Cho Jae-2017-China3465 ( December 15, 2017)

Since the revenue amount in the immediately preceding business year is false, simple expense rate may not be applied to the income amount in the business year concerned.

The instant disposition that applied the standard expense rate to the income amount in the relevant business year is legitimate, since the simple expense rate was reported while the income amount in the immediately preceding business year was returned, but the lease income is false.

Article 143 of the Enforcement Decree of Income Tax Act

Incheon District Court-2018-Gu Partnership-50615 (20 September 20, 2018)

U.S. Heading

○ Head of tax office

August 23, 2018

September 20, 2018

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The Defendant’s disposition of imposition of global income tax of KRW 308,058,723 on February 9, 2017, in excess of KRW 61,465,569, which was imposed by the Plaintiff on February 9, 2017, shall be revoked.

1. Details of the disposition;

On November 11, 2014, the Plaintiff acquired the ownership of approximately 1087-20 square meters, etc. (hereinafter “instant land”) in Nam-gu, Incheon Metropolitan City prior to the merger, and registered the business of housing construction and sales business as follows.

On January 25, 2015, the Plaintiff reported the instant rent as the value-added tax base by asserting that on November 11, 2014, the Plaintiff leased the instant land to MaB and received a total of KRW 1 million (hereinafter “instant rent”) from MaB from MaB in return for a simplified taxable person’s value-added tax return in 2014, the Plaintiff reported the instant rent as the value-added tax base.

On the instant land, etc. in 2015, the Plaintiff newly built and sold 16 households and 1 commercial buildings (hereinafter referred to as “instant building”) on the instant land, etc., and filed a comprehensive income tax return for May 31, 2016, the Plaintiff calculated the amount of income by deducting necessary expenses to which the simplified expense rate is applied from the said amount of income and filed a return on global income by calculating the amount of income for the immediately preceding taxable period of income as KRW 2.685 million, and the amount of income for the immediately preceding taxable period of income is less than the standard amount of income for construction business prescribed in Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 26982, Feb. 17, 2016; hereinafter the same shall apply) on the grounds that it falls under the subject of the simplified expense rate application.

The Defendant, on February 9, 2017, issued a disposition to impose and notify the global income tax (including additional tax; hereinafter the same shall apply) for the amount of tax adjusted to the Plaintiff from KRW 308,05,723 to the global income tax (including additional tax; hereinafter the same shall apply) for the tax amount adjusted to the Plaintiff on February 9, 2017, that the instant rent reported as the tax base of the value-added tax for simplified taxable persons in 2014 was the false amount of tax generated to apply the simplified expense rate at the time of filing a return of global income tax for the year 2015 for the sale of the instant building, and that the Plaintiff, as a business operator newly commenced a business in 2015 and was deemed eligible to apply the expense rate exceeding KRW 150,000,000,000,000,000 from the amount of income accrued from the sale of the instant building in excess of KRW 61,465,569,569 (hereinafter referred to as “instant disposition”).

[Ground of recognition] Evidence Nos. 1, Nos. 2 through 5, the purport of the whole pleadings

2. Whether the disposition is lawful;

A. The plaintiff's assertion

Since the Plaintiff’s income accrued in 2014 from the instant rent of KRW 1,00,00 according to the land rental business, the simple expense rate should be applied pursuant to Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act to the business income accrued in 2015, and the instant disposition that applied the standard expense rate otherwise deemed unlawful.

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

Comprehensively taking account of the following circumstances acknowledged by the statement in Eul evidence Nos. 6 through 15 and the purport of the entire pleadings, it is difficult to view that the plaintiff engaged in the land leasing business in 2014 and obtained income of one million won of the rent of this case (it is difficult to view that the plaintiff actually acquired such income in light of the details and period of the land lease, etc. of this case, it is also deemed that the income falls under the business income that the plaintiff started a new business in 2015, and the income amount exceeds KRW 150,000,000,000 from the income amount from the sale of the building of this case, and thus, the disposition of this case is legitimate by calculating the income amount calculated by deducting the necessary expenses applied to the standard expense rate from the income amount from the sale of the building of this case by the plaintiff.

① The Plaintiff asserted that the Plaintiff leased the instant land at KRW 500,000 from MaB to MaB on November 11, 2014, upon receiving a request from MaB to store containers and building materials. However, in view of the fact that there is no objective data to recognize the lease relationship of the instant land, such as there is no financial transaction data to acknowledge that the Plaintiff was paid the instant rent from MaB, etc. (No. 6 and 11 evidence cannot be deemed as objective data on the lease relationship of the instant land), the Plaintiff’s assertion that the Plaintiff leased the instant land to MaB and received the instant rent from MaB is difficult to believe.

② Even according to the Plaintiff’s assertion, when acquiring ownership of the instant land on November 11, 2014, the Plaintiff leased the instant land to MaBB on the same day, and after completing business registration on December 11, 2014, it was closed on February 10, 2015. The Plaintiff’s land rental business registration was maintained for a shorter period of two months at the time of preparation for business activities of the Housing Construction and Sales Business Act, which is the main business, and the relevant land rental business is the reason for leasing the instant land to MaB. Considering that the Plaintiff’s land rental business registration was made as a means of reducing tax burden pursuant to the Housing Construction and Sales Business Act, there is a strong doubt as to whether there is the substance of the business that conforms to the said land rental business registration.

3. Conclusion

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

Related Acts and subordinate statutes

former Income Tax Act (Amended by Act No. 15225, Dec. 19, 2017)

Article 19 (Business Income)

(1) Business income shall be the following income, generated in the relevant taxable period:

6. Incomes accruing from the construction business;

12. Income generated from real estate business and rental business: Provided, That income generated by lending rights prescribed by Presidential Decree, such as easement, etc. shall be excluded;

20. Income generated from continuous and repeated activities under a person's own calculation and responsibility for profit-making purposes, as income similar to income under subparagraphs 1 through 19.

(2) Business income shall be the amount obtained by deducting necessary expenses incurred therein from the total amount of income in the relevant taxable period, and where necessary expenses exceed the total amount of income, such excess amount shall be the deficit.

Article 80 (Settlement and Correction)

(2) Where a person (including a person who fails to file a final return on tax base pursuant to Article 73, in cases falling under subparagraphs 2 and 3) who has filed a final return on tax base pursuant to Articles 70, 70-2, 71 and 74, the head of a regional tax office or the head of a regional tax office having jurisdiction over the place for tax payment falls under any

1. Where an omission or error exists in the return;

(3) Where the head of a regional tax office or the head of a regional tax office having jurisdiction over the place of tax payment determines or revises the tax base and amount of tax in the relevant taxable period pursuant to paragraphs (1) and (2), he/she shall calculate the amount of income on the basis of books and other evidentiary documents: Provided, That where the calculation of income is impossible on the grounds prescribed by Presidential Decree,

Enforcement Decree of the former Income Tax Act (Amended by Presidential Decree No. 26982, Feb. 17, 2016)

§ 143. Determination and revision by estimation

(1) "Grounds prescribed by Presidential Decree" in the proviso to Article 80 (3) of the Act means any of the following cases:

1. Where necessary account books and documentary evidence are missing or important parts are incomplete or false in the calculation of the tax base;

(3) In cases of estimated determination or correction of income amount under the proviso to Article 80 (3) of the Act, it shall be done by the following methods: Provided, That subparagraph 1-2 shall apply only to persons subject to the application of simple expense rate:

1. The method of determining or revising, as the relevant amount of income (hereafter in this Article, referred to as the "amount of standard income"), the amount obtained by deducting the following amounts from the amount of income. In such cases, if the amount to be deducted exceeds the amount of income, the amount in excess shall be deemed non-existent: Provided, That where the standard amount of income is in excess of the amount calculated by multiplying the amount of income under subparagraph 1-2 by the multiple factor prescribed by Ordinance of the Ministry of Strategy and Finance, the amount calculated by multiplying such multiple factor may be determined as the amount of income until the amount of income is determined

(c) The amount obtained by multiplying income by standard expense rate: Provided, That in cases of a person subject to double-entry bookkeeping under Article 160 (3) of the Act, the amount obtained by multiplying income by 1/2 of standard expense rate;

1-2. The method of determining or revising as income amount the amount obtained by deducting the amount obtained by multiplying the income amount by the simple expense rate;

(4) "Business operators subject to the application of simple expense rate" in the proviso to paragraph (3) means any of the following business operators:

1. A business operator who starts a business anew in the relevant taxable period and whose revenue in the relevant taxable period falls short of the amount referred to in the items of Article 208 (5) 2;

2. A businessman whose aggregate amount of income in the immediately preceding taxable period (including the amount of income increased by determination or revision) falls short of the amount in the following items:

(b) Manufacturing, lodging and restaurant business, electricity, gas, steam and water service business, sewage, waste disposal, raw material recycling and environment restoration business, construction business (excluding non-residential building construction business, but including residential building development and supply business), transportation business, publication, image, broadcasting and telecommunications and information service business, finance and insurance business, goods brokerage business: 3.6 million won;

§ 208. Keeping and recording books

(5) "Business operators below a certain size by type of business prescribed by Presidential Decree" in Article 160 (2) and (3) of the Act means any of the following business operators: Provided, That business operators under Article 147-3 and Article 109 (2) 7 of the Enforcement Decree of the Value-Added Tax Act shall be excluded herefrom:

1. A businessman who starts a business anew in the relevant taxable period;

2. Business operators whose aggregate amount of income (including the amount of income increased by determination or correction) in the immediately preceding taxable period falls short of the following amount: Provided, That in cases of small business prescribed by Ordinance of the Ministry of Strategy and Finance in consideration of the current status of business types, etc., a business operator who

(b) Manufacturing, lodging and restaurant business, electricity, gas, steam and water service business, sewage, waste disposal, raw material recycling and environment restoration business, construction business (excluding non-residential building construction business, but including residential building development and supply business), transportation business, publication, image, telecommunications and information service business, finance and insurance business, goods brokerage business: 1.5 million won;