2014west 1250 (No. 13, 2014)

Construction expenses are capital expenditures, excessive rental fees, labor expenses in excess of personnel expenses in joint business, and overseas travel expenses should be excluded from deductible expenses.

The excess of the personnel expenses of the joint business shall be excluded from the deductible expenses, the construction expenses shall be immediately depreciated as they fall under the capital expenditures, and the excessive rent paid to the related party shall be applied by the wrongful act and the overseas expenses shall not be included in the deductible expenses.

Article 26 (Non-Inclusion of Excessive Expenses in Deductible Expenses)

2014Guhap72040 Revocation of Disposition of Imposing corporate tax

OOO

O Head of tax office

National Rotations

June 4, 2015

July 16, 2015

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The Defendant’s imposition of corporate tax of 28,898,340 won for the business year 2008 against the Plaintiff on November 11, 2013, corporate tax of 33,632,260 won for the business year 2009, corporate tax of 169,892,510 won for the business year 201, and corporate tax of 116,341,920 for the business year 201.

1. Details of the disposition;

A. On January 15, 1983, the Plaintiff was a corporation that mainly runs non-residential building rental business in AAA building located in OOO in Seoul, OOO(hereinafter “instant building”) and filed a report on the corporate tax base for the business year from 2008 to 2012.

B. The Defendant deemed that part of the officers and employees of the Plaintiff corporation jointly performed the business of the Plaintiff corporation, BB Construction Co., Ltd. (hereinafter “B Construction”) and the representative director of the Plaintiff corporation, the Defendant: (a) deemed 1,147,792,087 won as personnel expenses of the joint business operator; (b) deemed 489,153,485 won as excess of the Plaintiff’s share in the calculation based on the sales for each business year (hereinafter “the instant personnel expenses”); (c) deemed that 1,79,153,485 won as non-deductible expenses (hereinafter “the instant personnel expenses”); (d) deemed that 200,000 won as total of the construction expenses paid for the Plaintiff corporation, BB Construction Co., Ltd. (hereinafter “B Construction”) and the Plaintiff’s 1,792,000,000 won as capital expenses; and (d) paid 1,713,900,0000 won as non-deductible expenses (hereinafter “the instant land”).

C. The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on February 14, 2014, but was dismissed on August 13, 2014.

[Ground of recognition] Facts without dispute, Gap evidence 1-1 to 4, Gap evidence 2, 3, Gap evidence 1-1, Eul evidence 5-1 to 5-4, and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) Part on personnel expenses of this case

Although the defendant was disposed of by applying Article 48 of the Enforcement Decree of the Corporate Tax Act with respect to the non-deductible of common expenses, the plaintiff is not the same organization as BB construction, etc., and there is no fact that the lease business, etc. is operated jointly, and thus

Even if otherwise, according to Article 48 of the Enforcement Decree of the Corporate Tax Act, the calculation of the Plaintiff’s share of common expenses should be based on the sales in the immediately preceding business year. The Defendant calculated the share of common expenses based on sales in the pertinent business year, and thus, this part of the disposition is unlawful.

2) Construction cost of this case

This case’s construction work is nothing more than a construction work of the level of remuneration for the purpose of maintaining the current function of the leased building. Thus, this constitutes a beneficial disbursement and it is not subject to the legal fiction of prompt depreciation.

Even if unlike this, the construction cost of this case is not an accessory facility to the construction stage of the building, and it is necessary to calculate the depreciation cost in accordance with the depreciation rate corresponding to five years in the lifespan of assets by industry.

3) The rent portion of the instant case

Article 88(3) of the Enforcement Decree of the Corporate Tax Act provides that "Where the difference between the market price and the transaction price is at least 300 million won or at least an amount equivalent to 5/100 of the market price, the determination of whether the case constitutes "where the market price is at least 5/100 of the market price" should be made on the basis of the relevant business year or total transaction period. However, the Defendant’s excessive payment of rent paid in May 4, 2010, 11,569,610, and 5,058,05 won paid over March 201, and the excessive payment of rent paid in March 201 falls short of 442,038,407, the total rent in the business year 2011, and 383,46,026 won, respectively, shall be excluded from the application of wrongful calculation under Article 88(3) of the Enforcement Decree of the Corporate Tax Act.

4) Part of travel expenses of this case

The travel expenses of this case are used by the representative director for overseas business travel expenses such as repair of the building of this case, collection of information about new buildings, and customer visits, and thus constitutes deductible expenses under the Corporate Tax Act.

B. Relevant statutes

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

C. Determination

1) Part on personnel expenses of this case

A) First, I would like to examine whether the Plaintiff jointly operates or operated the same organization or business with the 14 individual businesses, which served as the basis for calculating the Defendant’s common expenses sharing amount.

In full view of the purport of the arguments in Gap evidence 3, 5, 11-1, 11-1, 2, and 4-1 through 5, the representative of the plaintiff corporation, BB construction, and the above individual workplace are KimCC, most of the above businesses are real estate leasing businesses, there is no exclusive employee belonging to other individual businesses than the plaintiff corporation and BB construction, and the plaintiff corporation and BB construction employees work together at the same place (16th floor in AA building) and share the duties of both the plaintiff corporation, BB construction, and the above individual businesses. The defendant asked the employees of the plaintiff corporation at the time of investigation into the part of the 16th floor in AA building, and then asked the plaintiff corporation about the part of the 16th floor in AA building, and it is recognized that the joint business operator was designated according to the response, and considering that there is no circumstance to induce the plaintiff employee to make a false statement, such as deception or coercion during the above investigation process, it is reasonable to view that the corporation jointly paid the labor expenses of the plaintiff corporation with the above individual businesses.

B) Next, in applying Article 48(1) of the Enforcement Decree of the Corporate Tax Act, we examine whether the Defendant has lawfully calculated the share of the common expenses. As to the calculation standard of share of the common expenses, Article 48(1)2 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22035, Feb. 18, 2010) which applies to the business year 2008 and 2009 provides that "the amount exceeding the ratio of the share of the corporation's sales to the total sales of the pertinent business year." Article 48(1)2 of the Enforcement Decree of the Corporate Tax Act, which applies to the business year 2010 to 2012, provides that "the amount exceeding the ratio of the corporation's sales of the pertinent business year to the total sales of the pertinent business year shall be deemed to have been selected in the immediately preceding business year or the total sales of the pertinent business year (if not selected, the total sales of the immediately preceding business year shall be applied for five business years from the selected business year)." Therefore, the Defendant's disposal of the portion of the first business year is unlawful.

In regard to this, the defendant asserted that it was possible to calculate the share of common expenses on the basis of the sales amount of the pertinent business year at the corporation's option during the pertinent business year from 2010 to 2012, but there is no evidence to acknowledge that the plaintiff corporation expressed its intent to calculate the share of common expenses based on the sales amount of the pertinent business year. Thus, the

C) However, in a lawsuit seeking the revocation of a taxation disposition, the determination of whether the tax disposition is unlawful ought to be made by whether the amount of the tax assessed exceeds a reasonable tax amount (see, e.g., Supreme Court Decisions 81Nu296, May 11, 1982; 98Du4993, Sept. 3, 1999). Thus, even in cases where the tax authority erred in the course of calculating and determining the tax base and tax amount, and where the taxation disposition is unlawful, the tax amount imposed and collected in such manner does not exceed the scope of the reasonable calculated tax amount, and the erroneous method does not vary from the scope of the taxable unit and the reason for the disposition, the imposition and disposition within the reasonable tax amount should not be revoked (see, e.g., Supreme Court Decisions 91Nu10695, Jul. 28, 1992; 92Nu10180, Sept. 28, 1993).

In full view of the purport of the argument in the statement No. 4-1 through No. 5 of the evidence No. 4, the amount of the common expenses subject to non-deductible expenses calculated based on the sales revenue in the pertinent business year is as shown below, and the amount of the common expenses subject to non-deductible expenses calculated based on the sales revenue in the immediately preceding business year is recognized as the same as the standard of the former sales revenue in the immediately preceding business year. As such, the amount of the common expenses subject to non-deductible expenses in the business year 2009 and 2012 was calculated as unfavorable to the plaintiff as seen above. However, in full view of the purport of the argument in each statement No. 5 and No. 6 of the evidence No. 5 and No. 6, it is acknowledged that the defendant deducted the common expenses equivalent to non-deductible expenses that the plaintiff should have originally shared in accordance with the criteria under Article 48 of the Enforcement Decree of the Corporate Tax Act (hereinafter referred to as the "amount of non-deductible expenses") from the non-deductible expenses amount, and thus, the defendant's calculation of non-deductible expenses should be excluded.

208

209

2011

2012

(1) Standard of sales (1)

90,386,00 won

10,975,108 won

121,524,207 won

121,805,123 won

Standard for Electrical Sales (B)

92,737,308 won

106,982,102

124,518,217 won

108,237,428 won

Difference (1-B)

-2,351,308 won

3,993,006 won

-2,994,010

13,567,695 won

Amount to be deducted

18,359,532 won

17,745,494 won

32,512,464 won

18,167,618 won

Therefore, even if there were some errors in the calculation of the defendant's share of expenses, the reason for cancelling the disposition of this case is not the reason for cancelling the disposition of this case. Ultimately, this part of the plaintiff's assertion is without merit.

2) Construction cost of this case

A) Capital expenditures and beneficial expenditures

The issue of whether internal repair costs, internal electric installation costs, office floor remodeling costs, etc. are capital expenditures deemed to be immediately depreciated pursuant to Article 31 of the Enforcement Decree of the Corporate Tax Act or revenue expenditures not deemed to be immediately depreciated pursuant to Article 31 of the Enforcement Decree of the Corporate Tax Act shall be first determined by considering whether each of the above expenditure costs is either expenses paid by a corporation to restore the original state of the fixed assets owned by the corporation or to maintain the efficiency thereof, or expenses to extend the service life of the fixed assets concerned or to increase the real value of the fixed assets concerned. If such distinction is unclear, it shall be determined in accordance with Article 31(2) of the Enforcement Decree of the Corporate Tax Act and Article 17 of the Enforcement Rule of the same Act (see, e.g., Supreme Court Decisions 88Nu520, Dec. 20, 198; 84Nu151, Mar. 12,

Comprehensively taking into account the purport of each statement in Gap 12 through 15, the plaintiff entered into a contract for the replacement of toilets with D industrial development Co., Ltd. on November 3, 2010; the estimated construction cost of 50 days; the construction cost of 103,400,00; the construction work together with the installation of the EEitdum Co., Ltd. (hereinafter referred to as the "Eitum")'s interior repair work; the above construction work; the toilet ventilation and two sides; the cleaning equipment; the cleaning equipment; the cleaning equipment; the cleaning equipment; the irrigation equipment; the equipment installation of the 1,000 and the replacement equipment; the equipment installation of the 2,000 square meters; the equipment installation of the 2,000 square meters; the equipment installation of the 2,000 square meters; the equipment installation of the 2,000 square meters; the equipment installation of the 1,000 square meters; the equipment installation of the 2,606,060 days.

In light of the construction period, construction amount, construction contents, etc. revealed in the above facts, it is reasonable to view that the toilet construction, electrical construction, and roto remodeling construction of this case does not merely merely repair the worn-out part of the building of this case, but it would have increased the real value of the building of this case and extended the durable years by comprehensively repairing the major common areas of the building of this case. Therefore, this constitutes capital expenditures deemed immediate depreciation. Accordingly, the Plaintiff’s assertion on this part is without merit.

(b) lifespan and depreciation rate;

In full view of the written evidence No. 16, it is acknowledged that the main structure of the instant building was a steel-framed reinforced concrete structure, and it is reasonable to view that the standard service life applicable to the instant building and its accessory facilities is 40 years, in principle, pursuant to Article 15(3) [Attachment 5] of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 325, Feb. 23, 2013).

However, according to the proviso to paragraph (2) of the same attached Table 5, in the event that the attached facilities are managed as assets by type of business separately from the building, the standard service life in attached Table 6, as alleged by the plaintiff, may be applied. However, there is no evidence to prove that the plaintiff was in charge of the above accounting, and the plaintiff's assertion

3) The rent portion of the instant case

In full view of the overall purport of the arguments, Gap evidence Nos. 2 and 8, the plaintiff corporation concluded a lease agreement on the land annexed to the building of this case with the representative director KimCC, who is a person with a special relationship, and agreed to calculate the monthly rent pursuant to Article 89 (4) 1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 23589, Feb. 2, 2012; hereafter the same shall apply in this paragraph), which is the method of calculating the appropriate rent under the Corporate Tax Act. In calculating the rent for April 4, 2010 and May, the plaintiff calculated the rent to be paid to KimCC by applying the excessive interest rate for the relevant month (4.3%) (5.0%) in calculating the rent for the rent for 68,847,516 won, which is equivalent to 11,569,610 won, the fact that the plaintiff additionally paid the rent to KimCC, 15% of the rent for 13.5%, 15% of the rent for the pertinent month 15.

Although the Plaintiff asserts that the rent portion in this case does not fall short of the standard amount of wrongful calculation under Article 88(3) of the former Enforcement Decree of the Corporate Tax Act, the determination of whether it constitutes “where the market price is at least five percent of the market price” under the above provision shall be based on transaction. In principle, there is no special circumstance that the Plaintiff presented by the National Tax Service established rules of the National Tax Service (No. 3074, Oct. 24, 2008). Thus, the Defendant’s disposition that deemed that the excessive payment of rent in April, May, 201 and March 201 constitutes an object of wrongful calculation under Article 88(3) of the former Enforcement Decree of the Corporate Tax Act, exceeds 16 percent of the appropriate monthly rent, is legitimate. Accordingly, the Plaintiff’s assertion on this part is without merit.

4) Part of travel expenses of this case

Considering the overall purport of the argument in the statement No. 3-1 and No. 2, it is recognized that KimCC, the representative director of the Plaintiff’s corporation, stays in New York, Luxembourg from September 18, 2009 to September 30, 2009, and disposed of the Plaintiff’s deductible expenses of the amount of KRW 7,801,40 for the purchase of the pertinent airline tickets (Seoul) as deductible expenses, and that KimCC visited the United States on May 28, 2010 and around December 7, 2010 and handled KRW 9,440,30 in total of the relevant airline tickets and hotel expenses as deductible expenses of the Plaintiff corporation. However, there is no objective evidence proving that the travel expenses in this case were related to the Plaintiff’s real estate rental business, while the expenses in this case were ordinarily not related to the Plaintiff’s business and the travel expenses in this case’s case’s No. 2-1 and 2-1, 300 for each of the following reasons.

Therefore, 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.