In a case where Company A built LNG complex power plants for self-production and reported corporate tax, and depreciated from the date of commencement of electric power production for each empty space of power plants, and the tax authorities deemed depreciation possible from the date of completion of the preliminary approval examination for each empty space, and imposed corporate tax by denying some of the depreciation costs reported by Company A from the date of completion of the preliminary approval examination, the case holding that it is difficult to view that the operation of a empty space during the preliminary approval examination period for the power plants is merely a case where a part of the power plants were completed and used for business.

In a case where Company A built LNG complex electric power plants for self-production and reported corporate tax, depreciated from the date of commencement of electric power production for each empty space of power plants, and the tax authorities deemed depreciation possible from the date of completion of the preliminary approval examination for each empty space, and imposed corporate tax by denying the inclusion of some of the depreciation costs reported by Company A in deductible expenses, the case holding that the judgment below erred by misapprehending the legal principles, which affected the conclusion of the judgment, even though it is difficult to view that the operation of the turbs during the preliminary approval examination period for power plants was conducted as part of the installation process prior to the normal use of the power plant’s facilities, since it was merely a small amount of electric power generated in the process and put them into the production process, even if it was difficult to view that the production process was partially completed and used for the business.

Article 23(2) of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008; see current Article 23(3)); Article 24(2)2 of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 19328, Feb. 9, 2006; see current Article 24(3)2); Article 12(3) of the former Enforcement Rule of the Corporate Tax Act (Amended by Ordinance of the Ministry of Strategy and Finance No. 187, Feb. 28, 201; see current Article 12(4))

Posco Co., Ltd. (Attorneys Son Ji-yol et al., Counsel for the defendant-appellant)

Head of the Tax Office

Daegu Director of the Regional Tax Office (Law Firm, Attorneys Lee Jae-in et al., Counsel for the plaintiff-appellant)

Daegu High Court Decision 2012Nu103 decided February 22, 2013

The part of the judgment of the court below against Defendant Port Tax Office regarding the imposition of corporate tax on the depreciation costs of composite power plant equipment is reversed, and that part of the case is remanded to the Daegu High Court. The remaining appeals by the Plaintiff and Defendant Daegu District Tax Office and by the head of Defendant Port Tax Office are all dismissed. The costs of appeal by Defendant Daegu District Tax Office are assessed against the above Defendant.

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

1. Plaintiff’s ground of appeal

Article 26(1) of the former Restriction of Special Taxation Act (amended by Act No. 7003 of Dec. 30, 2003) provides for a special exception to deducting a temporary investment amount equivalent to a certain amount from corporate tax for a taxable year prescribed by the Presidential Decree. The Enforcement Decree of the Restriction of Special Taxation Act (amended by the Presidential Decree No. 16431 of Jun. 30, 199) amended by the Presidential Decree No. 16431 of Jun. 30, 199 provides that “the amount of investment made under the Presidential Decree of the Restriction of Special Taxation Act (hereinafter “former Enforcement Decree of the Restriction of Special Taxation Act”) shall be “the amount of investment made to newly acquire facilities falling under the business assets prescribed by the Ordinance of the Ministry of Finance and Economy not later than December 31, 199.” Article 23(3) provides that “The taxable year prescribed by the Presidential Decree shall be the taxable year in which an investment made under paragraph (1) is completed or the relevant investment is completed” Article 23(1) of the Addenda.

The court below acknowledged the facts that the Plaintiff’s investment in this case, which had been commenced on January 1 through December 31 each year in 1999 and completed in 2000 as a result of its commencement in the business year 199, and determined that with respect to the amount invested by the Plaintiff up to December 31, 1999, the amount of the investment was completed on December 31, 199, and thus, the amount of the temporary investment tax in this case should be deducted from the corporate tax in the business year 199 and could not be deducted from the corporate tax in the business year 200

In light of the above provisions and relevant legal principles and records, the above determination by the court below is just, and contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the legal principles on the timing of deduction of temporary investment tax amount under Article 23(3) of the Enforcement Decree of the former Enforcement Decree of the Special Act on Assistance,

2. As to the grounds of appeal by the director of the tax office on defendant Portal Aviation

A. Whether the imposition of additional tax related to the deduction of temporary investment tax is legitimate

In light of the relevant legal principles and records, the court below was just in holding that there was a circumstance under which the Plaintiff could not cause any error by deducting the temporary investment tax amount of this case, which was completed by the investment of this case, from the corporate tax of 2000 business year, and thus, the disposition imposing penalty tax on this portion was unlawful. In so doing, contrary to the allegations in the grounds of appeal, the court

B. Whether the disposition of corporate tax imposed on the Plaintiff and the U.S. legal entity of the U.S. Corporation and Coal International Inc. (hereinafter “AMI”) related to the transaction of purchase of coal in Canada is legitimate

Before the enactment of the Adjustment of International Taxes Act, Article 46(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 14861, Dec. 30, 1995) provides for the method of calculating the market price, etc., which serves as the basis for the avoidance of wrongful calculation, to allow an international transaction to be subject to wrongful calculation under the Corporate Tax Act. However, the Adjustment of International Taxes Act (amended by Act No. 6779, Dec. 6, 1995; hereinafter “former Adjustment of International Taxes Act”) enacted by Act No. 4981, Dec. 18, 2002; hereinafter “former Adjustment of International Taxes Act”) enacted the Adjustment of International Taxes Act, which is difficult to apply to international transactions between related parties, by prior application of the Adjustment of International Taxes Act to other Acts and subordinate statutes, and also deleted all relevant provisions in the Corporate Tax Act.

In full view of the history and relationship of the enactment and amendment of the Corporate Tax Act and the International Tax Adjustment Act, the contents and developments of Article 3(2) of the International Tax Adjustment Act, the purpose and purpose of the Evaluation of Wrongful Acts and the Transfer Price Taxation Act, etc., with respect to international trades with foreign specially related parties, it is reasonable to interpret that the provisions on taxation adjustment at the arm’s length price of the former International Tax Adjustment Act apply only to the provisions on taxation adjustment at the arm’s length price of the former International Tax Adjustment Act before the enforcement of the amended International Tax Adjustment Act after the enactment and enforcement of the amended International Tax Adjustment Act, and that the provisions on taxation adjustment at the arm’s length price of the amended International Tax Adjustment Act apply only to the donation of certain assets under Article 3(2) after the enforcement of the amended International Tax Adjustment Act.

Examining the record in light of the above legal principles, the transaction that the Plaintiff purchased Canadian coal from AMF during the period from January 1, 200 to December 31, 2004 and the transaction that the Plaintiff intends to make a installment payment to TCC stocks (hereinafter “TCC stocks”) from TPP and the Plaintiff’s overseas subsidiary company, a related party, does not constitute “the donation of assets, etc.” under Article 3(2) of the former Adjustment of International Taxes Act. Thus, the former Adjustment of International Taxes Act or the amended International Tax Adjustment Act only applies to the taxation adjustment based on the arm’s length price under the amended International Tax Adjustment Act, and the provision that is the unfair calculation part of the corporate tax law, based on the premise that the above transaction falls under the category of wrongful calculation, is unlawful.

Before the amendment of the amended International Tax Adjustment Act enters into force, the lower court did not have the premise that the former Act on the Adjustment of Taxes applies to international trades with foreign specially related parties if the former Act on the Adjustment of International Taxes is not applicable. However, the lower court’s conclusion that the aforementioned transactions between the Plaintiff and AMF do not fall under the category of wrongful calculation and thus the disposition of corporate tax imposition on this part was unlawful is justifiable. Therefore, the allegation in

(c) Whether the denial of depreciation costs of multiple power plants and facilities under construction is legitimate;

Article 23(2) of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter the same) and Article 24(2)2 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 9, 2006; hereinafter the same) provide for “property under construction” as one of the assets excluded from the assets subject to depreciation, and Article 12(3) of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Strategy and Finance, Feb. 28, 2011; hereinafter the same shall apply) provides that “property under construction” includes the assets under construction or the assets under trial operation period to test its performance, but where the relevant part is completed and used for a business, such part shall be deemed as falling under depreciable assets.

According to the reasoning of the judgment below and evidence duly admitted by the court below, ① the Plaintiff constructed a new LNG complex electricity plant (hereinafter “instant power plant”) at each of the port 0 and luminous plant upon entering into a contract for construction work with 0.0 KNG Construction (hereinafter “SU”). ② The instant power plant produces one-lane electricity from 2 LNG to 00, and supply the steam generated from waste heat emitted from 00 to 00 to 200, and ③ The Plaintiff completed the preliminary approval of construction work for each of the instant power plants at each of the instant 200 GM plants upon completing the preliminary approval of construction work for 00 GUG’s 20.0, the Defendant completed the preliminary approval of construction work for each of the instant plants at each of the instant 00 GUG 20.3

In light of the structure and development method of the instant power plant, inspection procedures, and power generation of the optical power plant, etc., it seems that the operation of a turbine during the period of preliminary approval and test for the instant power plant is merely an operation of a trial for performance test as part of the installation process prior to the normal use of the equipment of the instant power plant. Thus, even if a small amount of power was produced and put into a manufacturing process, it is difficult to view that the operation of the instant power plant constitutes a case where a part of the instant power plant was completed and used for business.

Nevertheless, the lower court determined otherwise, on the ground that the commencement of electricity supply by operating a part of the turbine during the preliminary approval test period for the instant power plants, and the commencement date of depreciation of each turbine installed in the instant power plants was the date of commencing the supply of electricity by each turbine. In so doing, the lower court erred by misapprehending the legal doctrine on the “property under construction as partially completed and used for business,” thereby adversely affecting the conclusion of the judgment. The allegation contained in the grounds of appeal on

D. Whether the disposition imposing corporate tax related to the purchase transaction of Australia coal between the Plaintiff and Pohang Pty Ltd. (hereinafter “POSA”), and the purchase transaction of Australia coal between the Plaintiff and the Plaintiff and Pohang Canada Ltd. (hereinafter “POSCN”), is legitimate

In order for a tax authority to impose a tax on a resident’s transaction with a foreign specially related party in accordance with Article 4(1) of the amended International Tax Adjustment Act, it shall choose the most reasonable arm’s length price calculation method by taking into account the comparative feasibility, etc. based on the data collected through a request, etc. for submission of data against the taxpayer. In cases where a difference in the compared circumstances has a significant impact on the compared transaction price or net profit, the difference must be reasonably adjusted to calculate the arm’s length price. The burden of proving that the arm’s length price, which forms the basis for the tax disposition, was lawfully calculated through such a process, is the tax authority (see Supreme Court Decision 2011Du6127, Dec. 26, 2012

After finding facts as indicated in its reasoning, the lower court determined that this part of the taxation is unlawful on the grounds that the difference between the discounted price of Australia coal supplied by MPC to POSA and the discounted price of the Canadian coal supplied to POSCN is the normal price reasonably adjusted. Rather, since each transaction price between the Plaintiff, POSA, and the Plaintiff and POSCN is within the scope of the normal price, the lower court determined that this part of the taxation is unlawful.

Examining the record in light of the above legal principles, the above determination by the court below is just, and contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the legal principles on the computation of arm's length price

E. Whether the disposition of taxation related to the integrated account management of the majority of the parties to the instant case (hereinafter “the instant GCM contract”) is legitimate

After finding the facts as indicated in its holding, the lower court determined that the Plaintiff’s deposit of USD 20,000,000 to its GCM account on September 2, 2001, and KRW 12 million on February 1, 2002, each of the foreign subsidiaries received a loan from BOA under mutual and joint guarantee after the deposit of a certain amount of money to the foreign subsidiaries, and thus, the Plaintiff cannot be deemed to have directly lent funds to the foreign subsidiaries or to have equivalent thereto, and thus, it does not constitute a provisional payment under Article 28(1)4(b) of the former Corporate Tax Act, and thus, it does not constitute a third party transaction under Article 7 of the amended International Tax Adjustment Act, such as direct determination by BOA on the major terms and conditions of the instant GCM contract, and thus does not constitute an arm’s length price subject to tax adjustment under Article 4 of the same Act.

In light of relevant provisions, legal principles, and records, the above determination by the court below is acceptable. Contrary to the allegations in the grounds of appeal, the court below did not err by misapprehending the legal principles on provisional payment and tax adjustment by arm's length price.

F. Whether the instant incentive constitutes a purchase discount

After finding the facts as stated in its holding, the court below determined that the corporate tax imposition of this portion of the corporate tax on a different premise is unlawful on the ground that it is justifiable for the Plaintiff to report corporate tax that deducts the incentive in this case from the purchase price of the business year in which the incentive occurred and the amount of the incentive was determined by purchasing more than the agreed quantity, on the ground that it is reasonable to reasonably estimate the purchase price of the raw materials in advance, as the Plaintiff entered into a one-year purchase contract with the raw materials supplier, such as steel ore, and received the raw materials, and met the conditions of annual purchase quantity, etc. agreed upon in advance.

In light of the relevant legal principles and records, the above determination by the court below is just, and contrary to the allegations in the grounds of appeal, the court below did not err by misapprehending the legal principles on purchase discount.

3. As to the ground of appeal by the director of the regional tax office of Daegu

A. Whether notice of change in income amount related to the purchase transaction of Canadian coal by the Plaintiff and AMFI is legitimate

Based on its stated reasoning, the lower court determined that the Plaintiff’s notice of change in the amount of income on the ground that the transaction that the Plaintiff purchased Canadian coal from AMF from January 1, 200 to December 31, 2004 does not constitute an object of wrongful calculation, and that the transaction constitutes an object of wrongful calculation and constitutes an object of wrongful calculation, and that the notification of change in the amount of income under the premise that the difference between the market price and the market was out of the company was unlawful.

Examining the relevant provisions, legal principles, and records, the above determination by the lower court is justifiable, and contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the principle of substantial taxation, by misapprehending the legal principles on wrongful calculation, omission, or disposal

B. Whether the notice of change in income amount related to the spot distribution of the TRCC stock sales price claim is legitimate

After finding the facts as stated in its reasoning, the lower court determined that the Plaintiff’s act of receiving a claim for the sale price of the stocks of the POSAM from the POSAM to receive a dividend on February 12, 2003, and obtained a benefit from obtaining an exemption from liability under a long-term purchase contract for coal instead of transferring the claim without compensation from AMFI’s subsidiaries, and thus, the above sales price claim cannot be deemed economic value. Thus, the Plaintiff’s act of receiving a claim for the sale price assessed as the claim amount and receiving a dividend cannot be deemed an wrongful calculation by applying Article 52(2) of the former Corporate Tax Act, on the ground that the Plaintiff’s act of receiving a claim for the sale price cannot be deemed an act of wrongful calculation by applying Article 52(2) of the former Corporate Tax Act, on the ground that the act of receiving a claim for the sale price constitutes an act of receiving an asset without any value as a result

In light of the relevant legal principles and records, the above determination by the court below is just, and contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the legal principles on wrongful calculation, omission or disposal of income.

4. Conclusion

Therefore, the part of the judgment of the court below against Defendant Port Tax Office concerning imposition of corporate tax on the depreciation costs of composite power plant facilities shall be reversed, and that part of the case shall be remanded to the court below for a new trial and determination. All of the appeals by Plaintiff and Defendant Daegu Director of the Regional Tax Office and the remaining appeals by Defendant Port Tax Office are dismissed. The costs of appeal by Defendant Daegu Director of the Regional Tax Office shall be borne by the above Defendant. It is so decided as per Disposition by the assent of all participating Justices

Justices Park Poe-young (Presiding Justice)