Cho High-depth2014Gu4967 ( December 07, 2015)

Whether a corporation subject to special taxation under Article 72 of the Restriction of Special Taxation Act can regard the accumulation of excessive bad debts reserve as legitimate costs in the immediately preceding year.

Even if a corporation subject to the special taxation of Article 72 of the Restriction of Special Taxation Act has set aside excessive allowances for bad debts in comparison with the immediately preceding year, it cannot be deemed that it violates corporate accounting standards

Article 72 of the Restriction of Special Taxation Act

2016Guhap20618 Revocation of Disposition of Corporate Tax Imposition

AA

O Head of tax office

September 30, 2016

November 11, 2016

1. Corporate tax of 1,785,069,770 won (additional tax) imposed on the Plaintiff on July 1, 2014

b) revoke the part exceeding 135,718,070 won of the disposition of imposition.

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

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. Based on the Agricultural Cooperatives Act, the Plaintiff is a non-profit corporation under tax law established as a product-specific cooperative with farmers as its members, and runs a mutual financial business as a profit-making business.

B. The Plaintiff selected the method of taxation on net income pursuant to Article 72 of the former Restriction of Special Taxation Act (amended by Act No. 10445, Mar. 9, 201; hereinafter “Special Taxation Restriction Act”), and reported and paid corporate tax to the Defendant. However, the Defendant: (a) deemed that the Plaintiff accumulated the reserve for bad debts in violation of the corporate accounting standards in the amount of KRW 12,63 million out of the reserve for bad debts in the annual financial statements 2010 in the annual financial statements for the settlement of accounts; (b) was excluded from deductible expenses in the net income for the year before the annual financial statements for the settlement of accounts for 2010; and (c) imposed corporate tax of KRW 1,649,351,700 on the Plaintiff on July 1, 2014 (hereinafter “instant disposition”).

C. The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on September 3, 2014, but was dismissed on December 7, 2015.

[Ground for Recognition] Unsatisfy, Gap evidence 1 to 3 (including a tentative number; hereinafter the same shall apply),

The purport of all pleadings

2. The parties' assertion

A. The plaintiff

1) Considering the legislative intent of Article 72 of the Restriction of Special Taxation Act, which provides for the net income on the settlement of financial statements as corporate tax base, the Defendant, who is the tax authority, has no provision restricting the limit of the allowance for bad debts under the Restriction of Special Taxation Act, takes the allowance for bad debts accumulated by the Plaintiff at will according to the corporate accounting standards as excessive accumulation amount, and conducts tax adjustment in excess

2) On August 17, 2009, the National Agricultural Cooperatives Federation sent to regional agriculture and livestock cooperatives, etc. operating a mutual financial business with the Plaintiff et al. (hereinafter "the notice of this case"). According to the method of setting up allowance for bad debts and known material facts, the Plaintiff needed to maintain the reserve rate for bad debts at the banking zone level. According to the notice of this case, either 400% or 600% of the amount required under the mutual financial supervision regulations (based on the lower standard) is similar to 100% of the reserve rate for bad debts in bank rights. Thus, it is appropriate that the Plaintiff accumulated 469% of the amount required to set aside allowance for bad debts in 2010 under the above mutual financial supervision regulations. In light of the fact that the external auditor on the financial statements in 2010, the Plaintiff's financial statements in the settlement of accounts, as well, must prove the proper opinion on the reserve rate for bad debts in the financial statements in the above settlement of accounts, the Plaintiff's financial statements in the business year 2010 years should be proved.

B. Defendant

1) The Defendant merely revises the tax base and tax amount pursuant to Article 66(2)11 of the Corporate Tax Act because there is an error or omission in the details of the report on net income on the settlement of accounts due to the failure of the Plaintiff to properly include the allowance for bad debts in accordance with the corporate accounting standards, and does not seek additional tax adjustment on the net income on the settlement of accounts prepared appropriately in accordance with

2) The allowances for bad debts established by the Plaintiff in 2010 amounting to 43,387 million won is 469% of the minimum amount required to be accumulated under the Regulations on Supervision, 2010, and 227.5% of the standards for self risk management committee. This is bound to be an excessive appropriation in light of the corporate accounting standards. Therefore, the Defendant considers that the method of calculating the amount used by the Plaintiff for accumulation of bad debts in 209 is the maximum standards that can be allowed in light of corporate accounting standards, and considers the amount equivalent to 30.7 billion won calculated in such formula as the maximum amount to be reserved for bad debts allowance in accordance with corporate accounting standards, and imposes corporate tax on the same. Accordingly, the instant disposition is justifiable.

3. Whether the instant disposition is lawful

(a) Related Acts and corporate accounting standards;

It is as shown in the attached Form.

B. Organization of issues

1) First, the Plaintiff asserts that the instant disposition is against the principle of no taxation without law because there is no legal basis. However, as alleged by the Defendant, the tax authority may rectify the tax base and tax amount of corporate tax on the income of each business year of the corporation where the details of the return of corporate tax are erroneous or omitted, as alleged by the Defendant, in a case where there is an error or omission in the details of the return of corporate tax pursuant to Article 66(2)1 of the Corporate Tax Act. Thus, if it is confirmed

2) However, the Defendant issued the instant disposition on the premise that the Plaintiff’s allowance for bad debts appropriated in the financial statements for the settlement of accounts in 2010, in excess of the corporate accounting standards, and thus, the instant disposition was taken on the premise that the allowances for bad debts appropriated in the financial statements for the settlement of accounts in 2010, exceeded the scope set forth in the corporate accounting standards, as alleged by the Defendant.

C. Determination

1) Facts of recognition

A) A partnership corporation operating a credit business shall maintain at least the balance of the bad debt allowance calculated in accordance with Article 12 of the former Regulations on Supervision of Financial Business (amended by the Financial Services Commission Notice No. 2012-5, Feb. 17, 2012) and Article 12 and attached Table 5 of the former Regulations on the Implementation of Mutual Financial Business Supervision (amended by the Financial Services Commission No. 2012-5, May 24, 2012) as the balance of the bad debt allowance on the settlement financial statements. The method is as follows. The balance of the bad debt allowance required to be accumulated constitutes the minimum criteria for setting bad debt allowance on the settlement financial statements that the Financial Supervisory Service grants in order to secure the

B) On September 18, 2006, the Plaintiff’s risk management committee decided to strengthen the asset soundness by raising the reserve rate for bad debts by bond soundness as shown in the table 2 below in preparation for risks such as insolvency of loan assets.

C) On August 17, 2009, the National Agricultural Cooperative Federation notified that, even though the credit rating of the obligor of the mutual financing is lower than the bank due to the lower credit rating of the obligor of the mutual financing through the instant regional association including the Plaintiff, etc., the standard of prudential classification under the Mutual Financial Business Supervision Regulations has been more relaxed than the banking business supervision regulations. Therefore, the office under the conditions was given a notice that the allowance for bad debts would be sufficiently set more than twice the current reserve by reflecting the experience loss ratio and the expected loss ratio in the future.

D) On December 28, 2010, the NAF notified the Plaintiff and subordinate regional associations, including the Plaintiff, to determine the estimated amount of non-performing debt in an objective and reasonable manner by taking into account the following decision factors:

E) When the Plaintiff prepares a financial statement on the settlement of accounts in 2010 in accordance with the foregoing standards, (1) calculated the balance of the bad debts fund required to be accumulated according to the soundness classification of loans in the year of 2010 at 10% of the bad debts fund ratio, and then additionally accumulated the bad debts fund in the bad debts fund required to be accumulated in addition to the bad debts fund 30 million won, reflecting 161.31%, which is the Plaintiff’s ratio of the bad debts fund in the bad debts fund in the bad debts fund, and (2) has re-established the bad debts fund in the bad debts fund to 50% as ‘fixedness', which reflects 161.31% of the bad debts fund in the bad debts fund as of the end of 2010, and then additionally accumulated the bad debts fund in the bad debts fund in the total of 2.33%,05 million won, which is the most recent average annual average ratio of the bad debts fund in the year of 2011.

F) From 2008 to 2010 to the end of the fiscal year of the Plaintiff’s fiscal year, the current status of reserves for bad debts is compared with the amount required to be accumulated by the Self-Risk Management Committee and the minimum amount required under the mutual financial supervision regulations under paragraph (a) below.

G) On January 14, 2011, an accounting firm, an external auditor, conducted an accounting audit on the Plaintiff’s financial statements for the settlement of accounts in 2010, and expressed the audit opinion that the financial statements for the settlement of accounts are adequately indicated in accordance with the Plaintiff’s financial standards.

[Reasons for Recognition] Evidence No. 6-9, Evidence No. 15, Evidence No. 22, Evidence No. 4, and the purport of the whole pleadings

2) Determination

In full view of the evidence mentioned above, Gap evidence Nos. 4, 5, 10 through 14, 17 through 21, Eul evidence No. 5, and Eul evidence Nos. 5, and evidence No. 17 through 5, the whole purport of the pleadings as a whole in the testimony of new witness, and the following circumstances that can be acknowledged as being comprehensively based on the overall purport of the pleadings, the circumstance and evidence presented by the defendant alone cannot be deemed to be in violation of the general corporate accounting standards or practices, since the accounting of the plaintiff to accumulate the allowances for bad debts of KRW 43,387 million, which is 469% compared to the amount of the reserves under the mutual financial supervision regulations when preparing the financial statements for settlement of accounts in 2

A) Unlike tax accounting for the purpose of financing and proper taxation by the State, corporate accounting is to prepare financial statements for the purpose of providing useful and appropriate information to users of corporate information by processing them in accordance with generally accepted accounting principles so that they can make reasonable decisions. The difference in this purpose brings about a big difference in corporate accounting standards and the Corporate Tax Act to what extent the managers' discretionary decisions can be permitted in reporting net income or taxable income between corporate accounting standards and the Corporate Tax Act. While the corporate accounting standards wide recognized the scope of managers' discretionary decisions, the Corporate Tax Act has strict provisions related to allowance for bad debts, business expenses, excessive entertainment expenses, etc. However, the former Act on Regulation of Tax Reduction and Exemption, which was completely revised on December 31, 1981 and enforced from January 1, 1982, was also amended on January 20, 198, which was enacted on the basis of the Special Act on the Taxation of Special Taxation (Article 9 of the Corporate Tax Act), which was amended on the basis of the total amount of net income tax without tax adjustment (Article 9 of the same Act).

In light of the legislative intent and amendment process of the regulations on the taxation of net income for partnership corporations, unless there are special circumstances that if it is not an item such as entertainment expenses, excessive expenses, office expenses, and allowance for bad debts for indemnity claims that can be subject to tax adjustment, it is obviously contrary to the corporate accounting standards as a result of the manager's discretionary judgment, it is consistent with the legislative intent of the above regulations to use the net income for the settlement statement as the corporate tax base.

B) Based on the fact that the provisions on bad debt allowances accumulated in 2010 are violated, the defendant mainly examined the amount of 469% of the demand for accumulation under the Mutual Financial Business Supervision Regulations or 227.5% of the demand for accumulation of the risk management committee itself, and held that the accumulation of allowances for bad debt in violation of the above standards can be violated corporate accounting standards. However, in the direction favorable to the plaintiff, allowances for bad debt in accordance with the calculation method applied in 209 would be recognized for the plaintiff. However, the balance of allowances for bad debt in the mutual financial business regulations is the minimum standard for setting bad debt allowances provided by the Financial Supervisory Service to secure the soundness of financial institutions. The risk management committee of the plaintiff raised the maximum rate for bad debt allowances for each bonds in preparation for risks such as insolvency of loans, etc. on September 17, 2009, it is expected that the 20th increase rate of bad debt debts will be more relaxed than the average increase rate of 20% of the loan earnings in each local association including the plaintiff.

C) Furthermore, a witness, who is a certified public accountant in charge of the Plaintiff’s external audit of the financial statements in the settlement of accounts for the year 2010, sufficiently examined whether the remaining balance of the Plaintiff’s bad debts allowance in 2010 was excessively appropriated as well as whether the bad debts allowance was insufficiently appropriated as well as the excessive appropriation of the bad debts allowance in consideration of the Plaintiff’s increase in long-term loans, the increased composition of increased loan obligations, etc., and the Plaintiff’s financial statements in the settlement of accounts in 2010 were made appropriate in accordance with the corporate accounting standards. This seems to support the Plaintiff’s assertion that the reserve for bad debts allowance was raised in consideration of the Plaintiff’s increase in the amount of the bad debts allowance due to farming income arising from the relief station that occurred around November 28, 2010, the increase in the amount of loans to the same person, and the increase in the amount of loans.

D) Although corporate accounting standards as well as mutual financial business accounting standards, mutual financial supervision regulations, and banking business supervision regulations have been established, banks and mutual savings banks in the city have a similar condition (hereinafter referred to as “terms for loans”) showing a difference of the reserve for bad debts more than three times in proportion to the accumulation rate of bad debts allowances. As a result of external audits on banks and mutual savings banks which accumulated bad debts at the highest ratio, they have an opinion that the financial status is reasonably indicated from the perspective of importance in accordance with corporate accounting standards. In light of these circumstances, the ratio of bad debts allowances may be determined within the scope of manager’s discretionary discretion determination, depending on the unique circumstances of each bank

E) The defendant asserts that the plaintiff is trying to avoid taxation by excessively accumulating the allowance for bad debts. However, the issue of appropriation of the allowance for bad debts in corporate accounting is merely a matter of the time when the bad debts are attributed, and oo also sets up the allowance for bad debts in excess of the allowance for bad debts, even though it is possible to avoid taxation due to the creation of the excessive allowance for bad debts, it is ultimately a difference in the reversion of the period.

4. Conclusion

The plaintiff's claim of this case shall be accepted on the grounds of its reasoning, and it is so decided as per Disposition.