Cho Jae-2013-China-2767 ( October 21, 2015)

Whether the provision on the conversion of major expenses is premised on the case where the main expenses included in the inventory at the end of the relevant taxable year can be separately calculated.

Among the major expenses, there is no objective evidence to acknowledge the purchase cost, and there is no evidence to separately calculate the principal expenses included in the basic inventory and the end inventory in 2008 by the Plaintiff, and thus, it is unreasonable to apply the conversion provisions to the extent that the conversion provisions are not applied.

Article 80 of the Income Tax Act

2015Guhap8364 Global Income and Revocation of Disposition

A KimA

AA Head of the Tax Office

April 12, 2016

May 10, 2016

1. The Defendant’s imposition of global income tax of KRW 191,198,340 against the Plaintiff on December 5, 2012 shall be revoked.

2. The plaintiff's remaining claims are dismissed.

3. 50% of the costs of lawsuit shall be borne by the Plaintiff, and the remainder shall be borne by the Defendant.

Cheong-gu Office

The Defendant’s disposition of imposition of KRW 191,198,340 of global income tax for the year 2008 against the Plaintiff on December 5, 2012 and global income tax for the year 2011 shall be revoked.

1. Details of the disposition;

A. The Plaintiff, a person who runs real estate sales business under the trade name of “OOO”, calculated the ‘major expenses included in the basic inventory among the main expenses items according to the notice given by the National Tax Service, included them in the necessary expenses, and reported and paid the global income tax as estimated income by standard expense rate.

B. On December 5, 2012, the Defendant re-calculated the estimated income amount to the Plaintiff on the ground that the evidence of disbursement for the main expenses included in the basic inventory assets and for the main expenses incurred during the current period was not verified, and notified the Plaintiff of the amount of global income tax of KRW 191,198,340, and global income tax of KRW 171,370,120 for the year 2008. On the ground that the Plaintiff raised an objection, the Defendant re-issued and notified the Plaintiff of the global income tax of KRW 155,149,912 for the reason that the purchase cost of real estate was additionally verified (hereinafter the above disposition of global income tax and global income tax of KRW 201 for the year 208).

C. The Plaintiff appealed and filed an appeal with the Tax Tribunal on June 5, 2013, but the Tax Tribunal dismissed the appeal on April 21, 2015.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

In calculating the estimated income amount based on the standard expense rate of the Plaintiff’s business income, in the case of global income tax for the fiscal year 2008, the National Tax Service Notice No. 2009-11 (hereinafter “Public Notice No. 2009-11 prior to the amendment”) applies. Since there is no premise that the former Public Notice No. 2009-11 (hereinafter “Public Notice No. 2008 prior to the amendment”), the main expenses should be calculated in accordance with the Public Notice No. 3 (b) of the former Public Notice No. 1 [Attachment Table 1], which is included in the basic inventory as of the beginning date of the pertinent fiscal year. In the case of global income tax for the fiscal year 2011, the main expenses included in the last inventory shall be separately calculated in the former Public Notice No. 2012-10 (hereinafter “Public Notice”) of the National Tax Service’s Public Notice No. 2008. However, in calculating the estimated income amount, the Defendant is unlawful in the calculation of the estimated income amount of this case.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

1) In the case of global income tax attributed to year 2011:

(A) The proviso of Article 80(3) of the Income Tax Act (amended by Act No. 11611, Jan. 1, 2013; hereinafter the same) provides for the basis for estimation, and provides for the method of calculating the calculation under Article 143(3) of the Enforcement Decree of the Income Tax Act and Article 67 of the Enforcement Rule thereof. Meanwhile, Article 143(3) of the Enforcement Decree of the Income Tax Act provides that “the amount paid or payable by documentary evidence as the purchase cost and the business rent for the fixed assets” shall be deducted from the amount of income, “the amount paid or payable by documentary evidence as the purchase cost and the business rent for the employees’ wages and retirement

(2) The method of deducting from the revenue amount the amount obtained by multiplying the simple expense rate of the revenue amount,

(3) Other reasonable methods are prescribed by the Commissioner of the National Tax Service. (2) Meanwhile, Article 4(5) of the amended Public Notice provides that: (a) the scope of purchase costs and rent for business fixed assets; (b) the type of documentary evidence is to be determined by the Commissioner of the National Tax Service; and accordingly, the Commissioner of the National Tax Service established the public notice. Article 4(1) of the amended Public Notice provides that the main expenses included in the underlying inventory or the end inventory may not be calculated. In addition, Article 4(2) of the amended Public Notice provides that the main expenses included in the underlying inventory or the end inventory may not be separately calculated, because there is no evidentiary document regarding the main expenses before the end of the immediately preceding taxable year; (c) the main expenses included in the underlying inventory as of the beginning date of the relevant taxable year can be separately calculated, but the basic expenses included in the underlying inventory as of the end of the relevant taxable year can be separately calculated by the following method. In other words, the main expenses included in the underlying inventory asset valuation as of the end of the relevant taxable year can be separately calculated by the main expense included in the relevant tax year.

(B) With respect to the instant case, Gap evidence Nos. 3 through 6 submitted in relation to the Plaintiff’s business income of the real estate sales business cannot be deemed as an objective evidence for the recognition of purchase cost among the important expenses, and thus, the purchase cost cannot be converted. There is no evidence to separately calculate the Plaintiff’s major expenses included in the Plaintiff’s basic inventory and inventory assets in 2011. Therefore, in calculating the income amount attributed to the Plaintiff in 2011, since the Plaintiff’s major expenses included in the inventory assets cannot be separately calculated, it is not a matter that can calculate the principal expenses by applying the provisions of Article 4(3) of the amended Public Notice. Therefore, this part of the Plaintiff’s assertion is without merit.

2) In the case of global income tax for the year 2008:

(A) Prior to the amendment, subparagraph 3 of [Attachment I] of [Attachment I] provides for the calculation method of major expenses included in inventory assets 】 (a) "purchase cost deducted from the revenue amount of the relevant taxable year," "lease cost for fixed assets for business," and employee's salary, retirement benefit (hereinafter "major expenses") shall be the amount calculated by adding the major expenses included in the underlying inventory assets to the amount paid or payable in the relevant taxable year, and deducting the major expenses included in the last day inventory assets." (b) provides that "in cases where it is impossible to calculate the major expenses included in the underlying inventory assets as of the beginning date of the relevant taxable year because there is no details and documentary evidence of the expenditure before the end of the immediately preceding taxable year, the amount may be calculated by the following method if the main expenses included in the underlying inventory assets as of the beginning date of the relevant taxable year can not be applied separately from the main expenses included in the calculation of inventory assets as of the end of the relevant taxable year ? (i.e., simple expense rate for the relevant taxable year as of the end of the immediately preceding taxable year).

(B) In the case of the income amount attributed to the Plaintiff in 2008, there is no objective evidence to acknowledge purchase cost among the important expenses, and there is no evidence to separately calculate the principal expenses included in the basic inventory assets and the end inventory assets in 2008. As such, the principal expenses included in the basic inventory assets as of the beginning date of the pertinent taxable year should be calculated by applying the provision on conversion of the principal expenses included in the basic inventory assets as of the beginning date of the pertinent taxable year in accordance with the revised notice. Nevertheless, with respect to the calculation of the estimated income by the standard expense rate of the Plaintiff’s business income, the provision on conversion of the principal expenses included in the basic inventory assets included in the initial notice prior to the amendment under the premise that “the principal expenses included in the basic inventory assets as of the end of the pertinent taxable year can be separately calculated.” Therefore, the Plaintiff’s assertion pointing this out is with merit.

3. Conclusion

Thus, among the plaintiff's claims, the part of the defendant's claim of this case against the plaintiff on December 5, 2012, 191,198,340 won of global income tax of 2008 is justified, and the remaining part is dismissed as it is so decided as per Disposition.

Indication of related Acts and subordinate statutes

Article 80 (Determination and Correction) of the former Income Tax Act (Amended by Act No. 11611, Jan. 1, 2013)

(2) Where a person who has filed a final return on the tax base pursuant to Articles 70, 71 and 74 (including a person who has failed to file a final return on the tax base pursuant to Article 73, in cases falling under subparagraphs 2 and 3) falls under any of the following subparagraphs, the head of a regional tax office or the head of a regional tax

1. Where an omission or error exists in the return;

(3) The head of a regional tax office or the head of a regional tax office having jurisdiction over the place of tax payment shall, where he/she determines or revises the tax base and amount of tax in the relevant taxable period pursuant to paragraphs (1)

Provided, That where it is impossible to calculate the amount of income by means of account books or other evidentiary documents on the grounds prescribed by Presidential Decree, the amount of income may be determined by estimation investigation, as prescribed by Presidential Decree.

(4) If any omission or error is found after the tax base and amount of tax are determined or corrected, the director of a regional tax office or the head of a regional tax office having jurisdiction over the place of tax payment shall immediately correct

§ 160. Keeping and recording books

(1) A business operator (including a nonresident having a domestic place of business or a nonresident with income under subparagraph 3 of Article 119; hereinafter the same shall apply) shall keep evidentiary documents, etc. so that he/she can calculate his/her income amount and shall record and manage his/her business in books by double entry so that all transactions related to

(2) Where a business operator below a certain scale by type of business prescribed by Presidential Decree in consideration of the type, scale, etc. of business, keeps simple books prescribed by Presidential Decree (hereinafter referred to as "Simple books") and faithfully enters the transaction details of such business, he/she shall be deemed to keep and record books under paragraph (1)

(3) A business operator less than a certain size by type of business prescribed by Presidential Decree pursuant to paragraph (2) shall be called a person subject to simple bookkeeping, and a business operator other than a person subject to simple bookkeeping shall be

(1) The former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 24356, Feb. 15, 2013)

§ 143. Determination and revision by estimation

(1) "Grounds prescribed by Presidential Decree" in the proviso to Article 80 (3) of the Act means any of the following cases:

1. Where necessary account books and documentary evidence are missing or important parts are incomplete or false in the calculation of the tax base;

(2) Where the tax base is estimated, determined and revised under the proviso to Article 80 (3) of the Act, the amount of tax base shall be calculated by making personal deduction and special deduction under Articles 50 through 52 of the Act from the income amount assessed under paragraph (3).

(3) In cases of estimated determination or correction of income amount under the proviso to Article 80 (3) of the Act, it shall be done by the following methods: Provided, That subparagraph 1-2 shall apply only to persons subject to the application of simple expense rate:

1. The method of determining or revising, as the relevant amount of income (hereafter in this Article, referred to as the "amount of standard income"), the amount obtained by deducting the following amounts from the amount of income. In such cases, if the amount to be deducted exceeds the amount of income, the amount in excess shall be deemed non-existent: Provided, That where the standard amount of income is in excess of the amount calculated by multiplying the amount of income under subparagraph 1-2 by the multiple factor prescribed by Ordinance of the Ministry of Strategy and Finance, the amount calculated by multiplying such multiple factor may be determined as the amount of income until the amount of income is determined

(a) Purchase costs (excluding those for fixed assets for business: hereafter the same shall apply in this Article) and rent expenses on the fixed assets for business which are paid or payable by the documentary evidences;

(b) The amount paid or payable by the relevant documentary evidence as wages and retirement benefits for employees;

(c) The amount obtained by multiplying income by standard expense rate: Provided, That in cases of a person subject to double-entry bookkeeping under Article 160 (3) of the Act, the amount obtained by multiplying income by 1/2 of standard expense rate;

1-2. The method of determining or revising as income amount the amount obtained by deducting the amount obtained by multiplying the income amount by the simple expense rate;

3. Other reasonable methods recognized by the Commissioner of the National Tax Service.

【Enforcement Rule of the Income Tax Act

Article 67 (Rates Applicable to Determination or Correction of Income Amount by Estimation)

The "ratio prescribed by Ordinance of the Ministry of Strategy and Finance" in the proviso to Article 143 (3) 1 of the Decree means 3.0 (2.4 in the case of a person subject to simple bookkeeping under Article 160 of the Act).

(1) Scope of purchase costs and rent, and types of documentary evidence (Notice by the National Tax Service No. 2009-11 of April 17, 2009)

The scope of ‘purchase cost' that is deducted from the amount of income when the amount of income is estimated, determined or revised pursuant to the proviso of Article 80(3) of the Income Tax Act and Article 143(3)1 of the Enforcement Decree of the same Act, and the scope of ‘purchase cost', ‘lease fee for fixed assets for business', and ‘ evidential documents' shall be publicly notified as shown in [Attachment Table 1] and [Attachment Table 2] under Article 143(5)

[Attachment 1] Scope of purchase costs and rent for fixed assets

1. Scope of purchase cost;

(a)The "purchase costs" are the purchase of goods (except for the purchase of fixed assets for business) and the cost of outsourcing processing and transportation as defined below:

2. Scope of rent for fixed assets for business;

The "rent for fixed assets for business" shall be the amount of rent for the lease of fixed assets, such as buildings and machinery and equipment, used directly for the business from others and paid or payable as the rent.

3. Calculation of the principal expenses included in the inventory assets;

(a) The "purchase cost" that is deducted from the amount of income for the taxable year concerned, "rent for fixed business assets", and "employee's pay, wages, and retirement benefits" (hereinafter major expenses) shall be the amount calculated by adding the main expenses included in the basic inventory assets to the amount that was paid or payable for the taxable year concerned and deducting the main expenses included in the basic inventory assets at the end of the taxable year: Provided, That in cases where the basic inventory assets or inventory assets cannot be separately calculated, the main expenses that were paid or payable for the taxable year concerned can be deducted from the amount of income, regardless of the basic inventory assets and inventory assets at the end of the taxable year concerned.

(b) In the case of paragraph (a), if it is impossible to calculate the major expenses included in the basic inventory as of the beginning date of the relevant taxable year because the details of the disbursement of major expenses before the end of the immediately preceding taxable year and documentary evidence are not available, the amount may be calculated by

The amount of major expenses included in the basic inventory as of the beginning of the taxable year concerned.

A person shall be appointed.

Addenda

(1) This public notice shall be given on or after the date of public notice.

(2) This public notice shall apply to the income accrued after January 1, 2008.

(1) Scope of purchase costs and rent, and types of documentary evidence (Notice by the National Tax Service No. 2012-10 on April 20, 2012)

Article 4 (Calculation of Main Expenses Included in Inventory Assets)

(1) Purchase costs deductible from the amount of income for the relevant taxable year, rent for fixed assets for business, and employees' benefits, wages, and retirement benefits (hereinafter referred to as "major expenses") shall be the amount calculated by adding the major expenses included in the basic inventory assets to the amount paid or payable for the relevant taxable year, and deducting the major expenses included in the inventory assets at

(2) In cases where it is impracticable to separately calculate the basic inventory assets or major expenses included in such inventory assets at the end of the relevant taxable year, the basic inventory assets and the end inventory assets at the end of the relevant taxable year may be used as the main expenses to be deducted from the amount of income, instead of considering the basic inventory assets

(3) Where the principal expenses included in the basic inventory as of the beginning date of the relevant taxable year are not separately calculated because there is no details of the disbursement of major expenses before the end of the immediately preceding taxable year and evidentiary documents, but the principal expenses included in the basic inventory as of the end of the relevant taxable year may be separately calculated by the following methods:

Addenda

Article 1 (Enforcement Date) This Notice shall enter into force on the date of its issuance.

Article 2 (Application) This Notice shall apply from income to which the first deadline for the final return of global income arrives after the enforcement date of this Notice.