KN Co., Ltd. (LLC, Attorneys Jeon Young-young et al., Counsel for the defendant-appellant)

The Director of the National Tax Service

May 26, 2016

1. The plaintiff's claim is dismissed.

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

The imposition disposition of value-added tax (including additional tax) by the defendant against the plaintiff shall be revoked in all of the attached imposition disposition of KRW 2,305,671,640.

1. Details of the disposition;

A. From October 2, 2002, the Plaintiff is a legal entity that runs the daily advertising agency business for small scale business operators from October 2, 2002, and runs a business through the method of issuing and distributing 38 member stores for each region throughout the country (32 member stores and 6 non-permanent operators).

B. The Plaintiff’s franchise store is classified into “direct franchise store” and “non-permanent franchise store,” and the direct franchise store is a franchise store operated by the Plaintiff after the Plaintiff’s personal business registration under the name of its employee (hereinafter “instant business establishment”); and the non-permanent franchise store is a franchise store operated by the Plaintiff in the manner that the Plaintiff receives fees from the operator of the instant franchise store instead of having the Plaintiff independently operate the relevant franchise store and operate the business. The current status of the instant business establishment is as follows.

(Registration of the workplace is omitted)

As above, the Plaintiff filed for registration as an individual entrepreneur in the name of the employee under the direct chain store, and received a tax invoice according to the business registration, and filed for the return and payment of value-added tax.

C. The Defendant conducted a consolidated investigation of corporate tax against the Plaintiff from November 29, 2012 to April 6, 2013, and recognized the sales and purchase of each of the instant workplace as the Plaintiff’s transaction under the premise that the actual business operator of the instant workplace is the Plaintiff, and subsequently notified the Plaintiff of corporate tax and value-added tax (hereinafter “the initial disposition”). However, regarding the purchase transaction of the instant workplace, the Defendant recognized the Plaintiff’s input tax deduction as the Plaintiff’s input tax amount.

D. On December 2013, the director of the Daejeon Regional Tax Office imposed an additional tax on the registration of title under Article 22(1)2 of the Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013; hereinafter “former Value-Added Tax Act”) on the instant place of business by conducting an audit of the business of the Defendant. The head of the Daejeon Regional Tax Office imposed an additional tax on the instant place of business. The head of the Daejeon District Tax Office requested the Defendant to correct the penalty tax by deducting the input tax amount under the tax invoice (hereinafter “instant tax invoice”) issued by other business operators during the taxable period from January to January 208 of the Value-Added Tax Act (hereinafter “instant tax invoice”). Furthermore, the head of the Daejeon Regional Tax Office imposed an additional tax on the unlawful underreporting under Article 47-3(2) of the former Framework Act on National Taxes (Amended by Act No. 12848, Dec. 23, 2014; hereinafter “former Framework Act on National Taxes”).

E. According to the above corrective order, the Defendant imposed KRW 411,880,610,00 on the Plaintiff (hereinafter “instant first disposition”) along with the initial disposition on March 10, 2014, as stated in attached Form 1. In addition to the initial disposition and the instant first disposition on August 19, 2014, the Defendant imposed KRW 1,893,737,030 in the aggregate of the value-added tax, the amount of the principal tax on non-deduction of input tax, the amount of the wrongfully underreported additional tax, and the amount of the additional tax on non-deduction of input tax (hereinafter “instant second disposition”). In addition, the instant first disposition and the instant second disposition were referred to as “each of the instant dispositions”).

F. On September 29, 2014, the Plaintiff filed a request for a trial with the Tax Tribunal by dissatisfied with the instant Disposition No. 1. On November 18, 2014, the Plaintiff appealed against the instant Disposition No. 2 and filed a request for a trial with the Tax Tribunal on November 18, 2014, but the Tax Tribunal rendered a decision to dismiss the request for a trial against the instant Disposition No. 2 on August 12, 2015 and on August 26, 2015.

[Ground of recognition] Gap evidence Nos. 1 through 5 (including branch numbers; hereinafter the same shall apply), Eul evidence No. 1, the purport of the whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. The plaintiff's assertion

1) The Defendant’s denial of the deduction of the relevant input tax amount by deeming the instant tax invoice as a tax invoice different from the fact goes against the legal doctrine on the validity of the business registration under another person’s name, as well as the registration number of the supplier is stipulated as a requisite entry item, and the name of the supplier is not stipulated as a requisite entry item, and is in violation of the legislative intent of Article 16(1)2 of the former Value-Added Tax

2) With respect to the imposition of additional tax on the Defendant’s registration of the place of business from 1 to 1, 2013, the Plaintiff’s act of registering the business in the name of the Plaintiff for the head office from 2008 to 1, 2013, and the act of registering the business in the name of his employee who is not the Plaintiff’s name is not “an act of registering the business in the name of another person prescribed by Presidential Decree” under Article 2(1)2 of the former Value-Added Tax Act, but “an act of using the business under Article 8 of another person’s name” under Article 60(1)2 of the amended Value-Added Tax Act, which was amended and enforced as of January 1, 2014, and thus, this part of the disposition by the Defendant constitutes an unlawful disposition that violates the principle of non-payment.

3) The imposition of an under-reported additional tax and an under-reported additional tax on the tax invoice of this case is unlawful since the Defendant’s act of excluding the input tax amount subject to deduction itself is unlawful. However, even though the Defendant’s act of registering the instant place of business in the name of his employee is justifiable, it is unlawful to impose an under-reported additional tax or an under-reported additional tax on the return of value-added tax on the ground that the Plaintiff’s act of registering the instant place of business in the name

4) With respect to the Defendant’s imposition of the additional tax on registration of title for the first term portion of 2008, value-added tax 20,910,510 for the first term portion of 2008, and value-added tax 29,251,90 for the second term portion of 208 after the lapse of the exclusion period for imposition. In relation to the imposition of value-added tax on the premise of non-deduction of the input tax, value-added tax for the first term portion of 2008, 106,627,50 for the second term portion of 208, and 137,15,920 for the second term portion of value-added tax for 208, and 182,810, and 290 for the first term portion of value-added

(b) Related statutes;

[Attachment 2] The entry is as follows.

C. Determination

1) Whether imposition of value-added tax upon non-deduction of input tax amount is unlawful

A) Article 17(1) of the former Value-Added Tax Act provides that an entrepreneur shall calculate the tax amount by deducting the input tax amount from the output tax amount for the supply of goods or services used or to be used for his/her own business. Meanwhile, Article 17(2) of the same Act provides that “in cases where all or part of the matters to be entered under Article 16(1)1 through 4 (hereinafter “necessary entry items”) are not entered or are different from the fact” in subparagraph 2 of the same Article, the input tax amount is stipulated as “in cases where the whole or part of the matters to be entered under Article 16(1)1 through 4 are not entered or are different from the fact” and Article 16(1)1 of the Value-Added Tax Act provides that “the registration number and name or title of the supplier,” Article 2 subparag. 3 of the Value-Added Tax Act provides that the value of supply and value-added tax amount, and subparagraph 4 of the same Article

B) For a normal operation of the pre-stage tax credit system adopted under Article 17(1) of the former Value-Added Tax Act, the main text of Article 17(2)2 of the former Value-Added Tax Act provides that input tax shall not be deducted in cases where the whole or part of the necessary entry items of the tax invoice are entered differently from the fact, taking into account the fact that it is essential for an entrepreneur to mutually verify the input tax amount to be deducted at each transaction stage by the pre-stage entrepreneur from the input tax amount to be traded. This legislative purpose lies in preparing a kind of sanctions to secure the accuracy and accuracy of the tax invoice, which serves as the basis for the operation of the value-added tax system, separate from the principle of substantial taxation (see, e.g., Supreme Court Decisions 2014Du35706, Feb. 18, 2016; 2002Du4761, Dec. 11, 203). Therefore, in light of the purport of Article 17(2)1 of the former Value-Added Tax Act, where the person actually belongs to the goods or services.

C) The Plaintiff asserts that the Defendant, on the ground that the registration number of the person receiving the instant tax invoice stated in the instant tax invoice is the registration number of the business registration registered under another person’s name, not the Plaintiff, and that the Defendant did not deduct the input tax amount by deeming the instant tax invoice as a tax invoice stating differently from the fact, and that the “the registration number of the person receiving the supply,” which is a requisite entry item under Article 17(2)2 of the former Value-Added Tax Act, is a tax invoice. The Defendant’s imposition disposition of value-added tax should be premised on the fact that, in order to be lawful, the registration number of the other person’s business registration is not deemed the actual business registration number of the actual business operator. However, even if the Plaintiff used another person’s name in relation to the pertinent business registration, there is no difference in that it constitutes the actual business registration number of the actual business operator, not the nominal owner, and as long as the business registration under another person’s name also becomes effective by the actual business registration, it is possible to deduct the input tax amount.

Accordingly, as seen earlier, Article 17(2)1 of the Value-Added Tax Act provides that an input tax amount shall not be deducted from the output tax amount in cases where the entries of the tax invoice issued by an entrepreneur are differently entered from the facts. Article 16(1)2 of the former Enforcement Decree of the Value-Added Tax Act provides that “the registration number of the supplier” as one of the necessary entry items of the tax invoice. Provided, That Article 60(2)2 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 24638, Jun. 28, 2013; hereinafter “former Enforcement Decree”) provides that an input tax amount may be deducted exceptionally in cases where the transaction is confirmed by considering the requisite entry items of the tax invoice as other necessary or discretionary entry items of the relevant tax invoice, but the aforementioned provision provides that a transaction may be made by exceptionally under the current provision of the Value-Added Tax Act by adopting the tax invoice at the stage of national finance and its authenticity under the Act.

Meanwhile, comprehensively taking account of the overall purport of the arguments as to Gap evidence Nos. 1 through 4 and Eul evidence Nos. 4 through 8, the plaintiff intentionally borrowed the name of the employee issued as a branch office and completed the registration of an individual entrepreneur in the name of the employee, and even though the plaintiff was actually supplied to the plaintiff, it can be acknowledged that the purchase tax invoice was issued to the above employee who was supplied with an individual entrepreneur under the above employee's name, which is entirely different from the plaintiff, in the form of the plaintiff. Thus, the above purchase tax invoice constitutes a tax invoice stating differently the registration number of the recipient, one of the necessary descriptions under Articles 16 (1) 2 and 17 (2) 2 of the former Value-Added Tax Act, and it cannot be deemed that it was caused by mistake under Article 60 (2) 2 of the Enforcement Decree of the same Act.

D) Furthermore, under the current Value-Added Tax Act, the tax invoice system has the function of mutual verification between taxpayers that facilitate the dissemination of income tax and corporate tax as well as value-added tax by exposing transactions between the parties to the transaction. The Value-Added Tax Act provides that the person who receives the tax invoice exchanges the tax invoice between the parties to the transaction and deducts the input tax amount indicated in the above tax invoice shall refund the input tax amount collected by proving the disbursement of the input tax amount as the tax invoice. However, although the fact that there was a mutual transaction between the parties to the transaction was disclosed during a specific taxable period is significant significance, the plaintiff was not issued a legitimate tax invoice, at his own option, with the Plaintiff’s failure to deduct the input tax amount, and this cannot be said to violate the principle of substantial taxation.

E) In addition, under Article 22(1)2 of the former Value-Added Tax Act, where an entrepreneur does not engage in a business on his/her own account and responsibility, i.e., business registration under another’s name and the actual operation of a business, administrative sanctions are imposed by adding an amount equivalent to 1/100 of the value of supply to the amount of tax payable or deducting from the amount of tax refundable; and ii) Article 11(1) of the former Punishment of Tax Evaders Act (amended by Act No. 13627, Dec. 29, 2015; hereinafter “former Punishment of Tax Evaders Act”) provides that a person who registered his/her business by using another’s name for the purpose of evading tax evasion or compulsory execution shall be punished by imprisonment for not more than two years or by a fine not exceeding 20,000 won, and (3) the issuance of a tax invoice by stating the registration number of the person who received goods or services under another’s name as the person who registered his/her name is indicated as the person subject of the actual transaction cannot be deemed unlawful by the Defendant’s objective disposition of tax exemption.

F) Furthermore, the Supreme Court precedents that the Plaintiff’s business place may be deemed an actual business place using another’s business registration, even if the business place is registered under another’s name, hold the authority to impose value-added tax on the actual business operator. If an entrepreneur has received a tax invoice from the other party to the transaction and fails to submit it to the Government within the statutory period, the input tax amount cannot be deducted (Supreme Court Decision 87Nu131 Decided February 23, 198). Furthermore, the issue of this case is whether the input tax should be deducted if the entrepreneur is issued with the business registration number indicated in the other party’s name. Meanwhile, the Supreme Court en banc Decision 2014Du35706 Decided February 18, 2016, which is invoked by the Plaintiff, should not be deemed to have been issued with the same tax invoice as that of the Plaintiff’s actual business registration date prior to the issuance of the input tax invoice, and thus, the remaining tax invoice should not be deemed to have been issued for the same purpose as that of the transaction under the former Enforcement Decree of the Value-Added Tax Act.

Therefore, this part of the plaintiff's assertion is without merit.

2) Whether the imposition of additional tax on the registration of title is unlawful

A) In order to facilitate the exercise of taxation rights and the realization of tax claims, additional tax under the tax law is an administrative sanction imposed pursuant to the tax law in cases where a taxpayer violates a return, tax liability, etc. under the tax law without justifiable grounds, and the taxpayer’s intention or negligence is not considered. On the other hand, such a sanction should be imposed on the taxpayer for nonperformance of tax obligations unless there are justifiable grounds, such as where the taxpayer is reasonably deemed to have been unaware of his/her duty, or where it is unreasonable for him/her to expect the fulfillment of his/her duty (see, e.g., Supreme Court Decision 2010Du16622, Apr. 28, 201).

B) Article 22(1)2 of the former Value-Added Tax Act provides for the following:

(1) Where an entrepreneur falls under any of the following subparagraphs, the amount under each subparagraph shall be added to the amount of tax to be paid or deducted from the amount of tax to be refunded;

Article 60(1)2 of the Value-Added Tax Act (amended by Act No. 12167, Jan. 1, 2014; hereinafter "the amended Value-Added Tax Act") provides that "where it is confirmed that a business has been conducted under another person's name or by using another person's business registration under Article 8, an amount calculated by multiplying the total amount of supply under another person's name from the commencement date of the business to the date immediately before the date it is confirmed that the business has been actually conducted, by one percent" shall be included in the regulation under the former Value-Added Tax Act, "the use of business registration under Article 8 in another person's name" as well as "the use of business registration under Article 8 of the former Value-Added Tax Act", and the Plaintiff's act of using another person's name under the latter part of Article 20 of the former Value-Added Tax Act shall be revoked under another person's name, not the latter part of the Value-Added Tax Act since its head office was registered under another person's name.

C) Comprehensively taking account of the overall purport of the Plaintiff’s statements and arguments as follows: (a) the Plaintiff issued a business registration under the name of the branch office and reported value-added tax to an individual workplace; (b) Nonparty 1, a representative director of the Plaintiff, was executing a decision-making with the final approval of the Plaintiff Company’s management; (c) the instant branch office under the control of the Plaintiff Company, including revenue management, budget management, and personnel management, was de facto controlled by the Plaintiff Company; (d) the Plaintiff’s sales of the instant branch office under the name of an individual business owner, was subject to certain control on the account of the external audit; and (e) the Plaintiff did not report the sales of the instant branch office under the name of the head office of the 7th branch office; and (e) the Plaintiff did not report the sales of the instant branch office under the name of the head office of the 10th branch office under the name of the 7th branch office; and (e) reported the remainder of the sales office under the name of the Plaintiff’s sales office under the name of the head office.

D) In addition, the Plaintiff’s act of registering a business in the name of another person means the case where the Plaintiff has registered a business in the name of another person for each place of business established by the actual entrepreneur, and the case where the “act of using a business in the name of another person” means the case where a business operator has registered a business in the name of another person, and thus, the Plaintiff’s act constitutes “act of using a business in the name of another person.” However, it is reasonable to deem that the “act of using a business in the name of another person” means the case where the Plaintiff is operating a business in the name of another person already registered. In particular, even if the Plaintiff had registered a business in the name of another person as to the head office, as in the case of this case, while the Plaintiff had registered a business in the name of another person, it is merely the case where the Plaintiff is operating a business in the name of his own workplace and only the name of his employee, which constitutes “act of using a business in the name of another person,” and therefore, it is clear that

3) Whether the imposition of unfair underreporting tax is unlawful

A) Article 47-3(2) of the former Framework Act on National Taxes (amended by Act No. 11124, Dec. 31, 2011; hereinafter the same) provides that a taxpayer shall impose an additional tax for 40% on the under-reported amount of tax if any under-reported return is made in an unjust manner. According to the delegation under Article 47-3(2) of the former Framework Act on National Taxes, “unfair method” under Article 27(2) of the former Enforcement Decree of the Framework Act on National Taxes (amended by Presidential Decree No. 23592, Feb. 2, 2012) is a violation of the duty to report the tax base or the amount of national tax based on the concealment or disguise of all or part of facilities that serve as the basis for calculating the tax base or the amount of national tax, and thus, violates the duty to make false recording in books, such as preparing double books, ② false evidence or document, ③ false certification, ④ destruction of books and records, ⑤ concealment of income, profits, concealment or transactions, or other unlawful acts.

In full view of the regulatory structure of Article 47-3 of the former Framework Act on National Taxes, the language and content of each subparagraph of Article 27(2) of the former Enforcement Decree of the Framework Act on National Taxes, and the legal nature of penalty taxes for underreporting, where penalty taxes are imposed in cases of an unjust underreporting under Article 47-3(2) of the former Enforcement Decree of the Framework Act on National Taxes, where all or part of the facts constituting the basis for calculating the tax base or the amount of national tax are concealed or pretended, it is impossible or considerably difficult to impose and collect taxes, and thus, imposing penalty taxes much higher than those imposed on the general underreporting that is not “unfair” to induce taxpayers to faithfully report the tax base. In addition, Article 27(2) of the former Enforcement Decree of the Framework Act on National Taxes provides that the purpose of imposing penalty taxes for underreporting underreporting under Article 27(1)6 of the former Enforcement Decree of the Framework Act on National Taxes is to be deemed to be necessary to constitute “unfair method” under Article 27(2) of the former Enforcement Decree on National Taxes 13).

B) In the crime of tax evasion under Article 3(1) of the former Punishment of Tax Evaders Act, the term “Fraud or other unlawful act” refers to an act that enables the tax evasion, which is recognized as unlawful under the generally accepted social norms, i.e., a deceptive scheme or other unlawful act that makes it impossible or considerably difficult to impose and collect taxes. It does not correspond to the mere failure to file a tax return under the tax law or making a false tax return without accompanying any other act, but it does not correspond to the mere failure to file a tax return or making a false tax return without accompanying any other act. However, it may be recognized that the imposition and collection of taxes is impossible or remarkably difficult in cases where the circumstances indicate active concealment, such as false bookkeeping, check, etc., and repeated use of multiple borrowed accounts in the book (see Supreme Court Decision 201Do345, Mar. 24, 2011).

C) The Plaintiff’s issuance of the instant tax invoice, stating the registration number of the person to whom the business registration number registered in the name of the employee was issued, is a passive act that the Plaintiff was made by registering the business under the name of the employee under the direct management of the instant business establishment, and in itself, it cannot be deemed an unfair return. As long as the Plaintiff legally reported and paid the value-added tax based on the instant business establishment, it did not interfere with the Plaintiff’s exercise of the authority to impose and collect the value-added tax established through the instant business establishment’s taxation transaction. However, as seen in paragraph (2)(a) of the same Article, the Plaintiff prepared a contract as if there was a normal contract transaction between the Plaintiff and the business owner registered in the name of the employee after issuing the outstanding employee as the head of the branch office under the direct management of the instant business, and made it difficult to view the Plaintiff’s submission of the tax invoice list by stating the Plaintiff’s transaction as if the Plaintiff’s transaction was the one of the individual business operators, including the value-added tax and the global income tax.

D) Furthermore, in full view of the overall purport of the statements and arguments in the evidence Nos. 10 and 11 of Eul, the Daejeon Regional Tax Service Regulation Review Committee notified the defendant that it would evade value-added tax by omitting the revenue amount of KRW 47,700,000 on the ground that the Plaintiff’s actual representative Nonparty 4 registered as an individual business operator in the name of the branch office in the name of the employee under his/her control and grasping the actual revenue amount by the accounting program of the head office. This constitutes a tax evasion by fraudulent or other unlawful acts under the Punishment of Tax Evaders Act. As a result, it is recognized that the Plaintiff paid the penalty amount of KRW 235,13,00 on May 22, 2013 without raising any objection. As can be seen, the Plaintiff’s actual operation of the instant place of business in question by himself/herself and without reporting the revenue amount in the name of the employee under his/her own control, thereby making it reasonable to deem the Plaintiff’s act of evading tax revenue under his/her own name or under his/her disguised tax return.

4) Whether the exclusion period has expired

A) Article 26-2(1) of the former Framework Act on National Taxes provides that the exclusion period of imposition of national taxes shall be ten years from the date on which a taxpayer can be imposed national taxes if a taxpayer evades a national tax or obtains a refund or deduction by fraud or other improper means (No. 1); seven years from the date on which the relevant national tax may be imposed if a taxpayer fails to file a tax base return by the statutory due date of return; and five years from the date on which the relevant national tax may be imposed if a taxpayer falls under any of the above subparagraphs. The legislative purpose of Article 26-2(1) of the former Framework Act on National Taxes is to ensure prompt determination of tax legal relations, in principle, the exclusion period of the imposition of national taxes is five years, but it is difficult to find that the tax authority is not obliged to file a return of omission or to find a false fact, and thus, it is difficult to expect that tax evasion or other unlawful act constitutes a fraudulent or unlawful act under the name of a taxpayer or other unlawful act under Article 26-2(1)1 of the former Framework Act on National Taxes.

B) Comprehensively taking into account the facts acknowledged by the aforementioned evidence and the purport of the entire arguments, that is, the Plaintiff’s name issued a business registration for the instant workplace as a branch office was made for the purpose of tax evasion as seen earlier. Furthermore, active acts such as preparation of a false franchise business contract, etc., value-added tax by double books, income tax, and corporate tax return were committed so as not to discover the facts. In light of the above, this constitutes “Fraud or other unlawful acts” under Article 26-2(1)1 of the former Framework Act on National Taxes, and thus, the period for exclusion of value-added tax shall be 10 years. Accordingly, the Plaintiff’s assertion on this part is without merit.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and it is so decided as per Disposition.

[Attachment]

Judges in the first instance court (Presiding Judge)