Cho High-2017-Seoul Office-4327 (O. 29, 2018)

In calculating the amount of tax credit for research and development in accordance with the method of increase in the divided taxable year, the method of calculating annual average income generated for the preceding four years

In calculating a tax credit for research and development in accordance with the increase method, the annual average income accrued during the immediately preceding four years of the divided corporation shall be deducted from the total annual average income accrued during the immediately preceding four years of the divided corporation before division to the annual average income generated during the immediately preceding four years of the divided corporation.

Article 10 of the Restriction of Special Taxation Act, Article 9(4) and (5) of the Enforcement Decree of the Restriction of Special Taxation Act

Seoul Administrative Court-2018-Gu Partnership-78992

A Stock Company

o Head of the tax office

July 26, 2019

October 11, 2019

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The defendant's rejection rejection disposition against the plaintiff on May 30, 2017, seeking the refund of KRW 46,345,050 of the corporate tax for the business year 2012, is revoked.

1. Details of the disposition;

A. Status of the plaintiff, etc.

1) A Co., Ltd. (hereinafter referred to as “A”) established on April 3, 1964 and operated food business, pharmaceutical business, etc., and established B (hereinafter referred to as “B”) on April 1, 2012 by spin-off of the pharmaceutical business sector and related research institutes.

2) The Plaintiff merged A on January 4, 2016.

(b) Application for tax credit for research and development expenses;

1) Prior to the division, A has obtained tax credits under Article 10 of the former Restriction of Special Taxation Act (amended by Act No. 11614, Jan. 1, 2013; hereinafter the same) with respect to general research and human resources development expenses concerning food and pharmaceutical business (hereinafter referred to as “research and human resources development expenses”). After the division, research and development expenses were incurred only in the food business.

2) A applied for each tax credit of KRW 206,498,375 for the business year of 2012, and KRW 348,617,536 for the business year of 2013 when a tax credit was granted pursuant to research and development expenses in 2012 and 2013, and paid corporate tax for the business year of 2012,2013.

C. Plaintiff’s motion for correction and Defendant’s rejection disposition

1) On August 2, 2016, the Plaintiff filed a request for rectification to refund corporate tax of KRW 83,477,435 and corporate tax of KRW 50,774,112 for the business year 2012, which was already paid on August 2, 2016.

2) On May 23, 2017, the Defendant accepted all of the Plaintiff’s claim for correction in the business year 2013, and rendered a disposition to refund only KRW 237,132,380 in the business year 2012 and to refuse the remainder (hereinafter “instant disposition”).

[Ground of recognition] Facts without dispute, Gap 1 and 2 evidence, the purport of the whole pleadings

2. Relevant statutes;

3. The parties' arguments and the issues of this case

A. Article 10(1) of the former Restriction of Special Taxation Act provides that a domestic corporation shall deduct research and development expenses from corporate tax for the pertinent taxable year, in cases where a domestic corporation has any research and development expenses for the pertinent taxable year, and subparagraph 3(a) provides that an amount equivalent to 40/100 of the excess amount shall be deducted where the research and development expenses incurred for the pertinent taxable year exceed the annual average of the research and development expenses incurred for the

B. Meanwhile, Article 10(2) of the former Restriction of Special Taxation Act provides for the classification and calculation of annual average of research and development expenses for the said four-year period, as well as other necessary matters, and Article 9(4) of the Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 24271, Dec. 28, 2012; hereinafter the same) provides that research and development expenses for the following four-year period.

C. In the instant case, the facts constituting A’s research and development expenses incurred in the pertinent taxable year in 2012 consisting of 2,866,750,370 does not conflict between the parties. However, the method of calculating “research and development expenses incurred for the pertinent taxable year immediately preceding four years” is different from the Plaintiff and the Defendant due to the division between A and a corporation established through division during the pertinent taxable year of 2012, which is the pertinent taxable year.

1) The plaintiff's calculation

A’s aggregate of research and development expenses for the immediately preceding four years: 8,625,259,159 - 1,462,735,473 won =7,162,505,686 won in aggregate of research and development expenses for the immediately preceding four years of A

A’s annual average research and development expenses for the immediately preceding 4 years: 7,162,505,686x 12/12 =

1,790,626,422

Amount of tax: (Amount of tax credit: 2,866,750,370 won per annum 1,790,626,422 won per annual average of the immediately preceding four years) x 40% = 430,449,579 won

2) Defendant Accounting

A’s annual annual research and development expenses for the preceding 4 years

: 539,078,697 won (A’s total amount of research and development expenses for the immediately preceding four years of A) calculated by month for three months of annual average amount of research and development expenses incurred for the immediately preceding four years of A before division (8,625,259,159/4x 3/12) + KRW 1,342,969,816 (the total amount of research and development expenses for the immediately preceding four years of A after division) calculated by month for nine months of annual average amount of research and development expenses incurred for the immediately preceding four years of A of a divided corporation after division (7,162,505,686/4 x 9/12) = 1,82,048,513 won

Amount of tax credit: (Amount of tax calculated at 2,866,750,370 won per annum 1,882,048,513 won per annual average of the immediately preceding four years) x 40% = 393,880,742 won

D. Ultimately, the key issue of the instant case is whether it is reasonable to take any of the above methods of calculating A’s research and development costs incurred for the four years immediately preceding the 2012 taxable year.

4. Determination

A. In full view of the following reasons, it is reasonable to adopt the method of calculating the Defendant’s assertion in the calculation of research and development expenses incurred during the 4 years immediately preceding the 2012 taxable year A. As such, the instant disposition is lawful.

1) The purpose of the tax credit system under the Restriction of Special Taxation Act is to deduct a certain amount of money from the income tax or corporate tax in the pertinent taxable year in a case where there are personnel expenses, etc. for a certain scope required by the department exclusively in charge of research and development of research and development, and thus, the tax credit system should be limited to the expenses directly related to research and

2) Article 9(4) of the former Enforcement Decree of the Restriction of Special Taxation Act provides for a method of calculating the annual average amount of occurrence, which is the standard for calculating the increase, and provides for a method of calculating the annual average amount of occurrence, once the taxable year falls short of 12 months, the annual average amount of occurrence shall be calculated again. The purport of such provision is to eliminate distortions caused by the difference in the number of months by converting the annual average amount of occurrence to the number of months in the month of occurrence, and to compare the annual average amount of research and development expenses incurred for the year immediately preceding

3) Of the calculation formula under Article 9(4) of the former Enforcement Decree of the Restriction of Special Taxation Act, when calculating the total amount of research and development expenses incurred for 4 years retroactively from the commencing date of the pertinent taxable year, research and development expenses incurred from a divided corporation prior to the division shall be deemed to have accrued from a corporation established through division. This is deemed to have accrued from a corporation established through division since research and development expenses incurred for 4 years retroactively cannot exist since there is no entity prior to the division in the case of a corporation established through division. In other words, the said provision stipulates only the method of calculating research and development expenses for 4 years immediately preceding the division, and does not explicitly stipulate the method of calculating research and development expenses of a divided corporation for 4 years immediately preceding the previous 4 years of a corporation established through division. Therefore, a divided corporation for 4 years immediately preceding the pertinent taxable year should be calculated by taking only the expenses directly related to research and human resources development for the pertinent taxable year

4) However, as seen earlier, A’s ongoing business year 2012 divided into April 1, 2012, and accordingly, A’s research and development expenses incurred during the relevant business year from January 1, 2012 to March 31, 2012 constitute A’s research and development expenses (food + medicine sector) and A’s research and development expenses (food sector) from April 1, 2012 to December 31, 2012. The foregoing aggregate includes research and development expenses from January 1, 2012 to March 31, 2012 (limited to research and development expenses attributed to a corporation established by a corporation after division). This expression is as follows.

5) However, as alleged by the Plaintiff, in calculating A’s annual annual annual research and development expenses from A’s annual average annual research and development expenses for the 4 years immediately preceding the 4 years immediately preceding the division, only the annual average research and development expenses for the 4 years immediately preceding the division would be calculated. The expression in the forest is as follows:

In other words, if it is calculated as alleged by the Plaintiff, the calculation of research and development expenses for the relevant year includes the research and development expenses incurred by a divided corporation (food sector) and a corporation established by division (medical sector) during the period from January 1, 2012 to March 31, 2012, the annual average calculation of research and development expenses for the immediately preceding four years would result in the deduction of all the research and development expenses incurred by the corporation established by division. Such calculation method cannot be deemed an appropriate method for calculating the expenses directly corresponding to the research and development expenses for the relevant taxable year.

6) Article 9(4) of the former Enforcement Decree of the Restriction of Special Taxation Act provides for the formula that the annual average of the research and development expenses shall be calculated when the taxable year falls short of 12 months in calculating the research and development expenses for the immediately preceding four years. In light of the purport of the foregoing provision that intends to compare the annual average of the research and development expenses incurred for the immediately preceding four years and the annual average of the research and development expenses incurred for the immediately preceding four years in the same line, it is reasonable to calculate A’s research and development expenses for the immediately preceding four years as of the following divided date

5. Conclusion

The plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.