[1] Where a value-added tax system applies zero tax rate in the value-added tax system / Where an entrepreneur does not go through a local letter of credit or a purchase confirmation under Article 11(1)1 of the former Value-Added Tax Act and Article 24(2)1 of the former Enforcement Decree of the Value-Added Tax Act while supplying goods to a domestic company, whether such transaction can be deemed as a zero-rate tax rate

[2] In a case where Gap corporation sold "special purpose tobacco" to the crew of ocean-going or deep-sea fishing vessels, or the passengers of aircraft or passenger ships operating on international navigation, as "export", and did not receive an export declaration certificate from the traders, but did not receive a local letter of credit or purchase certificate, and the traders exported part of the tobacco supplied by Gap to China and distributed most of the remaining tobacco to China, and the tax authorities imposed value-added tax on Gap on the grounds that this transaction constitutes a taxable transaction not zero-rate tax transaction, the case holding that the judgment below was erroneous in the misapprehension of Article 54 (1) 1 of the former Local Tax Act since Gap supplied tobacco to the traders for export without a local letter of credit or purchase certificate, and thus, this transaction does not constitute zero-rate tax, and thus, the tobacco consumption tax is exempted pursuant to Article 54 (1) 1 of the former Local Tax Act, and thus, the part of the taxation disposition which included the tobacco consumption tax base by applying Article 49 (5) of the former Local Tax Act.

[1] Article 11 Subparag. 1 of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013; see current Article 21); Article 24(2)1 of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Presidential Decree No. 24638, Jun. 28, 2013; see current Article 21(2)3; Article 31(2)1 of the Enforcement Decree of the Value-Added Tax Act) / [2] Article 225(5) of the former Local Tax Act (wholly amended by Act No. 1021, Mar. 31, 2010; see current Article 49(5)); Article 232(1) (see current Article 54(1)); Article 45(1)1 of the former Local Tax Act (wholly amended by Act No. 134638, Jul. 24, 2015; see current Article 4)

[1] Supreme Court Decision 2011Du2774 Decided May 26, 2011

KTW Co., Ltd. (Attorneys Jeong Byung-chul et al., Counsel for the defendant-appellant)

Daejeon District Court (Law Firm Corporation, Attorneys Soh Ho-ho et al., Counsel for the plaintiff-appellant)

Daejeon High Court Decision 2015Nu13879 decided August 8, 2016

All appeals are dismissed. The costs of appeal are assessed against each appellant.

The grounds of appeal are examined.

1. Plaintiff’s ground of appeal

A. Regarding ground of appeal No. 1

Article 11(1)1 of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013) and Article 24(2)1 of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Presidential Decree No. 24638, Jun. 28, 2013; hereinafter the same) provide that the zero-rate tax shall be applied by deeming that the goods supplied by an entrepreneur to a domestic company through a local letter of credit or a written confirmation of purchase are included in the exported goods.

In principle, the application of zero tax rate in the value-added tax system is recognized only for exports in order to prevent double taxation, and it is recognized exceptionally and narrowly as prescribed by statutes only in cases corresponding to exports to domestic consumption in compliance with the national policy purpose of encouraging foreign exchange earnings within the scope not impairing foreign exchange management and the order of collection of value-added tax. Thus, if an entrepreneur supplies goods to a domestic company and does not follow a local letter of credit or a written confirmation of purchase under the above provision, such transaction shall not be deemed zero tax (see Supreme Court Decision 2011Du2774, May 26, 201, etc.).

Upon citing the judgment of the court of first instance, the court below acknowledged the following facts: ① the Plaintiff sold the “tobacco for special use” reported for the purpose of sale to the crew of ocean-going vessels or deep-sea fishing vessels, or to the passengers of an aircraft or passenger vessel operating on international routes, as “export” to the wholesalers of the company, such as Il-main, Co., Ltd. (hereinafter “the instant traders”); ② in this case, the Plaintiff was issued an export declaration certificate from the instant traders but did not receive a local letter of credit or a purchase confirmation certificate; ③ the instant traders exported part of the tobacco supplied by the Plaintiff to China, and distributed most of them to the Republic of Korea; ④ the Defendant imposed value-added tax on the grounds that the instant transaction constitutes a taxable transaction, not a zero-rate tax transaction.

Then, the lower court determined that since the Plaintiff supplied tobacco to the instant trading company, which is a domestic company, for export without a local letter of credit or a purchase confirmation, the instant transaction is not subject to zero-rate tax, and furthermore, it cannot be viewed differently even if the Plaintiff was issued an export declaration certificate from the instant trading company.

Examining the reasoning of the first instance judgment cited by the lower court in light of the records, including the evidence duly admitted, the lower court’s determination is based on the aforementioned provisions and legal principles. In so doing, contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal doctrine regarding the

B. Regarding ground of appeal No. 2

The lower court, citing the first instance judgment, determined that it is difficult to deem that the Plaintiff has justifiable grounds for failing to perform his/her duty to report and pay value-added tax.

Examining the reasoning of the first instance judgment cited by the lower court in light of the relevant legal doctrine and the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine on the legitimate grounds for exempting additional tax, contrary to what is alleged in the grounds of appeal.

2. As to the Defendant’s ground of appeal

Article 54(1) of the former Local Tax Act (amended by Act No. 13427, Jul. 24, 2015; hereinafter the same) provides that “where a manufacturer or importer provides tobacco for any of the following purposes, he/she shall be exempted from tobacco consumption tax.” The exemption requires that “export” (Article 1); “sale to the crew of an ocean-going vessel or deep-sea fishing vessel” (Article 4); and “sale to the passengers of an aircraft or passenger vessel operating on an international port (Article 54)” (Article 49(5) of the former Local Tax Act (hereinafter “instant provision”) provides that “if the manufacturer or importer takes out the duty-free tobacco under Article 54 and sells, sells, consumes, or disposes of it without using it for the relevant purpose, the person who takes such disposition shall be liable to pay tobacco consumption tax” (Article 25(1)5 of the former Local Tax Act (wholly amended by Act No. 1021, Mar. 31, 2010).

(1) Upon citing the judgment of the court of first instance, the court below acknowledged the following facts: (a) the Plaintiff reported the instant tobacco to a special purpose tobacco for "sale to overseas navigation crew members, etc." but actually supplied it for export; (b) the Defendant deemed that tobacco consumption tax was not exempted on this ground; and (c) based on the substance over form principle, the Plaintiff’s delivery for export to the instant traders constitutes Article 54(1)1 of the former Local Tax Act; and (b) the instant provision explicitly provides that the dispositive entity is liable to pay tobacco consumption tax in the event the Plaintiff took out tax-free tobacco for the purpose of export; and thus, the Plaintiff’s interpretation that the instant tobacco is included in the instant provision on the grounds stated in its reasoning, such as contrary to the language and text, and thus, it is reasonable to deem that the instant transaction constitutes removal of tobacco for export purposes, and thus, constitutes exemption from tobacco consumption tax pursuant to Article 54(1)1 of the former Local Tax Act. (c) The part of the instant disposition that applied the instant provision to the tax base is unlawful.

Examining the reasoning of the lower judgment in light of the foregoing provision and the relevant statutes and the legal doctrine as well as the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine on the instant provision, contrary to what is alleged in the grounds of appeal.

3. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against each appellant. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim So-young (Presiding Justice)