[Case Number] Trial 2014 middle 4307 ( November 27, 2014)
[P] Corporation [Type of Decision]
[Summary of the Decision] Contract is a secret protection provision, and there is a device that prevents a third party from being disclosed to the public, and it is reasonable to view that the cost of the service in question considerably exceeds the amount calculated by adding normal profit to the cost of the service in question. Therefore, it is reasonable to regard the cost of the service in question as the royalty income, not the business income from the provision of the service in question.
[Related Acts] Article 93 of the Corporate Tax Act
[Reference Decision] High Court Decision 2011 middle2686
The appeal is dismissed.
1. Summary of disposition;
A. On March 3, 2011, the claimant corporation formed an OO corporation and a consortium with an engineering company that has its head office in the OO and performs business activities throughout the whole world, and entered into a three-stage O construction contract with an OO corporation (hereinafter “instant contract”).
B. The claimant corporation takes charge of major portion of basic engineering services and detailed design services (hereinafter “clocking services”) and foreign equipment supply and supervision services among the key design services and facility supply services under the contract, and the OO corporation takes charge of the supply of the remainder of the detailed design services and domestic equipment. In paying OO to the claimant corporation in return for the key service performed by the claimant corporation, the OO corporation paid the same amount to the claimant corporation, deeming that the payment falls under the royalty income of the Agreement between the Republic of Korea and the OOO for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (hereinafter “Korea-OO Tax Treaty”), and paid the aggregate of the corporate tax withheld to the disposition agency by applying the withholding tax rate of 10%.
C. On May 9, 2014, the applicant filed a claim for correction to the effect that the price for the key service provided by the applicant corporation to the disposition authority in connection with the key contract constitutes not usage fee income but business income, and thus, the aforementioned amount of withholding tax was refunded. However, the disposition authority rejected the claim on July 7, 2014.
D. The applicant filed an appeal on July 22, 2014.
2. Opinion of the requesting corporation and the disposition agency;
A. The claimant corporation's assertion
The price for the key service is not the royalty income, but the business income, for the following reasons, it is not subject to withholding.
(1) Services supplied under the key contract have the characteristics of general engineering (design) services. The claimant corporation does not have any intent to transfer its expertise, design work experience, etc. so that it can use such professional experience and technology for itself. OO corporation does not acquire professional technology of the claimant corporation, but merely takes advantage of such professional technology in the process of plant design, and if OO corporation acquires know-how or transfers know-how for its own use, it would be much higher than that of the key contract. Accordingly, the claimant corporation is providing design services, but does not grant OO corporation the right to use its intellectual property rights.
The scope of key services includes basic and detailed design (including process design, division and arrangement plan, installation specifications, pipes, structure/electric/civil engineering design, measurement, etc.), completion drawings, preparation of design documents, design and design management, etc., which are necessary for the implementation of the specific contract concerned, and all design documents are prepared only for the purpose of such plant concerned. The key service also corresponds to the typical business model (personal service) model of the engineering company which prepares design drawings by utilizing his/her experience and is subject to the transfer of know-how, the transfer of universal application nature design, the transfer of universal application contents to other plant, or the grant of other rights or licenses, etc., and thus, the price received for the service is not the royalty income but the business income.
(2) The engineering (design) service provided under the key contract does not fall under the old age limit stipulated in the Korea-OO Tax Treaty, Article 12 of the OECD Model Tax Convention, and relevant domestic tax laws. The key issue is only an engineering (design) contract for a specific plant, and the OO corporation does not intend to obtain technical information that allows the applicant corporation to re-produced other plant processes on its own, and it does not intend to do so. The applicant corporation bears personnel expenses for conducting research, design, inspection, and drawing-up, unlike the general old age limit supply that does not perform the contract, unlike supplying information or recycling materials existing, unlike supplying information, the applicant corporation bears considerable cost of research, design, inspection, and drawing-up. This constitutes a general service provision rather than an old age limit that falls under Article 12 of the OECD Model Tax Convention. In other words, the applicant corporation's business model itself requires the applicant corporation to provide the service on its own, and thus, it is much more likely that it will supply the service on its own, a specialized basis that it provides the service on its own.
(3) does not fall under the criteria of Article 93-1327(3) of the General Rules of the Corporate Tax Act, which provides for three elements for determining whether a person is a know-how.
(A) If there is a special device to prevent confidential information or disclosure to a third party, the contract cannot be deemed as a licensing agreement on the sole basis of the existence of a confidential provision in the key contract. In other words, the secret protection provision in a license agreement is much more specific and more specific and main obligations in licenses, while the secret provision in a general service agreement is most widely defined for each party, and the secret provision in a general service agreement is most widely defined for each party. Accordingly, the secret protection provision in a key contract can be seen as typically in a service agreement rather than a license agreement.
(B) Examining whether the cost of technical services is considerably in excess of the ordinary profit level, in the event the key contract is terminated due to a cause attributable to the supplier, such as the claimant corporation, under Article 26.1 (h) of the key issue contract, the OO corporation may re-contract with the third party on the non-performance part, and the re-contract amount may be determined at a price deemed reasonable in accordance with the international standards at the time of the re-contract. The engineering services in the key contract may be provided as substitute for the other engineering company if necessary for the completion of the pertinent business, and the contract cannot be seen as a transaction in which no fact exists in the Nohle transfer contract, and the cost of engineering services under the key contract does not exceed the amount calculated by adding an ordinary profit to the cost of providing technical services.
(C) In applying information or know-how provided by an employer, whether the provider is required to perform a special role or whether the provider guarantees the result of the application (if it is guaranteed, the nature of the personal service), the applicant under Article 14.1 of the key issue contract bears the obligation to guarantee the result of the service provided to an OO corporation, which constitutes personal service income (business income under the Korea-OOO Tax Treaty).
(4) Article 93-13227(2) of the General Rules of Corporate Tax Act provides that “services (Nice) are not standardized professional services or standardized, but that is performed by utilizing professional knowledge or skills normally owned by the same kind of service provider.” In accordance with Article 26.1(h) of the key issue contract, where a contract is terminated due to a cause attributable to the supplier, such as the claimant corporation, the OO corporation has the right to re-contract with a third party at the time of re-contract for the non-performance portion, and where the claimant corporation violates the key issue contract, the OO corporation has the right to re-contract with a third party at the time of re-contract. In that sense, the engineering service under the key contract can be completed by the other engineering company in the sense that it is “ordinary professional services performed by Nice.”
(5) According to the OO tax law in relation to the key contract, the applicant corporation cannot be allowed to deduct the tax amount withheld at home from the OO for the key service, so it is inevitable to double taxation in case of taxation in Korea. Therefore, the price for the key service shall be regarded as the business income.
(b) Opinions of disposition agencies;
The compensation for the key service is not the business income for the following reasons, but the user fee income.
(1) The “3-level OOO”, which the applicant corporation entered into a supply contract with an OO corporation, is a factory which takes the largest amount of the entire factories of the steel mills established by OOO corporation. In concluding a supply contract with the applicant corporation, it is confirmed that the applicant corporation has monthly technical skills, such as capacity to design, possession of source technology, and performance of supply. It is confirmed that the applicant corporation occupies at least 80% of the global market and has various new technologies and patents. The key design drawings for Coke Oven, etc., and the key design drawings for the supply contract are included in the scope of non-public technical information and personal services are provided. The key issue is that the cost of the service can be used by the applicant corporation. In addition, Article 3.2.2(b) of the main issue contract also refers to the right to use the drawing.
(2) According to the criteria of Article 93 subparag. 9 of the Corporate Tax Act and Rule 93-1327(3) of the General Rules of the same Act, the price for the service at issue falls under the royalty income.
(A) In light of the existence of a special device to prevent confidential information or disclosure to a third party, Article 28.1 of the key contract provides that information about the care, planning, detailed details, design, etc. shall not be disclosed to a third party in connection with the implementation of the contract shall be specified in detail. In addition, Article 28 of the key contract provides that confidentiality provisions shall be strictly observed, and the subject matter shall remain effective for all contractual information other than certain disclosed information and shall not be disclosed to a third party for the next ten years after the completion of the construction.
(B) Examining whether the cost of technical services exceeds the normal profit level, the claimant corporation is entitled to renew the contract under a reasonable price condition with a third party when the contract is terminated due to a cause attributable to the supplier under Article 26.1 (h) of the key issue contract rather than claiming by objective profit rate data that the key service does not exceed the normal profit added to the ordinary profit added to the supplier. However, the key point is that the key point is that there is no transfer of know-how by universal service and the addition of the ordinary profit added to the ordinary profit does not necessarily exceed the normal profit. However, in the lower part of Article 26.1 (h) of the key issue contract, the buyer can indirectly confirm that all drawings, data, and information provided by the supplier is available to the third party and all patents are available free of charge if he/she has signed the re-contract including the conditions corresponding to the confidentiality clause of Article 28.1 (h).
(C) The claimant corporation asserts that it bears a guarantee duty for the results of the service provided to the OO corporation pursuant to Article 14.1 of the key issue contract, but this provision does not include a guarantee for engineering as a result of the performance of the facility.
(3) The opinion regarding the international tax-related theory, Article 12 of the OECD Model Tax Convention, and its Commentmentary content, etc. presented by the claimant corporation does not have binding force in the process of examining through specific facts.
3. Hearing and determination
(a) Points in dispute;
Appropriateness of the claim claim statement that the applicant corporation provided basic engineering services and detailed design services related to plant installation works to the OO corporation, and the amount paid for such services is not the royalty income subject to withholding tax pursuant to the Korea-OO Tax Treaty.
(b) Relevant statutes, etc.: To enter in attached Form;
C. Facts and determination
(1) The following facts are revealed in the review materials of the disposition agency and the defenses of the claimant corporation.
(A) OOO Co., Ltd deemed OO as the royalty income for the provision of the services at issue, and paid OO to the disposition agency through withholding as follows.
Details of payment and withholding tax for key services.
(B) On March 3, 2013, the main contents of the key issues contract entered into between the OO Co., Ltd. (Buyer) and the requesting corporation, and the OO(supplier) are as follows.
3. The scope of the contract (SCOPE OF AGREENT);
3.1 set of work specifications.
The supplier shall provide the goods and services listed below in accordance with the terms and conditions of this Agreement, and every content conforms with the definition of the “work” which is set out in the contract form in a more complete manner.
(a) the supply of such facilities as are described in more detail in the contract specifications and drawings attached separately to this Agreement;
(b) “factory design and engineering” provided in the contract form with a greater complete provision.
(c) Provision of contractual specifications and the supervision services specified in section 7; and
(b) the supplier agrees that the documents set out in this contract will be based on the latest knowledge available and commercially demonstrated by the supplier, and that the detailed design services will be conducted by the supplier in accordance with the latest design standards known to the supplier as at the date of entry into force.
14.1 Performance Bond Grante
(a) The supplier shall guarantee that the operation that consists of operating units will display the performance guaranteed in Chapter III of the contract formation if it is inspected and operated in accordance with the procedures, methods, processes and inspection conditions set out in the contract formation.
(b)The supplier shall provide at its own expense any inspection equipment and testing apparatus necessary to conduct preliminary acquisition inspections and final acquisition inspections in addition to the equipment and apparatus available in Korea. They shall re-export from Korea at its own expense after completion of final acquisition inspections.
(c) The buyer shall procure at his own expense such goods and services as may be necessary for qualified training and skilled crafts and all such services as electricity, gas, air, water, straws, raw materials, expendable goods, facilities and basic facilities.
(d) If the Supplier fails to comply with the provisions of paragraphs (b) and (c) of Article 14.1, and paragraphs (a), (b) and (c) of Article 14.2, or fails to dispatch staff under the contract formation agreement for its own reason, the buyer shall be subject to the provisions of Article 26 entirely.
28.Observance and Provision of Information (CONFIDENALITY, PUBLIC SETEMNTS)
28.1. Application. The Party receiving information in connection with the negotiation and implementation of the contract (hereinafter referred to as the “receiving Party”) must treat any verbal or written information and information disclosed directly or indirectly by the Disclosing Party as strictly confidential information through any form of document corresponding to Article 28.2 (Tracked Information) and any other form of document, and any such information shall not be disclosed to a third party.
28.2. Matters not included in the scope of confidential information. It does not constitute confidential information:
(a) The information recipient has already received public information at the time the information is received;
(b) Information that is part of the public domain after being provided to the person who received the information (other than disclosure of information in breach of the terms of this Agreement)
(c) the information has already been provided to the person receiving the information and is not otherwise obtained directly or indirectly from the person providing the information;
(d) the information that is legally received from the person with the legal authority to disclose such information, if the need to maintain such information is to be legitimate.
28.3An obligation to comply with confidential information. The recipient of the information under Article 28.4 must:
(a) No confidential information shall be, directly or indirectly, disclosed to any person other than an employee, legal counsel, auditor or subcontractor, OOO, or other consultant with respect to this contract without the prior written approval of the disclosed person. It shall not use or make a copy of the confidential information other than the purpose of this contract.
(b) shall not use or create a copy of confidential information other than the purposes of this Agreement.
28.4 Exceptions to the observance of Confidentiality. The obligations set out in Articles 28.1 and 28.3 do not apply to the recipient of the information:
(a) When the recipient of the information discloses confidential information under the law, he shall give prior notice to the disclosing Party and only disclose the confidential information legally required.
(b)If the disclosure of confidential information is to comply with the provisions of the relevant legislation or with the requirements of the government authorities, the recipient of the information shall immediately notify the provider of the information to the extent practicable and be recorded with the provider to the extent practicable and endeavor to ensure that the disclosure of the information may take place to the minimum extent and shall manage the disclosed information to ensure that it will be treated as confidential in the future.
28.5.return of confidential information. The recipient of the information shall, upon written request of the provider of the information, immediately return to the provider of the information all documents and other data containing the confidential information that he/she holds to the maximum extent;
28.6.Disclosure of Information. Unless by the relevant legislation or by the written consent of any other party, the Parties shall not disclose to the outside any material relating to the transaction performed under this Agreement not later than 10 years from the date of the final approval, provided that the Parties may make it available upon prior approval of the Parties, and that approval shall not unreasonably be unreasonably postponed or delayed.
(C) In light of the detailed calculation basis of “PWCOO” on the serviceO that is similar to the key service and provided by the claimant corporation to the OO corporation, the price for the engineering service (amount under a contract) is the OO, the estimated cost required for the service in question is the OO, and the amount of indirect cost related to the service in question is the OO, but the specific calculation basis was not presented.
(2) Comprehensively taking into account the facts and relevant laws and regulations, the consideration shall be determined by taking into account the following: (a) where information or know-how related to industrial, commercial or scientific knowledge and experience is domestically used or paid in Korea; (b) such information or know-how is a foreign corporation’s domestic source income; and (c) any non-public technical information necessary for industrial reproduction of the product or process, regardless of whether it can be an object of an intellectual property right, which exists before the provision of the information; (i) whether the information or know-how is information or know-how has any special device that is not disclosed to a third party; (ii) whether the amount of the technical service exceeds considerably the amount calculated by adding the ordinary profit-making to the expenses invested in the performance of the service; and (iii) whether the information or know-how provided by the employer requires the provider to play a special role or guarantee its result in applying the information or know-how provided by the employer.
(A) In light of the existence of a confidential provision or a special device that prevents a third party from being disclosed to the public, the seller and the purchaser under the main provision of Article 28 of the key issue contract are classified as confidential information in all documents, data, data, and information provided by one party to the other party. The seller and the purchaser are classified as confidential information in accordance with the provision of Article 28 of the key issue contract and are not disclosed to the third party without the prior written consent of the other party for 10 years from the date when the purchaser issued the final certificate of acceptance.
(B) If the cost of the technical service exceeds the amount calculated by adding ordinary profits to the cost invested in the performance of the service in question, it seems that the applicant corporation does not present a detailed basis for calculation of the expected profit ratio of the service in question, and that the applicant corporation has a unique and accumulated technology with respect to the service in question, thus concluding the contract by a negotiated contract, even though the cost of the service in question is required to be higher than that of other companies.
(C) In applying information or know-how provided by an employer, whether the provider is required to perform a special role or the result of its application is guaranteed, the key issue contract is a performance guarantee clause in Article 14 of the key issue contract. It is reasonable to interpret that the key issue contract also has a guarantee clause in relation to the key service, since the applicant corporation formed a consortium with the OO corporation without distinction of services.
Therefore, it is reasonable to view the cost of the service as the royalty income, not the business income from the provision of the service, because the claim corporation claims that the service can be seen as a personal service because there is a guarantee provision for the service of the issues in the contract, but the contract has a secret provision, and there is a device that prevents the service from being disclosed to a third party. Since the cost of the service of the issue seems to considerably exceed the amount calculated by adding an ordinary profit to the cost incurred in the provision of the service in question, it is reasonable to regard the cost of the service as the royalty income rather than the business income from the provision of the service (the same purport is the same as the above).
This case shall be decided as ordered in accordance with Articles 81 and 65 (1) 2 of the Framework Act on National Taxes because the petition for adjudication has no merit as a result of the review.
Relevant Acts and subordinate statutes, etc.
(1) Corporate Tax Act
Domestic source income of a foreign corporation under Article 93 shall be classified as follows:
5. Income generated by a business operated by a foreign corporation (including income taxable as domestic source business income in accordance with tax treaties) prescribed by Presidential Decree: Provided, That income under subparagraph 6 shall be excluded;
6. Income generated from rendering personal services prescribed by Presidential Decree in Korea. In such cases, where a person who receives the relevant personal services bears expenses prescribed by Presidential Decree, such as air charges, in connection with the provision of such personal services, it refers to an amount excluding such expenses;
8. Where any of the following rights, assets, or information (hereafter referred to as "rights, etc." in this subparagraph) is used in Korea or the price therefor is paid in Korea, the consideration therefor and the income accruing from the transfer of such rights, etc.: Provided, That where the double taxation Convention on Income prescribes whether the income falls under domestic source income based on the place of use, the consideration for the rights, etc. used overseas shall not be deemed domestic source income, notwithstanding whether the income is paid in Korea. In such cases, where the relevant patent, etc. is registered overseas and the right necessary to register the exercise of such rights, such as patent rights, utility model rights, trademark rights, design rights, etc. (hereafter referred to as "patent, etc." in this subparagraph) has been used in Korea, regardless of whether it is
(a) Copyrights, patent rights, trademark rights, designs, models, and drawings of scientific or artistic works (including motion picture films), secret formula or processes, films and tapes for radio and television broadcast, and other similar assets or rights;
(b) Information or know-how on industrial, commercial, and scientific knowledge and experience;
(ii)the Agreement between the Republic of Korea and the Republic of the OOCO for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
Article 12. Rental Fees
1.The usage fees accruing in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.
2.However, such user fees may also be taxed in the Contracting State in accordance with the laws of that State, provided that the recipient is the beneficial owner of the user fees, the taxes so charged shall not exceed:
(a) 2 percent of the total amount of usage fees paid for the use or right of use of industrial, commercial or academic equipment;
(b) in all other cases 10 percent of the total amount of such royalties.
3. The term "user fee" used in this Article means any kind of money received in return for copyright, patent, trademark, design, design, drawings, drawings, use or right of use of secret public formula or process, use of industrial, commercial or academic equipment, or for information on industrial, commercial or academic experience, including film films and films or tapes for radio or television broadcasting.
4.The provisions of paragraphs 1 and 2 shall not apply where the beneficial owner of royalty, who is a resident of a Contracting State, has carried on a business at that place through a permanent establishment located in the other Contracting State where the royalty is generated, or has carried on an independent personal service at that place through a fixed facility located in that other Contracting State, and where the rights or property which is the cause of payment of the royalty is substantially related to the permanent establishment or fixed facilities in question. In such cases, the provisions of Article 7 or 14 shall apply as
Article 14. Independent Manpower Services
1.Income acquired by a resident of a Contracting State in connection with professional services or other independent activities shall be taxed only in that Contracting State unless that resident has periodically fixed facilities available to him for the purpose of carrying out such activities in the other Contracting State. If that resident has such fixed facilities, income may be taxed in the other Contracting State, but only in part belonging to that fixed facilities. For the purpose of this Agreement, for the purpose of this Agreement, if an individual who is a resident of a Contracting State stays in the other Contracting State for a single period exceeding 183 days in total or in total during the 12-month period beginning or ending in that fiscal year, and that person shall be deemed to have a fixed facilities regularly available to him in the other Contracting State, and the income acquired from his activities conducted in the other Contracting State shall belong to that fixed facilities.
2. Professional services include not only independent activities of medical doctors, dentists, attorneys-at-law, technicians, certified architects and accountants, but also independent academic, literary, artistic, educational or teaching activities;