[1] Whether a corporate obligation, etc. is included in the “disqualified asset” under Article 58(1) of the former Corporate Tax Act only due to a disaster without loss of its assets (negative)

[2] Requirements for determining the method of an additional investigation, and the person responsible for such assertion and certification

[3] The case holding that imposition of corporate tax on the estimated income calculated by multiplying the amount of business profit by the standard income rate by the method of seeking the tax base by adding foreign exchange marginal profit and foreign currency conversion profit to the estimated income amount cannot be deemed as legitimate estimated taxation

[1] Article 58(1) of the former Corporate Tax Act (amended by Act No. 7317 of Dec. 31, 2004) does not include obligations, etc. borne by a corporation only due to a disaster without loss of assets under Article 95(1) of the Enforcement Decree of the Corporate Tax Act.

[2] Even if there are grounds for the determination of estimated tax base and tax amount due to a field investigation decision are impossible, it shall be based on a reasonable and reasonable method. As to the reasonableness and validity of such estimation method, the tax authority is responsible for asserting and proving the legitimacy of disposition.

[3] The case holding that the imposition of corporate tax on the estimated income calculated by multiplying the amount of business income by the standard income rate by the method of seeking the tax base by adding foreign exchange marginal profit and foreign currency conversion profit to the estimated income amount shall not be deemed a legitimate estimated taxation with rationality and feasibility

[1] Article 58(1) of the former Corporate Tax Act (amended by Act No. 7317 of Dec. 31, 2004), Article 95(1) of the Enforcement Decree of the Corporate Tax Act / [2] Article 66(3) of the former Corporate Tax Act (amended by Act No. 6293 of Dec. 29, 200), Article 104(2)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 1703 of Dec. 29, 200), Article 33(1)7 and Article 39(4) of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 200), Article 95(1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 1701 of Dec. 31, 200), Article 97(1)9(2) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 16092 of Dec. 29, 197(2)

[2] Supreme Court Decision 90Nu3140 delivered on May 12, 1992 (Gong1992, 1904)

DianFC Co., Ltd. (Attorney Lee Im-soo, Counsel for the defendant-appellant)

Head of Ansan Tax Office

Seoul High Court Decision 2005Nu7633 decided May 24, 2006

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. As to the grounds of appeal regarding the tax credit for disaster losses

Article 58 (1) of the former Corporate Tax Act (amended by Act No. 7317 of Dec. 31, 2004; hereafter the same shall apply in this paragraph) provides that "where it is deemed difficult for a domestic corporation to pay taxes because it has lost 30/10 or more of its total assets as prescribed by Presidential Decree due to natural disasters or other accidents during each business year, the amount calculated by multiplying the corporate tax amount under each of the following subparagraphs by the ratio of the ratio of the value of lost assets to the total assets prior to the loss to the total assets shall be deducted from the tax amount," and Article 95 (1) of the Enforcement Decree of the Corporate Tax Act delegated by the domestic corporation shall be the total assets as prescribed by Presidential Decree, and Article 95 (1) of the former Enforcement Decree of the Corporate Tax Act shall be the sum of "business assets (excluding land)" under subparagraph 1 and "any corporation whose liability for compensation

In light of the contents of the above provision, it is reasonable to interpret that the phrase “disqualified asset” under Article 58(1) of the former Corporate Tax Act does not include obligations, etc. borne by the corporation only due to a disaster without loss of assets under Article 95(1) of the Enforcement Decree of the Corporate Tax Act.

In full view of the adopted evidence, the court below acknowledged the facts as stated in its holding, and held that the value of each of the items Nos. 1, 2, 4, and 5 of the table Nos. 1, 4, and 5 of the judgment of the court below among the value of the assets lost due to the disaster of this case by the plaintiff's assertion does not constitute a lost asset under Article 58 (1) of the former Corporate Tax Act as the debts borne by the corporation only due to the disaster without loss of assets under Article 95 (1) of the Enforcement Decree of the Corporate Tax Act. In light of the above legal principles and records, the above judgment

2. As to the ground of appeal on estimated taxation

According to the reasoning of the judgment below, the court below acknowledged the facts as stated in its holding, and determined that the tax disposition of this case was legitimate, unless the foreign exchange losses and foreign currency conversion losses are deducted from the total operating expenses, such as foreign currency assets and liabilities, are reflected in the standard income ratio, and such non-business expenses are not directly corresponding to the profit from foreign exchange and foreign currency conversion, and thus, in imposing estimated income tax based on the standard income rate, the profit from foreign exchange marginal profits and foreign currency conversion, which are non-business profits, based on Article 43 of the Corporate Tax Act and Article 66-1043 of the General Rules of the Corporate Tax Act, is added to the tax base, but the tax disposition of this case

Even in cases where there are grounds for the determination of estimation due to the impossibility of the determination of tax base and amount of tax by on-site investigation, it shall be based on a reasonable and reasonable method, and the tax authority is liable to assert and prove the lawfulness of disposition with respect to the rationality and validity of the method of estimation (see Supreme Court Decision 90Nu3140 delivered on May 12, 192).

Article 104(2) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 1703 of Dec. 29, 2000) (amended by Presidential Decree No. 15970 of Dec. 31, 1998), upon delegation of Article 66(3) proviso (amended by Act No. 6293 of Dec. 29, 200) of the former Corporate Tax Act (amended by Act No. 15581 of Dec. 28, 1998), Article 104(2) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 1703 of Dec. 29, 200) (amended by Presidential Decree No. 15970 of Dec. 31, 198) provides that “The method of determining or correcting the amount of tax calculated by subtracting the salary paid to the representative’s income amount from the amount obtained by multiplying the standard rate of income under Article 145 of the Enforcement Decree of the Income Tax Act.”

Article 145 (1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 16682, Dec. 31, 199; hereinafter the same) provides that "the standard income rate shall be determined by the Commissioner of the National Tax Service through deliberation of the Standard Income Council in consideration of the standard rate investigated by the Commissioner of the National Tax Service according to the characteristics of the business type and the characteristics of the enterprise in the scale and the circumstances of the business." Article 124 of the Regulations on the Management of Income Tax Affairs provides that "the standard income rate survey shall reflect general and common gross income and necessary expenses." Article 125 provides that "the standard income rate survey report shall be reported to the Commissioner of the National Tax Service based on the Standard Income Rate Investigation Report," and Article 125 provides that "the summary of the standard income rate survey report is excluded from special profits and special losses which have occurred contingent during the relevant taxable period from among profits and expenses outside

Meanwhile, Article 143(3) of the former Enforcement Decree of the Income Tax Act provides for the method of estimation by which “the amount of income multiplied by the standard income rate shall be determined or corrected by the amount of income.” According to Articles 33(1)7 and 39(4) of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 200; hereinafter the same), Article 97(1) and (2) of the former Enforcement Decree of the Income Tax Act, Article 52 of the Enforcement Rule of the Income Tax Act, foreign exchange profit or loss on foreign currency assets and liabilities shall be included in the necessary expenses or total amount of income in the current year.

The aforementioned legal principles and the standard income rate under the Corporate Tax Act only provide that the tax base shall be the amount calculated by deducting the representative’s salary from the amount calculated by multiplying the business revenue amount by the standard income rate, and there is no provision that adds foreign exchange profit or foreign currency conversion profit to the tax base, and the basic provisions of the Corporate Tax Act do not have the effect of binding force on the court or the people (see, e.g., Supreme Court Decisions 92Nu7580, Dec. 2, 1992; 2005Du12718, Jun. 14, 2007). According to the relevant provisions and the former Income Tax Act, the standard income rate is the average income rate reflecting both the foreign exchange profit and foreign currency conversion profit and the foreign currency exchange profit and the foreign currency exchange profit, which are the business revenue rate, and thus, it is difficult to view the foreign exchange profit and foreign currency conversion profit to the tax base based on the standard income rate as the total business revenue amount calculated by adding the foreign exchange profit and foreign currency conversion profit to the tax base.

Nevertheless, the court below determined that the disposition of this case was legitimate estimated taxation. In so doing, the court below erred by misapprehending the legal principles on estimated corporate tax based on standard income rate, which affected the conclusion of the judgment. The ground of appeal assigning this error is with merit.

3. Conclusion

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Yang Sung-tae (Presiding Justice)