In a case where an entrepreneur receives a national subsidy, etc. for the supply of services falling under a non-taxable business, not a case where the entrepreneur receives the proceeds of supply, whether Article 61(1) of the former Enforcement Decree of the Value-Added Tax Act may apply mutatis mutandis (negative) and a method of adding an input tax amount subject to non-deductible in such cases.

In principle, an input tax amount related to a taxable business and a non-taxable business shall be calculated according to the actual attribution. If an input tax amount is related only to a non-taxable business, it shall not be deducted from the output tax amount. If an input tax amount cannot be separated from the actual attribution due to a common use for a taxable business and a non-taxable business, in principle, the provisions of the Enforcement Decree of the Value-Added Tax Act on the proportional distribution of the common input tax amount shall apply mutatis mutandis to the input tax amount subject to non-deductible: Provided, That if an entrepreneur receives a subsidy, group subsidy, or environmental improvement special account from the State or a local government to the other party for the supply of services falling under a non-taxable business, it cannot be deemed a consideration for the supply of services falling under a non-taxable business, and thus, Article 61(1) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 24359, Feb. 15, 2013; hereinafter the same shall apply) that stipulates that the common input tax amount shall be calculated by applying the tax amount.

Article 17(2) (see current Article 39(1)) of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010); Article 61(1) (see current Article 81(1)) and (4) (see current Article 81(4)) of the former Enforcement Decree of the Value-Added Tax Act (Amended by Presidential Decree No. 24359, Feb. 15, 2013)

Supreme Court Decision 2009Du16268 Decided September 8, 2011

Korea Environment Corporation (Law Firm LLC, Attorneys Sung-tae et al., Counsel for the defendant-appellant)

Mapo Tax Office and 22 others (Law Firm Sejong, Attorneys Gangnam-gu et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2012Nu5277 decided August 21, 2013

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

The grounds of appeal are examined (to the extent of supplement in case of any statement in the supplemental appellate brief not timely filed).

1. The lower court: (1) pursuant to the former Korea Environment and Resources Corporation Act (amended by Act No. 9433, Feb. 6, 2009), the Korea Environment and Resources Corporation, a public corporation, established for the purpose of recycling, processing, selling, etc. of waste vinyl without compensation, collects waste vinyl left in farmland during the taxable period of value-added tax from 1 to 2005, which is selected at a regional place of business; (2) immediately sold waste vinyl which can be sold without permission; and (3) consigned the disposal of waste vinyl for its own recycling to an external enterprise; and (4) on January 1, 2010, the Plaintiff comprehensively transferred the property, rights, and obligations of the Korea Environment and Resources Corporation pursuant to the former Act (hereinafter “Korea Environment and Resources Corporation”) (hereinafter “Plaintiffs” and the Defendants, who directly sold such waste vinyl to the Plaintiff by recycling business or calculated the value-added tax by analogy from 10 to 200,000 won under the former Enforcement Decree of the Value-Added Tax Act, by deeming it to be within 10.

Furthermore, the lower court determined that each of the instant dispositions was unlawful on the grounds that the Plaintiff’s service of collecting and treating waste vinyl performed by the Plaintiff is merely an integral accompanying to the Plaintiff’s business of selling waste vinyl, and it is difficult to view it as a separate business, and even in light of the laws based on the Plaintiff’s establishment basis or the business nature performed by the Plaintiff, the Plaintiff merely carries out a single taxable business that recycles waste vinyl as a whole, and that the Plaintiff’s payment of disposal fees to an external company and disposal of waste vinyl cannot be used for its original business purpose due to lack of facilities, and thus, it can be deemed that the Plaintiff’s disposal of waste vinyl collected from an external company would be for business purpose to lower the cost of inventory management, etc.

2. However, we cannot agree with the judgment of the court below for the following reasons.

A. In full view of the fact that the purpose of the establishment of the Korea Environment and Resources Corporation is to run a non-taxable business, such as collection, recycling, and disposal of recyclable resources, in the public interest purpose, and that the entrepreneur operating a non-taxable business in the process of carrying on a part of the business as a single taxable business and deducts the total input tax amount from the total input tax amount, in principle, is contrary to the basic principles of the value-added tax system that deducts only the input tax amount related to taxable business, in the process of carrying out a non-taxable business such as collection, recycling, and disposal of recyclable resources, the Korea Environment and Resources Corporation, which operates some taxable businesses that sell recyclable plastic products, shall be deemed to concurrently carry on a taxable business and a non-taxable business. Therefore, the input tax

Meanwhile, in principle, input tax amounts related to taxable and non-taxable businesses shall be calculated according to the actual attribution. If the input tax amounts are related only to non-taxable businesses, they shall not be deducted from the output tax amount. If there is an input tax amount that cannot be separated from the actual attribution due to the common use for taxable and non-taxable businesses, in principle, the provisions of the Enforcement Decree of the Value-Added Tax Act on the proportional distribution of common input tax amounts shall apply mutatis mutandis to the input tax amount subject to non-deductible (see, e.g., Supreme Court Decision 2009Du16268, Sept. 8, 2011). However, if the pertinent entrepreneur receives a national subsidy from the State or a local government, not to receive a consideration for the supply of services falling under non-taxable businesses, it cannot be deemed a consideration for the supply of services, and thus, Article 61(1) of the former Enforcement Decree of the Value-Added Tax Act, which provides for the proportional calculation of common input tax amount in accordance with the ratio of the supply value of the taxable business and non-taxable businesses, should not be applied.

B. A transaction partner who purchases waste vinyl or processed products from the Plaintiff, regardless of the provision of treatment, etc. of waste vinyl or processed products, shall not only pay and purchase the price of waste vinyl or processed products, but also cannot be deemed that the Plaintiff ordinarily carries out services, such as recycling, etc. of waste vinyl, conducted by the Plaintiff for the public interest purposes. Furthermore, the Plaintiff is performing the duties of collecting, recycling, and disposing of waste vinyl or processed products with a national subsidy, etc. granted by the State and local governments pursuant to the relevant statutes. As such, the Plaintiff’s services, other than the supply of goods of waste vinyl or processed products, constitute a non-taxable business conducted by the Plaintiff to achieve his/her establishment purpose. Therefore, the Plaintiff should be deemed to concurrently engage in the non-taxation business of treatment, etc. of waste vinyl other than the taxable business of supplying waste vinyl or processed products

Meanwhile, since the input tax amount related to consignment processing, among the input tax amounts that the Defendants are non-deductible, is not related to sales of waste vinyl or processed products, which are taxable businesses, it shall not be deducted from the output tax amount. However, the common input tax amount related to direct sales and self-recycling processing cannot be separated, and the government subsidies, etc. paid by the Plaintiff cannot be viewed as the consideration for the supply of services corresponding to non-taxable businesses. Therefore, the lower court should have determined the legitimacy of each of the dispositions of this case by applying the method of reasonable calculation, such as the method under each subparagraph of Article 61(4) of the former Enforcement Decree of the Value-Added Tax Act, which is appropriate for

Nevertheless, the lower court determined that each of the instant dispositions was wholly unlawful solely on the grounds stated in its reasoning. In so doing, the lower court erred by misapprehending the legal doctrine on the method of distinguishing between the operation of a single taxable business and the concurrent operation of a taxable business and a non-taxable business under the Value-Added Tax Act, and the nature of the business operated by the Korea Environment and Resources Corporation, thereby failing to exhaust all necessary deliberations as to the method of calculating the amount of common input tax on taxable

3. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kwon Soon-il (Presiding Justice)