Korea Railroad Corporation (Law Firm LLC et al., Counsel for the defendant-appellant)

Head of Yeongdeungpo District Tax Office and fourteen others (Attorney Kim Jung-il, Counsel for the plaintiff-appellant)

November 25, 2016

1. All of the plaintiff's claims are dismissed.

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

On January 22, 2014, each disposition imposing value-added tax (including each additional tax) for the second period of 2008, in the attached Form No. 2008, which the Defendants issued to the Plaintiff, shall be revoked.

1. Details of the disposition;

A. The Plaintiff is running passenger transportation of high-speed railroads, freight transportation, rental business, etc. subject to taxation under the Value-Added Tax Act, and general railroads and metropolitan railroad passenger transportation services subject to exemption under the Value-Added Tax

B. On June 26, 2008, pursuant to Articles 32 and 33 of the Framework Act on Railroad Industry Development, the Plaintiff entered into an indemnity agreement for public service costs in 2008 with the Minister of Land, Transport and Maritime Affairs (hereinafter “instant indemnity agreement”). The main contents of the instant indemnity agreement are to provide three types of public service pursuant to Article 3 subparag. 11 and Article 32(2) of the Framework Act on Railroad Industry Development from January 1, 2008 to December 31, 2008, namely, the public interest services, namely, the reduction or exemption of railroad fares for senior citizens, disabled persons, persons of distinguished service to the State (hereinafter “reduction or exemption of fares”), ② the reduction or exemption of railroad fares for persons of distinguished service to the State (hereinafter “a remote route”), ② the continuous operation of basic railroad service for public interest even though it is extremely difficult to secure the balance between the demand for railroad use and it is to provide the Minister of Land, Transport and Maritime Affairs with the special purpose of operation of the State (hereinafter “special purpose”).

C. The Plaintiff received KRW 266,168,00,000 in total from the Minister of Land, Infrastructure and Transport for the amount of compensation for the provision of public services in 2008 (hereinafter “the amount of compensation for public services in this case”). (The Plaintiff received KRW 92,354,00,000 for the reduction of freight, KRW 172,298,000 for the operation of remote routes, and KRW 1,516,000 for the operation of special Dongs (hereinafter “the amount of compensation for public services in this case”).

D. When filing a return on the second taxable value tax in 2008, the Plaintiff calculated the input tax amount related to the tax-free business by applying the supply value ratio of the business subject to VAT and the total supply value of the business subject to VAT as seen earlier, and did not deduct the amount from the output tax amount.

E. However, the Director of the Daejeon Regional Tax Office conducted a tax investigation with respect to the Plaintiff, and notified the Defendants of taxation data on the ground that “The amount of compensation for public service in this case is borne by the State on behalf of the Plaintiff for the service provided to the railroad users.” Therefore, even if an input tax amount should not be deducted from the output tax amount, the Plaintiff did not reflect the amount of compensation for public service in the calculation method of common purchase tax, and thus, the amount of the input tax was deducted excessively.” On January 22, 2014, the Defendants notified the Plaintiff of the correction and notification of the total amount of value-added tax for the second term period of 2008 (including additional tax) (hereinafter “instant disposition”).

F. On April 18, 2014 and April 21, 2014, the Plaintiff filed an appeal with the Tax Tribunal. However, the Plaintiff was dismissed on November 19, 2014.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 4, Eul evidence Nos. 1 through 22, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) The amount of the instant compensation for public service does not constitute “the amount of subsidies that are not directly related to the supply of goods or services,” and thus does not constitute “the amount of the supply price” under Article 13(1) of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010; hereinafter “the Act”); Article 48(1) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 22043, Feb. 18, 2010; hereinafter “Enforcement Decree”). Article 13(2)4 of the Act; Article 48(10) of the Enforcement Decree of the Act provides that “the government subsidies that are not directly related to the supply of goods or services,” as the amount of the instant compensation for public service, shall be excluded from the tax base. Accordingly, the amount of the instant compensation for public service cannot be reflected in the calculation method of the common purchase tax amount.

2) In order to reflect the revenue exempt from value-added tax in the calculation of the common input tax amount, it shall be the price for the goods or services provided by the business entity, which is generated from an independent non-taxable business conducted by the business entity. However, the Plaintiff does not separately run the existing taxation, such as passenger and freight transportation, independent exemption from the tax-free business, operation of remote areas, operation of special roads, and non-taxable business, but is merely compensated for some of the business losses incurred while performing the existing taxation and tax-free business from the Minister of Land, Transport and Maritime Affairs, other than the other party to the service, under the name of compensation for the pertinent

3) In the case of the operation of a special bus, most of the cost incurred is personnel expenses where the input tax amount does not occur, or the costs that the Plaintiff himself treats as non-deduction of input tax amount, and the other common expenses are not used for the operation of a special bus. Therefore, in accordance with the principle of actual attribution, only the input tax amount for the actual cost incurred in the operation of a special bus should be deducted. If the amount of compensation for the operation of a special bus is additionally deducted by reflecting some of the common input tax amount in the calculation of common input tax amount, such as the Defendant, if the amount of compensation for the operation of a special bus is additionally deducted as a result

B. Relevant statutes

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

C. Determination

1) Relevant legal principles

The Value-Added Tax Act calculates the value-added tax by deducting the input tax amount from the output tax amount. The input tax amount to be deducted from the output tax amount refers to the tax amount on the supply of goods or services to be used or used by an entrepreneur for his/her own business. Here, one’s own business refers to only a taxable business including a business subject to zero tax rate and does not constitute a business subject to which the input tax amount is included in the cost and no tax exemption (hereinafter “tax exemption business, etc.”). This is because there is no reason to deduct the value-added tax included in the expenditure for the tax exemption business, etc., because the tax exemption business, etc. is not an entrepreneur for the purpose of the value-added tax.

Where an entrepreneur operates both a taxable business and a tax-free business, an input tax amount related to the taxable business should be deducted from the output tax amount. Therefore, if it is clear that an input tax amount is related to the taxable business, or an input tax amount related to the tax-free business, among the input tax amount, is attributed, only the input tax amount related to the taxable business should be deducted from the output tax amount. If an input tax amount cannot be classified into an actual ownership related to the taxable business and the tax-free business, it should be divided in a reasonable way. Article 61(1) and (4) of the Enforcement Decree of the Act applicable to this case provides only the method of calculating the input tax amount, which is commonly used for the taxable business and the tax-free business, and does not provide for the method of distributing the input tax amount in a case where an entrepreneur concurrently operates the taxable business and the tax-free business. However, there is controversy as to whether it can be applied to the case where an entrepreneur concurrently operates the taxable business and the tax-free business, and there is no provision related to the tax-free business and the tax-free business.

In such cases, if a business operator receives national subsidies, etc. from the State or a local government with respect to the supply of services falling under a non-taxable business, not where the relevant business operator receives the proceeds from supply separately from the other party, but it is not deemed a consideration for the supply of services falling under a non-taxable business, the provision of Article 61(1) of the Enforcement Decree that provides that the amount of common purchase tax shall be calculated pro rataly according to the ratio of the supply value of the tax-exempt business and the taxable business should not be applied by analogy. In such a case, the input tax amount distributed proportionally to the non-taxable business shall be determined by applying the method of calculating common purchase tax among other reasonable methods of calculation, such as the method under each subparagraph of Article 61(4) of the Enforcement Decree (see the aforementioned Supreme Court Decisions 209Du16268, Mar. 24, 2016; 2013Du4575, Jun. 23, 2016).

2) Whether the plaintiff can be viewed as concurrently running a non-taxable business

The issue of the Value-Added Tax Act is that a non-taxable business that supplies goods or services on which the value-added tax is not levied is the principle that if an input tax amount is used for a non-taxable business, but the input tax amount is included in the input tax amount deducted from the input tax amount deducted from the input tax amount, or if the non-taxable business does not reflect the ratio of the input tax amount included in the common input tax amount to the whole business of the business operator in the calculation method of the common input tax amount, the non-deductible amount of the input tax amount should be unfairly counted, and as a result, the input tax amount should be calculated by deducting the input tax amount from the output tax amount only for the input tax amount paid in connection with the taxable business. In order to prevent such a result, the input tax amount that is actually input in the non-taxable business (where it is clear to which the actual ownership belongs) or that is included in the non-taxable business through the calculation method of the common input

Furthermore, as seen earlier in the legal doctrine, the calculation of the input tax amount related to a non-taxable business (or tax-exempt business), first of all, should be applied by analogy the provisions of the “tax-free business-related input tax amount” under the Value-Added Tax Act, and if the provisions of the “tax-free business-related input tax amount” cannot be applied, it should be applied by finding that the provisions of the “tax-free business-related input tax amount” are appropriate for other reasonable calculation methods. As seen earlier, the Value-Added Tax Act basically takes the position that only the input tax amount related to the transaction subject to taxation (10% tax rate or zero tax rate) can be deducted, while the distinction between the input tax amount to be deducted and the non-deductible input tax amount is based on the actual attribution, but it takes the supplementary calculation method where the actual attribution cannot be separated. From this perspective, there is no strict reason to view that the “non-taxable business” subject to the non-taxation tax-free business should be an independent business, as alleged by the Plaintiff.

However, Article 3 subparag. 11 of the former Framework Act on Railroad Industry Development (amended by Act No. 11690, Mar. 23, 2013; hereinafter “Framework Act”) defines a railroad service provided by a railroad operator for policies or public purposes, etc. of the State or a local government, regardless of business activities for profit-making purposes, as a public service. Article 33 of the Framework Act provides that a railroad operator shall conclude a compensation agreement and the scope of public service following the provision of public service by a railroad operator. Article 34(1)2 of the Framework Act provides that a railroad operator may restrict or suspend railroad service with the approval of the Minister of Land, Transport and Maritime Affairs in cases where a reasonable compensation for public service costs is not paid. Article 35(1) of the Framework Act provides that the Minister of Land, Transport and Maritime Affairs may choose not to grant approval for the restriction or suspension of railroad service where the Minister of Land, Transport and Maritime Affairs has a duty to provide public service to the same railroad operator, such as the Plaintiff.

Therefore, the Plaintiff may deem that a construction business for public service (the provision of passenger transportation services, the provision of basic railroad services for which fare reduction or exemption is granted, the provision of services for remote routes or stations, and the provision of services for special purpose by the State) under the subparagraphs of Article 32(2) of the Framework Act against a person eligible for fare reduction or exemption, a person eligible for use of remote routes, or a person eligible for use of special roads. In particular, in the course of the Plaintiff’s provision of public service, where only a person eligible for fare reduction or exemption uses a railroad in the course of providing the above public service, a state 3) where only a person is operating a railroad on a remote route but no user is all, the case where a person is operating a railroad on the remote route, etc. is deemed to be an example where only a non-taxable project is conducted without overlap with a taxable business or a tax exemption project, and in this respect,

3) As to each item:

A) The reduction of and exemption from fares

As seen earlier, it is reasonable for the Defendant to regard the amount of compensation related to the reduction and exemption of freight as the amount of non-taxable public service income and apply the common purchase tax to the calculation method of the amount of common purchase tax. In addition, according to the instant compensation agreement, the Plaintiff: (a) while operating a general railroad or metropolitan railroad passenger transport service, which is a business subject to tax-free exemption; (b) provided that the Plaintiff shall pay part of the amount of compensation for public service of this case to the Plaintiff at the beginning of each half year; and (c) provided that the amount of compensation after the end of each half year; and (d) provided that 70% or 80% of the amount of compensation shall be paid even if following the Plaintiff’s assertion. Accordingly, the amount of compensation related to the reduction and exemption of freight may be deemed to have increased in proportion to the amount of compensation that the person subject to tax reduction and exemption is not a beneficiary through the subsidy, and thus, it can be deemed to have been paid as compensation for the provision of goods or services to the business owner, which constitutes “non-taxable or non-taxable provision of services” under the aforementioned legal doctrine.

B) Part on the operation of remote routes

The Plaintiff continues to provide basic railroad services to the routes and stations in remote areas for public interest because it is extremely difficult to secure a balance between demand for railroad use as one of the public services. The Plaintiff calculated expenses incurred in operating remote areas and claimed as compensation amount for public services in this case to the Minister of Land, Transport and Maritime Affairs. According to the instant compensation agreement, as seen earlier, as in the reduction and exemption of fares, the Minister of Land, Transport and Maritime Affairs provides that part of the compensation amount for public services in this case shall be paid at the beginning of each half year, and the compensation amount shall be settled after the end of each half year, and even according to the Plaintiff’s assertion, 70% or 80% of the compensation amount was paid. The compensation amount related to the operation of remote areas has to be increased or decreased depending on how much the Plaintiff provided the railroad services on remote areas (as the Plaintiff’s major purchase tax item of remote areas is railroad service usage fees, engine car purchase and maintenance expenses, oil, electricity, etc., and input tax amount can also be assessed as being paid in return for the provision of goods or services to beneficiaries of the State subsidy.

C) Part on the operation of the special train

On the same ground as the operation of a remote route, it is legitimate for the Defendant to calculate the common purchase tax by deeming the amount of compensation related to the operation of a special bus as the amount of non-taxable business. In addition, as to the Plaintiff’s assertion that only the portion of the special bus operation, the items of the Plaintiff’s major common purchase tax are track usage fees, engine car purchase and maintenance expenses, oil and electricity fees, etc., and when the special car is operated more than the special car, it can be easily anticipated that more of the common purchase tax would be invested in the special car operation in proportion thereto, and the input tax amount that the Plaintiff was not deducted in relation to the operation of a special car does not include the above common purchase tax items (see subparagraph 5 of this Article). Accordingly, the Plaintiff’s assertion on the portion that reflected the amount of compensation for public service of this case, such as the reduction of freight, operation of remote bus routes, operation of a special bus, etc.

3. Conclusion

All of the plaintiff's claims are dismissed as without merit, and the costs of lawsuit shall be borne by the plaintiff who has lost. It is so decided as per Disposition.

[Attachment Omission]

Judges and decorations (Presiding Judge) and Lee Jin-gu decorations

1) The method of calculating the Plaintiff’s input tax amount not deducted = Common input tax amount ¡¿ (the supply value of the business subject to tax exemption / the tax exemption and the supply value of the business subject to tax exemption) calculated by calculating the Defendants’ input tax amount not deducted = Common input tax amount ¡¿ [the supply value of the business subject to tax exemption + the compensation amount for public service in this case] / (the supply value of the business subject to tax exemption

2) Article 17(2)6 of the Value-Added Tax Act amended by Act No. 11608 on January 1, 2013 was enacted.

3) The case where the fares of general railroads and wide-area railroad passengers are reduced may be deemed to be carried out in parallel with the business subject to tax exemption. Unlike the main text, even if the overall case should be seen as the business subject to tax exemption, the amount of compensation for the reduction or exemption of fares paid by the Plaintiff shall be included in the amount of income subject to tax exemption (see Article 13(2)4 of the Act and Article 48(10) of the Enforcement Decree thereof, which is equivalent to the instant disposition, as the amount of compensation for the reduction or exemption of fares is a national subsidy directly related to the supply of the services subject to tax exemption). However, the Plaintiff and the Defendants asserted that the amount of compensation for the reduction or exemption of fares is exempt from

4) If Article 61(1) of the Enforcement Decree applies the method of reasonable method of calculation instead of analogically applying Article 61(1) of the same Decree on the ground that the Plaintiff’s compensation amount related to the reduction of freight cannot be deemed as the revenue amount related to the non-taxable business, it would be more reasonable to use the common purchase tax in proportion to the common purchase tax, i.e., the method of using the actual fare reduction amount claimed by the Plaintiff to the Minister of Land, Transport and Maritime Affairs instead of the amount of compensation related to the reduction of freight paid by the Plaintiff, on the ground that Article 61(1) of the same Decree is not applied to the transport of one person eligible

5) If the Plaintiff’s reasonable method of calculation is not applied by analogy of Article 61(1) of the Enforcement Decree on the ground that it cannot be deemed that the amount of compensation related to the operation of remote routes received by the Plaintiff cannot be considered as the amount of income related to the non-taxable business, it seems that the Plaintiff would have to use the method of estimating the amount of income expected to have received in return for the operation of remote routes (Article 61(4)2 of the Enforcement Decree, and in this case, a certain percentage of the cost of operating remote routes computed by the Plaintiff would be added to the cost of operating remote routes (the method of using the purchase price ratio related to non-taxable projects is difficult to be applied as the limit of data). However, it is apparent that