The reasons for the selection of a person subject to investigation does not limit the scope;

If a notice on the extension of the scope of investigation was received in relation to the personal integrated investigation, it cannot be said that the disposition of imposition is unlawful even if it violated the written notification.

Expansion of scope of tax investigation under Article 63 of the Framework Act on National Taxes

Seoul High Court 2017Nu36832 Disposition Revocation of Imposition of Value-Added Tax

AAA Foreign1

00. Head of tax office

on October 24, 2017

on January 14, 2017

1. The plaintiff's appeal is dismissed.

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

Cheong-gu and purport of appeal

The judgment of the first instance shall be revoked. The defendant's disposition of imposing taxes as shown in attached Form 1 against the plaintiffs on July 1, 2015 shall be revoked.

1. Details of the disposition;

A. From November 25, 2010 to May 26, 2015, Plaintiff AA run a liquid retail business with the name of JJ from the second floor of the building located in 00:00 -00 -00 -00 - 00 - 00 - from November 26, 2015. From November 4, 2010 to June 10, 2014, Plaintiff AA engaged in a liquid retail business with the trade name of “SSS” from the first floor of the above building.

B. The Defendant notified the Plaintiffs of the tax investigation and the extension of the scope of the investigation (type conversion) as follows.

1) Around May 11, 2015, the Defendant notified the Plaintiffs of the tax investigation with the following content:

2) On May 22, 2015, the Defendant notified the Plaintiffs of the extension of the scope of investigation (type conversion) with the following content.

3) On June 15, 2015, the Defendant notified Plaintiff AA of the extension of the scope of investigation (type conversion) to the following details.

C. As a result of the investigation into the Plaintiffs, the Defendant: (a) conducted a tax investigation into the Plaintiff, Plaintiff AA without a herb pharmacist’s license, operated both J and SS; (b) received KRW 500,00 per month from Plaintiff AA; and (c) Plaintiff AA received KRW 7,62,00 for two-year period, 200, KRW 14,000 for one-year period, and KRW 50,014,000 for two-year period, 201, KRW 396,00 for one-year period, KRW 54,396,00 for one-year period, KRW 58,318,00 for two-year period, KRW 00 for 2 years, KRW 576,00 for 2 years, KRW 400 for 207, KRW 2000 for 207, KRW 2006, KRW 46, KRW 2075, KRW 2075, KRW 2046, KRW 206465.

D. On July 1, 2015, the Defendant, as indicated in attached Table 1, added the supply value reported as value-added tax exemption to the Plaintiffs, and added the sales that were omitted and added to the sales that were subject to value-added tax, issued a correction and notification of the value-added tax and the comprehensive income tax. On the same day, the Defendant included the Plaintiff LL in the income tax the monthly amount of KRW 5 million received from the Plaintiff AA, thereby making a correction and notification of the comprehensive income tax (hereinafter collectively referred to as “each disposition

E. The Plaintiffs appealed and filed an appeal with the Tax Tribunal on September 29, 2015, but was dismissed on December 18, 2015.

[Ground of recognition] Facts without dispute, Gap evidence 1, 2, Eul evidence 1, 7 through 10 (including branch numbers, hereinafter the same) and the purport of the whole pleadings

2. Whether each disposition of this case is legitimate

A. The plaintiffs' assertion

1) Occasional tax investigations may commence only when there are grounds prescribed in each subparagraph of Article 81-6(3) of the former Framework Act on National Taxes (amended by Act No. 13552, Dec. 15, 2015; hereinafter the same). However, each of the instant dispositions taken on the basis of the selection of illegally subject to tax investigations is unlawful, since it is difficult to deem that the Plaintiffs’ transaction details, such as disguised transaction, are suspected of false facts (Article 81-6(2) or there are evident evidence to prove omissions or errors in the details of the declaration.

2) The Defendant, which did not explain and notify the Plaintiffs on the grounds of investigation, conducted a tax investigation on disguised transactions under Article 81-6(3)2 of the former Framework Act on National Taxes, and breached the duty of explanation and notification under Articles 81-2(3) and 81-7(1) of the former Framework Act on National Taxes, and thus, each of the dispositions of this case, based

3) Around May 11, 2015, the Defendant’s notice of tax investigation to the Plaintiffs was a tax item investigation notification on global income tax for the year 2011 through 2013. Around May 22, 2015, Plaintiff AA’s notice of the extension of the scope of investigation (the conversion of a type) was a tax item investigation of Plaintiff AA’s 2, 2010, 1, 2014, and 2, 2010, 2010 and 1, 2014, 2011 through 2013, 2013, 2010, and 2014 of Plaintiff AA’s global income tax for the year 201 through 2013, and the Plaintiff’s global income tax for the year 2014, and each of the instant dispositions was unlawful on the basis that each of the instant tax investigation was conducted in violation of Article 81 of the former Framework Act.

4) Since the Defendant does not clarify the grounds for calculating global income tax and value-added tax that the Defendant imposed on the Plaintiffs, each of the instant dispositions is not legitimate.

B. Relevant statutes

Attached Table 2 shall be as stated in the relevant statutes.

C. Determination

1) Whether the commencement of tax investigation is legitimate

A) In full view of the relevant provisions of the former Framework Act on National Taxes and the background, purport, etc. of the introduction of Article 81-6 of the former Framework Act on National Taxes concerning the standards for and method of determination of the subject matter of the tax investigation, the act of selecting the subject matter of tax investigation and collecting the subject matter of tax investigation, even though there is no ground to select the subject matter of tax investigation under Article 81-6 of the former Framework Act on National Taxes, thereby violating the due process doctrine and Articles 81-4 and 81-6 of the former Framework Act on National Taxes, and thus, the said taxation disposition is unlawful (see Supreme Court Decision 201

B) Article 81-6(3)2 of the former Framework Act on National Taxes provides that "where there is a suspicion of false transaction details, such as non-data transaction and disguised and fictitious transaction," a tax investigation may be conducted in addition to a regular selection, and where the necessary entry in a tax invoice does not coincide with the actual supplier, price, and timing of the goods or service despite the formal entry in a transaction contract, etc. made between the parties to the goods or service, the transaction may be deemed a disguised transaction (see, e.g., Supreme Court Decision 96Nu617, Dec. 10, 196); and (3), (4), 15, and 16, comprehensively taking into account the overall purport of the pleadings, the following circumstances are acknowledged: (i) where a transaction is conducted by lending another person's name, such transaction constitutes a disguised transaction, but the actual supplier is not suspected of being supplied or supplied with the goods or service, and (ii) the Plaintiffs constitute a disguised transaction, such as the receipt of a false deposit in the accounts of the Plaintiff from the Plaintiff 50.

C) In addition, Article 81-6(3)4 of the former Framework Act on National Taxes provides that a tax investigation may be conducted in addition to an investigation by a periodic selection, in cases where there is clear evidence to acknowledge a suspicion of omission or error in the details of a return. In light of the circumstances acknowledged earlier, the Plaintiffs also apply to cases where evident evidence exists to acknowledge a suspicion of omission or error in the details of a return.

D) Therefore, the Defendant’s selection of the Plaintiffs as the subject of occasional tax investigations cannot be deemed unlawful.

2) Whether the investigation constitutes a breach of duty to explain or notify the reasons for investigation

On May 11, 2015, the defendant's notice of tax investigation was analyzed as omitting the amount of revenue as a result of reviewing the contents of return's report on the grounds of investigation, and it was selected as a person subject to investigation to verify the propriety of the report. However, the above contents are not limited to "where there is clear evidence to acknowledge the omission or error of the report, which is the grounds for the selection of the person subject to investigation under Article 81-6 (3) 4 of the former Framework Act on National Taxes," and it also includes "where there is a suspicion of false facts, such as unauthorized and disguised and fictitious transaction, which is the grounds for the selection of the person subject to investigation under Article 81-6 (3) 2 of the former Framework Act on National Taxes." Furthermore, it does not limit the scope of the grounds for the selection of the person subject to investigation.

Therefore, the plaintiffs' assertion that the defendant violated the duty of explanation and notification under Articles 81-2 (3) and 81-7 (1) of the former Framework Act on National Taxes by conducting a tax investigation on disguised transactions under investigation under Article 81-6 (3) 2 of the former Framework Act without providing explanation and notification to the plaintiffs is without merit.

3) Whether the scope of investigation is extended, and whether the notification is violated

A) Whether a notice of tax investigation on May 11, 2015 and a notice of extension of the scope of investigation (type conversion) around May 22, 2015 are a notice of investigation by tax item.

On May 11, 2015, the tax items subject to investigation issued by the Defendant to the Plaintiffs are written as global income tax, and on May 22, 2015, the tax items subject to investigation on the notice of extension of the scope of investigation (type conversion) around May 22, 2015 are as seen earlier. As such, the fact that the tax items subject to investigation are written as global income tax, alteration: Value-Added Tax: Value-Added Tax. Accordingly, it is reasonable to deem that the Defendant’s notice of tax investigation on May 11, 2015 on the Plaintiffs is a notice of investigation by tax item regarding “the global income tax for the year 201 or 2013” and that the notice of extension of the scope of investigation (type conversion) around May 22, 2015 is as follows: (i) Plaintiff AA’s “20 years 2010, 2014,” and Plaintiff LLL 2, 2010.

Meanwhile, Article 81-11 of the former Framework Act on National Taxes provides that, except as otherwise provided for in Presidential Decree, such as where it is necessary to conduct an investigation only, the tax investigation shall be conducted by combining the items of taxation subject to reporting and payment in accordance with tax laws with regard to the taxpayer's business. It is analyzed that there was omission of the amount of revenue, etc. as a result of examining the defendant's tax investigation on May 1, 2015, and the items of taxation excluded from the investigation were blanks; the defendant's notification of investigation to expand the scope of investigation (type conversion) on May 22, 2015 and the defendant's notification of investigation to the 20th public official on June 15, 2015; the defendant's notification of investigation to the 20th public official on the receipt of the notice from the 20th public official on the 15th public official's signature and seal; the defendant's receipt of the notice from the 15th public official on the 20th public official on the 5th public official's signature and 215th public official on the notification.

B) Whether the restriction on the extension of the scope of the investigation violates

Article 81-9 (1) of the former Framework Act on National Taxes provides that "no tax official shall extend the scope of a tax investigation during the investigation, except in cases prescribed by Presidential Decree, such as where it is confirmed that specific suspicion of tax evasion exists for several taxable periods or is related to other items of tax," and Article 63-11 (1) 1 of the former Enforcement Decree of the Framework Act on National Taxes (amended by Presidential Decree No. 26946 of Feb. 5, 2016) provides that "where it is necessary to conduct an investigation on other taxable periods, tax items, or items because specific suspicion of tax evasion exists for other taxable periods, tax items, or items, and subparagraph 3 of Article 63-1 of the former Enforcement Decree of the Framework Act on National Taxes (amended by Presidential Decree No. 26946 of Feb. 5, 2016).

"Where it is necessary to investigate the other taxable period related to suspected charges or errors in application of tax-related Acts by being connected to the other taxable period."

However, the following circumstances, which are acknowledged by comprehensively taking account of the respective descriptions of evidence Nos. 2, 3, 6, 15, 16, and 22 as well as the overall purport of the pleadings, namely, each of the instant dispositions was made on the ground that: (a) Plaintiff A had omitted sales acquired by operating herb banks under the Plaintiff LL from November 4, 2010 to June 10, 2014; and (b) had not been paid through a tax-free return; (c) the aforementioned ground was that: (a) Plaintiff AA’s global income tax for the year 201 through 2013; (b) Plaintiff AA’s global income tax for the extended investigation period for the year 2010, 2014, 2010, 10, 10, 2014 of Plaintiff LLL; and (d) Plaintiff AA’s global income tax for the year 201 to 2013, 201, 2014.

C) Whether the duty to notify the extension of the scope of investigation

Article 81-9(2) of the former Framework Act on National Taxes provides that the Defendant’s duty to notify the Plaintiff’s 2-year investigation upon extension of the scope of the investigation. According to the Plaintiff’s 2-year investigation evidence No. 1-2, 2011 through 2013, global income tax for 2010, and global income tax for 2014, the Plaintiff’s duty to notify the Plaintiff’s 2-year extension of the scope of investigation under the former Act No. 1-2, 2010, 2014, 1-2, 2010, 2010, 2014, 1-2, 2014, 2010, and 1-2, 2010, 5-2, and 5-year extension of the scope of investigation under the former Framework Act on National Taxes, even if the Defendant did not receive the Plaintiff’s duty to notify the Plaintiff’s 1-year extension of the scope of investigation.

4) Whether there are grounds for calculation of the tax base

In full view of the purport of each statement in Eul evidence Nos. 2 through 8, the defendant confirmed the omission of KRW 471,630,00 on the basis of the account under the name of the plaintiff in the name of the JJ and SS, for which the proceeds from the sale of the JJ and SS were transferred, and calculated as the value-added tax base amount. The plaintiff AA calculated as the value-added tax base amount on the basis of the supply value of KRW 3,071,476,363 as the value-added tax exemption in the course of operating JJ and SS. The fact that the above plaintiff AA calculated as the tax base of global income tax by reflecting the omitted cash sales amount as above, while operating the JJ and SS, and the fact that the plaintiff AA calculated as the tax base of global income tax by considering the income of KRW 5,00,000 received from the plaintiff LL as the other income of KRW 5,00,000 received from the plaintiff AA.

3. Conclusion

Therefore, the plaintiffs' claim of this case is dismissed in its entirety because it is without merit, and the judgment of the court of first instance is just in its conclusion, and all appeals by the plaintiffs are dismissed in its entirety as it is without merit. It is so decided as per Disposition.