestic and foreign businesses, and each of the instant dispositions by the Defendants seems to have been based on such premise.

① The Plaintiff conducted research on the development of 30 games during the pertinent business year (from 2009 to 2012) of each of the instant dispositions, and success in the development of 13 games, and the Plaintiff himself/herself recognized that eight games, which exceed half of the developed games, were withdrawn from abroad. Furthermore, during the pertinent business year, the domestic sales rate of the Plaintiff has gradually decreased to 54%, 47%, 37%, and 34%, while the foreign sales ratio is considerably high in dependence on the foreign sales of the Plaintiff’s online game business, such as each of the instant business years, 46%, 54%, 63%, and 66%.

② Furthermore, the high commercial game is supplied via the Internet. Moreover, inasmuch as the Plaintiff’s online game success in the Republic of Korea, the Plaintiff is able to gain a large amount of profit from overseas only with relatively small additional costs. In such a situation, it is difficult to easily understand that the Plaintiff’s investment in large-amount research and development expenses over a long-term period of time for the purpose of running out a foreign country where the Plaintiff is able to obtain a large amount of profit, and it is reasonable to view that the Plaintiff is developing the game program in mind with the intention of running out a foreign country (In addition, even if the Plaintiff asserts that the development and research of the game program and the development research of the game program at the time of running a foreign country is different from the beginning of the research, the Plaintiff does not present specific criteria to distinguish each of the above research).

(3) If so, it cannot be deemed that there is no game sales before the game program actually begins, and it cannot be deemed that the research and development expenses are directly related to a specific sales. Also, it is difficult to clarify whether the game program under research and development is related to a certain business in Korea and abroad. Therefore, considering the aforementioned circumstances, it is difficult to deem that the judgment of the Defendants, which indirectly recognized the research and development expenses of this case as common expenses related to both domestic and foreign businesses, has lost rationality.

④ In particular, in a case where a game program that was developed was withdrawn and the sales were incurred, the research and development expenses for the year of the withdrawal may be recognized as expenses directly related to the sales of the game in question. The Defendants recognized research and development expenses for the pertinent game in the year of the withdrawal as expenses related to the sales of the game in Korea and abroad by allocating the relevant game in proportion to the sales of the game in Korea and abroad. If the game actually developed according to the method of calculation by the Defendants did not appear in a foreign country, the relevant game research and development expenses for the pertinent year of the withdrawal are not recognized as losses related to the sales of the game in Korea due to the lack of the relevant foreign sales in Korea. Therefore, it does not go against the basic principles that “If a certain domestic revenue was directly related to the sales in Korea, it does not recognize as losses related to the sales of the foreign

B) Consideration of the Plaintiff’s accounting practice

In addition, in light of the following circumstances, each of the instant dispositions by the Defendants seems to be consistent with the Plaintiff’s accounting practices and to prevent excessive calculation of the foreign tax credit limit by consistently applying such accounting practices.

① In order to calculate domestic and foreign source income, which is a tax base for the pertinent business year, the instant research and development expenses should be first determined. The instant research and development expenses should be included in the Plaintiff Company’s deductible expenses, and what method it should be included is not always determined. In particular, given that online game programs need to engage in research on long-term games, expenses incurred in the event of online games and the timing of attribution of profits accrued from the event of the withdrawal are inevitably different. Inasmuch as there is no provision for solving these problems, the current situation is that there is no provision for solving these problems, it is inevitable to respect the relevant corporation’s accounting practice to a certain extent how to dispose of the development costs before the actual occurrence of profits accrued from online games.

(2) If so, the Plaintiff may include the deductible expenses of the year in which the instant research and development expenses are actually paid. The Plaintiff may include direct profits from the game generated by the game generated due to the instant research and development expenses in the deductible expenses corresponding to the pertinent year, and where it can be recognized as intangible fixed assets, the depreciation expenses may be included in the deductible expenses by accounting as intangible fixed assets.

However, the Plaintiff did not include the depreciation cost method in deductible expenses on the ground that the instant research and development expenses cannot be recognized as intangible fixed assets. Moreover, the Plaintiff included the instant research and development expenses as deductible expenses for the year in which the actual disbursement was actually made regardless of whether game programs were released and whether the actual profit accrued from the development research. Based on these accounting accounts, the Plaintiff filed a corporate tax base report.

③ As such, regardless of whether actual profits accrue from the instant research and development expenses, the Plaintiff accounts the research and development expenses as deductible expenses for the pertinent business year, and calculates the total tax base by deducting them from domestic and foreign source earnings (total revenues). Although the sales did not lead, each of the instant dispositions taken by the Defendants, which were recognized as deductible expenses related to overseas source earnings by the pertinent business year during which the research and development expenses were paid, are consistent with the Plaintiff’s accounting practice even with the Plaintiff’s accounting practice (in addition, when calculating the total tax base, the Plaintiff included the research and development expenses in the deductible expenses for the year in which the actual expenses were actually paid, even if the research and development expenses were not actually paid, but did not recognize them as deductible expenses related to overseas source income for the reason that they did not go against the Plaintiff’s accounting standards).

④ Recognizing the above assertion inconsistent with the Plaintiff’s financial practices, at the stage of researching a game program for the purpose of domestic withdrawal, the total tax base is calculated by deducting research and development expenses of the game program for the purpose of domestic withdrawal in the pertinent year from the total income of the pertinent year, and the said research and development expenses are not deducted from the total income of the pertinent taxable year while calculating the total tax base. However, even if the Plaintiff gains profits from the Plaintiff’s subsequent completion of the development of the game program, the said research and development expenses are already treated as deductible expenses for the entire tax base of the previous taxable year, and the pertinent taxable year in which the said foreign source income has already occurred after the said research and development expenses were already treated as deductible expenses for the entire tax base of the previous taxable year, and the said foreign source income cannot be deducted from the above foreign source income (the amount included in deductible expenses when calculating the “total tax base of the pertinent business year in which the said foreign source income has occurred” under Article 94(15) of the Enforcement Decree of the Corporate Tax Act. Ultimately, upon receiving the Plaintiff’s claim, the said foreign game method research and development expenses will not cause any problem.

C) Appropriateness of allocation method of "deductible expenses related to income generated from overseas sources"

On the other hand, the plaintiff distributed deductible expenses, such as depreciation costs of intangible assets (copyrights, etc. for external game programs) directly related to the relevant game to the sales of each game at home and abroad, and filed a tax base return in the manner of allocating deductible expenses for common expenses not related to a specific game to the ratio of the total sales at home and abroad.

As to the portion of the research and development costs of this case recognized as common expenses because the game did not appear in the pertinent expenditure year, the Defendants distributed the same to the domestic and foreign sales cost of the entire self-production game program and deducted the same from the foreign source revenue. On the other hand, after the actual game was launched, the distribution of the research and development costs was deducted from the sales cost of each game at the time of the withdrawal. This is not only based on the Plaintiff’s above disposal method, but also on the part of the Defendant’s above calculation method, in a situation where it is somewhat inevitable to calculate the sales directly related to the game before the game was released. Thus, such distribution method cannot be deemed unlawful.

3) Sub-decisions

Therefore, each disposition of this case is legitimate, and the prior plaintiff's assertion cannot be accepted on different premise.

3. Conclusion

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