Cho High Court Decision 201Do1544 (No. 29, 2011)

Since the contents of service transaction compared to the service transaction concerned cannot be deemed to be the same, it is illegal to calculate the market price based on this.

Where there is no service transaction similar to the service transaction between related parties, the amount calculated based on the return rate calculated by objective and reasonable methods taking into account all the conditions such as the contents of the relevant service may also be deemed as the market price. However, it cannot be deemed that the disposition agency's use as a similar service transaction does not coincide with the contents of the service previously provided between related parties, and thus, it is illegal to calculate the market price based on this.

2011 Doz. 31727 Demanding revocation of revocation of Corporate Tax, etc.

XX Automobile Corporation

Head of Seocho Tax Office

December 20, 2011

January 19, 2012

1. The Defendant’s rejection of correction regarding KRW 289,106,560 of the corporate tax for the business year 2009 against the Plaintiff on January 11, 201 shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff is a corporation established in around 1944 and operated as its main business for the manufacture and sale of vehicles and their accessories. XX Co., Ltd. is also an affiliated company of the O group for the purpose of integrating the distribution business of the △△ Group consisting of 40 affiliated companies, including the Plaintiff, the OO Co., Ltd., the △△ Group, the △△△ Co., Ltd., the 40 billion won (1 billion won) and 60% (1.5 billion won), and its head-Nam-Nam-B, which was established on February 22, 2001 (the name at the time of its establishment was △△, but the trade name at the time of its establishment was changed on June 20, 2003; hereinafter the same shall apply) and also is also an affiliated company of the O group.

B. After the establishment of XX, the Plaintiff paid the cost of the services with the provision of ① self-production parts (such as MIP, Plant in MIP, Plant in Made, engine, transmission, marketing, machinery and tools directly produced at the factory of its own company), ② equipment leasing services, ③ pre-delivery inspection services (hereinafter referred to as “MIP transportation services,” equipment leasing services,” and “TPPI services,” respectively).

C. The director of the Seoul Regional Tax Office, upon examining the tax investigation, deemed that the Plaintiff’s receipt of the instant service from the specially related parties under the Corporate Tax Act during the business year 2004 - 2007 at a higher price than the market price and made a reduction of the tax unfairly by paying the service at a higher price, and then notified the Defendant of the difference to be included in gross income pursuant to Article 52(1) of the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter the same) and Article 88(1)7 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 19891, Feb. 28, 2007; hereinafter the same).

E. Accordingly, the Defendant imposed corporate tax on the Plaintiff on November 1, 2008 for the business year of 2004 and 2005. On the other hand, the Defendant reduced the loss amount of KRW 1,038,329,609 for the business year of 2006, and the loss amount of KRW 1,027,146,456 for the business year of 2007 (hereinafter “instant loss amount”). The Plaintiff reported and paid the reduced loss amount of the business year of 2006 and 2007 as the loss amount of subparagraph 1 of Article 13 of the former Corporate Tax Act for the business year of 2009 as the loss amount of subparagraph 1 of Article 13 of the former Corporate Tax Act.

F. On January 5, 2011, the Plaintiff filed a claim for correction against the Defendant for refund of KRW 289,106,560 of the corporate tax paid in excess of the corporate tax base and tax amount for the business year 2009 pursuant to Article 45-2 of the former Framework Act on National Taxes (amended by Act No. 11124, Dec. 31, 201) on the ground that the instant reduction of losses was unlawful. However, on January 11, 2011, the Defendant rejected the Plaintiff’s request for correction (hereinafter “instant disposition”).

G. On April 8, 2011, the Plaintiff filed an appeal seeking the revocation of the instant disposition with the Tax Tribunal, which was dismissed on June 29, 2011.

[Ground of recognition] Facts without dispute, Gap evidence 2-1.2, Gap evidence 4-1. Eul evidence 1-1, 2, 2-3, and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The parties' assertion

1) The plaintiff's assertion

Since the reduction of losses of this case is illegal for the following reasons, the disposition of this case is also unlawful.

A) Regarding the economic rationality of the instant service transaction

The plaintiff entrusted the provision of this case to XX from 2001 in accordance with the plan for the integration and unification of the entire logistics organization and management of the O group. Accordingly, the plaintiff was provided with high-quality services compared to the services provided by the former shipping agency. In particular, from 2004 in 2004, the integrated logistics system of XX has been completed, innovative services were provided throughout the entire logistics process of the O group, such as collaboration in logistics, logistics standardization, logistics networkization, and logistics automation, and 2002 - the total cost reduction effect of about KRW 45 billion in the business year 2006. Thus, even if the plaintiff paid high-quality services compared to the previous service payment, the service transaction of this case between the plaintiff and XX is an ordinary trade that is economically reasonable.

On the other hand, the Plaintiff is receiving integrated logistics service by covering the service areas other than the instant service subject to taxation from XX, and the total sales revenue rate of the whole XX - 2004 - 2006 business year is average 7.96% of the total sales revenue rate of other domestic logistics companies, and is not higher than the return rate of the other domestic logistics companies. However, it is unreasonable to remove only the instant service areas, the total sales revenue rate of which exceeds 10% from the total sales revenue, and to view them as subject to rejection of unfair calculation under the Corporate Tax Act and reduce the instant loss.

B) Regarding market price assessment of the instant service

According to Article 89 (4) 2 of the former Enforcement Decree of the Corporate Tax Act, the market price of the service shall be calculated by adding the sales cost to the sales cost multiplied by the rate of profit during the pertinent business year from a service transaction similar to the service provided to a person other than a person with a special relationship. However, the defendant applies the rate of profit based on the service transaction not during the pertinent business year or provided to the plaintiff who is a person with a special relationship, or the rate of profit based on the service transaction different from the pertinent service, and thus,

(1) Services transactions for a business year other than the concerned business year.

In calculating the market price of the service transaction of this case, the Defendant applied the rate of return on the service transaction of this case in the business year 2006, 2007, which was not the business year subject to reduction of the loss of this case, and the Plaintiff and XX prior to raising the unit price of service between them.

(2) Transaction of services between related parties.

In calculating the market price of the instant service, the Defendant applied the rate of return on the relevant service transaction between the Plaintiff with a special relationship and XX.

(3) Services without similarity.

The Defendant asserts that the economic substance of the service transaction between the Plaintiff and the Plaintiff before the unit price increase is the same as the service transaction with the previous companies, including DDR companies that provided equipment leasing and PEI services (hereinafter “DD”), i.e. similar service transaction with the former companies, but the service transaction with the former companies that completed the integrated logistics system and the OO group’s integrated logistics system cannot be deemed as the form and substance similar service transaction.

(4) Illegal in calculating market prices related to the lease of self-employed equipment.

The defendant calculated the market price by multiplying the amount calculated at the market price in the case of the lease of one's own equipment in the case of the lease of other's own equipment by the sale of one's own equipment in the case of the lease of one's own equipment. This method of calculation is against the provisions of Article 89 (4) 2 of the former Enforcement Decree of the Corporate Tax Act and is unlawful because there is no other legal basis.

2) The defendant's assertion

A) Regarding economic rationality

In light of the fact that the Plaintiff left most of the logistics business in XX where the business ability is not verified, the Plaintiff paid the service price to XX without reflecting such economic effects despite the occurrence of a unit price reduction factor according to the size of the economy in the process of performing the instant service, and the Plaintiff paid the service price without considering the fact that the Plaintiff increased the service price to the Plaintiff before the establishment of XX and the instant service that was made after the receipt of DD without any particular reason despite the fact that: (a) the Plaintiff increased the service price without any specific reason; and (b) the Plaintiff’s failure to present the basis for calculating the unit price increase and relevant data, is an abnormal transaction that lacks economic rationality in light of sound social norms or trade practices.

B) Regarding the assessment of market price of the instant service

In light of the principle of tax interpretation, the legal provision should be interpreted in light of the equity of taxation and the consistency purpose of the pertinent provision. Since the market price of the service in this case is calculated based on the reasonable method, such as investigating and examining the transaction price of similar service transaction, it shall be adequate to prove the market price. In this case, most of the service in this case is providing service to OO group affiliated companies, and the plaintiff also entrusts 100% of the transport service to XX, so the Plaintiff and the service transaction in XX is in fact an indeption with a third party without any special relationship, so it is not possible to find the transaction price prescribed in Article 89(1) of the former Enforcement Decree of the Corporate Tax Act, since the market price of the service in this case is calculated on October 201 by applying the market price of the service in this case to the Plaintiff and the person with special interest, it is reasonable to apply the unit price increase to the transaction in this case to realize the rate of return between the Plaintiff and the Plaintiff under Article 89(2) of the former Enforcement Decree of the Corporate Tax Act.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

(c) Fact of recognition;

1) Establishment process of XX and establishment of an integrated logistics system

A) Around 1999, the OO Group selected D and SS Comprehensive Corporation (hereinafter referred to as “S Comprehensive Corporation”) as a company taking exclusive charge of logistics business of its affiliated companies. PD was responsible for the sale and logistics of PDI transportation services, export and import logistics, the lease of equipment among corporate logistics, the lease of equipment, the distribution of enterprises other than SS Comprehensive Corporation equipment, and the company AA was entrusted with the secondary business of △△ Group. The PP succeeded from DD in March 2001, from SS Comprehensive Corporation in July 2003, from AA in September 2003, and succeeded to the computer system and its employees as it is, the entire business division succeeded to the electronic computer system and its employees in September 2003.

B) From 2002 to build an integrated logistics system within the O group, XX began to operate in full scale since September 2003 by developing the logistics information system, such as the integrated transportation management system, export and import logistics system, the integrated warehouse management system, and the integrated warehouse management system (WM WM WM WWWWWWR). The level of transportation services provided to affiliated companies within the OO group was improved compared with the previous one.

C) The most part of the service transactions provided by XX during the business year 2006, 2007, which is the period subject to the reduction of the instant losses, was conducted between the affiliates of the O group including the Plaintiff, and the Plaintiff was provided 100% of the instant services from XX.

2) Contents, etc. of the instant service

A) MIP transport services

The Plaintiff, as a whole, is engaged in transportation, loading, unloading, storage, inventory management, etc. to move his/her automobile parts manufactured at a factory to a assembly factory, with in-house transportation between the factory and in-house transportation between the Plaintiff and in-house factory. Before the establishment of XX, the Plaintiff performed transportation business by entering into an individual contract with 36 companies. Even after the commencement of the provision of services from the XX, the Plaintiff first paid the service cost that he/she first paid to the former 36 companies as it is, and then paid the second unit price increase (1.2%) on October 1, 2001, on the ground of the increase in general management expenses (12.8%).

(b) equipment leasing services;

The lease of equipment is a service that leases equipment necessary for loading, unloading, and moving of the parts of the motor vehicle within the completed plant to the executor (the company that actually provides the above service after being entrusted with the above service) for the operation of the operator (the company that actually provides the above service). The lease of equipment is divided into the lease of equipment and the breach of trust of the other company that uses the equipment owned by the operator. Before the establishment of the XX, only the provision of other company (lease) is made because the D entrusted with the above service does not possess the equipment. The Plaintiff paid the service payment for the previous D even in XX, but increased the application rate of the general administration fee applied from 6% or 9% to 15% when the unit price is calculated.

C) PDI services

Before delivering a completed vehicle to a consumer, the process of final inspection at the factory shipment site or the regional shipment center of the completed vehicle is to check the external assembly and painting of the finished vehicle, the condition of interior finishing materials, etc., and to check the functions of various devices loaded on the vehicle. The inspection service is to check the parts of the garments, tools, sets, etc. installed and put in the finished vehicle, and attach a temporary number and make them possible to transport and deliver to the customer. At the end of the establishment of XX, DNA provided a PEI service, and even after the commencement of the above provision of service from XX, the Plaintiff first raised the unit price in October 2001 while paying the service fee that was paid to the previous D even if they were to receive the above provision of service.

3) The Defendant calculated the market price of the instant service in the business year 2006 and 2007 pursuant to Article 89(4)2 of the former Enforcement Decree of the Corporate Tax Act by type of service on the ground that the Plaintiff’s service unit price was unreasonable in October 2001. Accordingly, the Defendant calculated the amount subject to the rejection of unfair calculation by the Plaintiff. The specific details are as follows.

A) MIP transport services

The rate of return realized by trading the unit price before the second increase between the Plaintiff and the Plaintiff is the same as the rate of return in the transaction of providing similar services provided to a person other than a person with a special relationship, and the market price was calculated by adding the sales cost and the sales cost to the amount calculated by multiplying the rate of return 6.3% for MIP transport services provided to the Plaintiff by the rate of return 6.3% on October 2001 (the period before the second unit price increase after the first unit price increase).

(b) equipment leasing services;

(1) Cases of lease of equipment for other companies:

The rate of return realized through the transaction between the Plaintiff and the Plaintiff is the same as the rate of return in the transaction between the Plaintiff and DD prior to the establishment of XX, and the price was calculated by multiplying the sales cost and the sales cost by 6.38% of the rate of return in the equipment rental service provided by the Plaintiff during March 2001 (the pre-term period before the unit price), on the grounds that the rate of return in the transaction between the Plaintiff and DD is the same as the rate of return in the transaction between the Plaintiff and its related parties.

(2) Cases of lease of private equipment:

On the other hand, in the case of the lease of one's own equipment, the Defendant calculated the amount calculated by multiplying the transaction price by the ratio of the market price of other company's equipment and services computed prior to the reported sales for each business year provided to the Plaintiff to the reported sales (hereinafter "market price ratio of other company's equipment and services") on the ground that it is impossible to verify the profit rate during the period of increase (3-9 March 2001) and that it is also impossible to calculate the market price by the supplementary method under Article 89 (4) of the former Enforcement Decree of the Corporate Tax Act.

C) PDI services

The rate of return realized by trading the unit price before the increase between the Plaintiff and the Plaintiff is the same as the rate of return in transactions between the Plaintiff and DD prior to the establishment of XX, and calculated the market price by adding the sales cost and the sales cost to the amount calculated by multiplying the rate of return 3.48% in connection with the PDI services provided to the Plaintiff by the rate of return 3.48% during March 2001 (the period before the unit price increase).

[Ground of recognition] Facts without dispute, Gap I, 6 through 15, Eul evidence of 10 to 47, the purport of the whole pleadings

D. Determination

1) Contents and interpretation of the relevant statutes

The rejection of unfair calculation under Article 52 of the former Corporate Tax Act is a system under which the taxation authority denies or reduces the tax burden by abusing the various forms of transactions listed in each subparagraph of Article 88(1) of the Enforcement Decree of the same Act without using a reasonable method by a person with a special relationship. It is limited to cases where a person with a taxation authority denies or reducing the tax burden by using the forms of transactions listed in each subparagraph of Article 88(1) of the Enforcement Decree of the same Act, and it is deemed that there is an income objectively and reasonably reasonable by the method stipulated in the law. In light of the business place of an economic person, it is limited to cases where it is deemed that the economic rationality was neglected due to disregarding the calculation of natural and unreasonable acts. Determination of the existence of economic rationality shall be based on whether the transactions are abnormal in light of sound social norms and commercial practices (see, e.g., Supreme Court Decision 2005Du14257, Dec. 13, 2007).

Meanwhile, Article 88 (1) 7 of the former Enforcement Decree of the Corporate Tax Act provides that "a case where monetary or other assets or services are borrowed or received at an interest rate, rate, or rent higher than the market price" as one of the cases where it is deemed that the burden of tax is unjustly reduced under Article 52 (1) of the former Corporate Tax Act, and Article 52 (2) and (4) of the former Enforcement Decree of the Corporate Tax Act and Article 89 (1), (2) and (4) of the former Enforcement Decree of the Corporate Tax Act provide that "the market price of services, which serves as the basis for whether a corporation is provided with services by paying a higher price than the market price to a person with a special relationship, shall be the price generally traded with a third party who is not a person with a special relationship (Article 89 (1) of the former Enforcement Decree of the Corporate Tax Act), and where such transaction is not held, the value of such services may be calculated by dividing the amount of the service supplied by a person with a special relationship by 89 (2) of the former Enforcement Decree by the Corporate Tax Act.

However, since the market price includes a clear value in an objective and reasonable manner, if it is difficult to calculate the market price by the above method, the value assessed by objective and reasonable means may also be deemed the market price. Meanwhile, even if the price for the provision of services at a higher level than the market price was paid, if such transaction does not make an economic rationality in light of sound social norms or commercial practices, it does not constitute the subject of the avoidance of wrongful calculation. The burden of proving "market price, which serves as the basis for the avoidance of wrongful calculation, is against the tax authority claiming the denial of wrongful calculation (see, e.g., Supreme Court Decision 2003215287, May 12, 2005).

2) Whether the market price of the instant service is calculated appropriately

A) The Defendant calculated the market price of the instant service by applying the return rate for each business year of 2001 provided to the Plaintiff based on Article 89(4)2 of the Enforcement Decree of the former Corporate Tax Act, on the premise that the transport service between the Plaintiff and the Plaintiff and a third party that no comparable transaction exists with other related parties, and on the premise that the market price cannot be calculated by applying Article 89(1) of the former Enforcement Decree of the Corporate Tax Act. In addition, on the grounds that it is impossible to calculate the market price under Article 89(4)2 of the former Enforcement Decree of the Corporate Tax Act with respect to the self-owned equipment rental service, the market price of the said service was calculated by multiplying the reported sales of the self-owned equipment rental for each business year provided to the Plaintiff by the market price of other-owned equipment rental.

Therefore, in light of the relevant laws and legal principles as seen earlier, the issue is whether the above supplementary assessment method applied by the defendant in calculating the market price of the service of this case is appropriate, and this is first examined.

B) Article 89(4)2 of the former Enforcement Decree of the Corporate Tax Act provides that the market price shall be the total amount calculated by multiplying the cost and cost of the relevant service by the rate of profit during the pertinent business year from a transaction providing similar services to a person other than a person with a special relationship. The "rate of profit", which is based on the market price calculation under the above provision, is a person other than a person with a special relationship who is the other party to the transaction, and is required to be realized in the pertinent service transaction similar to the pertinent service. Thus, if there is such a transaction, the market price may be calculated based on the rate of profit. However, if there is no such example, the value calculated based on the rate of profit calculated based on an objective and reasonable method can be deemed as the market price in the application of the provision on the denial of unfair act calculation under Article 52(2) of the former Corporate Tax Act, which also accords with the legislative intent of the former Corporate Tax Act, which provides that "the calculation of profit shall be applied to a transaction that is not a person with a special relationship."

In the case of this case, the service transaction provided by XX during the business year of 2006, 2007, which is the target period of this case, was conducted between the affiliates of the O group including the Plaintiff with almost most of the service transaction provided by XX, and the Plaintiff also received most of the service related to the transportation from XX as seen earlier. Thus, the case where the Plaintiff engaged in the service transaction similar to the service of this case with a person other than a specially related party cannot be found, and it seems that it is practically impossible to calculate the market price by applying the "rate rate for similar service transaction during the pertinent business year" under Article 89 (4) 2 of the former Enforcement Decree of the Corporate Tax Act as the basis of the market price calculation.

Therefore, in such a case, even though the service transaction conducted between persons with a special relationship or the service is not similar in the pertinent business year, if the rate of return is calculated through a reasonable adjustment that could eliminate the difference in such conditions compared to the contents of the pertinent service, the “rate of return” under Article 89 (4) 2 can be deemed as “the rate of return” under Article 89 (4) 2. In full view of these legal principles and the following circumstances, it cannot be deemed lawful to calculate the market price of the instant service by applying the rate of return, considering that the following services provided by the Defendant to the Plaintiff are similar to the instant service.

(1) The Defendant’s use of the instant service as a similar service transaction is not a business year of 2006, 2007, which is not a business year of 2007, but a business year of 2001, the period prior to the increase of the service unit price for the preceding five years or more. Furthermore, since from 2004, each of the above services is provided through the integrated logistics system established by XX and its contents cannot be deemed to be the same as those of the previous service. Thus, it is difficult to view that the actual profit rate realized from the service transaction during the pertinent business year of 2006, 2007 is always the same as the actual profit rate realized through the service transaction during the pertinent business year of 201. Even if the Plaintiff, as alleged by the Defendant, raised the market price of the pertinent service unit price for the pertinent business year of 201, without any apparent difference between the Plaintiff and the pertinent business year of 200, based on the market price increase in the service unit price and the pertinent unfair calculation method.

On the other hand, the defendant calculated the amount calculated by multiplying the market value of the other company's equipment from the reported sales of the other company's equipment provided to the plaintiff among the equipment leasing services at the market price for each business year by the amount of the reported sales of the other company's equipment leasing services provided to the plaintiff. However, such a method of calculating the market price is not a legal basis and is not illegal since there is no evidence

(2) Other circumstances

The Defendant’s substantial reason for reducing the amount of loss seems to be that, unlike the actual condition of the shipping industry that does not exceed average 10% due to the Plaintiff’s ‘daily termination cycle for the instant service’, the gross profit ratio of the instant service was 15% or more, and the gross profit ratio of the instant service was 15% or more due to the expansion of sales size, and the company’s O groups including the Plaintiff have engaged in unfair support activities under XX, and the Fair Trade Commission imposed a penalty surcharge. However, the gross profit ratio is merely an indirect factor in determining economic rationality, and it is difficult to view that the Defendant’s computation of the market price of the instant service is justified solely on the grounds that the gross profit ratio is merely an indirect factor in determining economic rationality, and that the “unfair support activities” under Article 23(1)7 of the Monopoly Regulation and Fair Trade Act and Article 36(1)10(a) of the Enforcement Decree of the same Act are unfair in terms of economic rationality and market concentration at a different level, even if it is likely to undermine the market price.

3) Sub-determination

Therefore, the Defendant failed to prove that the market price of the instant service was calculated appropriately.

Unless the Plaintiff is recognized to have been provided with high-priced services from XX, the instant disposition is unlawful without having to further determine the remaining issues relating to the economic rationality of the Plaintiff’s assertion.

4. Conclusion

The plaintiff's claim is justified and accepted.