After Article 81-5 of the former Framework Act on National Taxes has been established, whether the right to ask questions and investigation prescribed by individual tax-related Acts is allowed only within the requirements and limits prescribed by the above provision (affirmative), and whether it is unlawful to collect taxation data and to conduct taxation without any grounds for selection of tax object under Article 81-5 of the former Framework Act on National Taxes (affirmative in principle)

In full view of the background and purport of the introduction of Article 81-5 of the former Framework Act on National Taxes (amended by Act No. 8139, Dec. 30, 2006; hereinafter “former Framework Act on National Taxes”), the relationship between the former Framework Act on National Taxes and the individual tax law on Chapter 7-2, including Article 81-5 of the former Framework Act on National Taxes, the right to ask questions and to investigate under the former Framework Act on National Taxes shall be allowed only within the requirements and limits prescribed in Article 81-5 of the former Framework Act on National Taxes, after the establishment of Article 81-5 of the former Framework Act

In addition, it is unlawful to collect taxation data by selecting a subject of tax investigation even though there is no ground to select a subject of tax investigation as prescribed in Article 81-5 of the former Framework Act on National Taxes, and thereby impose tax accordingly. Unless there are special circumstances, the taxation disposition violates Articles 81-5 and 81-3(1) of the former Framework Act on National Taxes.

Article 12(1) of the Constitution of the Republic of Korea; Articles 3(1), 81-3 (see current Article 81-4), and 81-5 (see current Article 81-3, 81-6) of the former Framework Act on National Taxes; Article 170 of the former Income Tax Act (Amended by Act No. 8144, Dec. 30, 2006); Article 35(1) (see current Article 74) of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010)

Plaintiff

Head of the distribution tax office and one other (Law Firm Korea, Attorneys Lee Jae-sin et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2011Nu22534 decided December 7, 2011

All appeals are dismissed. The costs of appeal are assessed against the Defendants.

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

1. Regarding ground of appeal No. 1

A. Article 81-5(2) of the former Framework Act on National Taxes (amended by Act No. 8139, Dec. 30, 2006; hereinafter the same) provides that “tax officials may conduct a tax investigation on the details of a return, etc. submitted by a taxpayer, first of all in any of the following cases, by selecting him/her as a subject of a tax investigation.” Provided, “Where a taxpayer fails to fulfill his/her duty to cooperate with tax payment by filing a return, preparing, delivering, and submitting a tax invoice or an invoice, preparing and submitting a payment record, etc. (Article 1)” (Article 2), “where a taxpayer is suspected of false transaction details, such asless transaction, disguised or fictitious transaction, etc.” (Article 3), “where there is a specific tax evasion report with respect to a taxpayer” (Article 4); “Where there is evident evidence to acknowledge a suspicion of omission or error in a return” (Article 5).

Meanwhile, Article 170 of the former Income Tax Act (amended by Act No. 8144, Dec. 30, 2006; hereinafter the same) provides that “Any public official engaged in the business of income tax may, when necessary for performing his/her duties, ask a person falling under any of the following subparagraphs to question him/her, or investigate or order him/her to submit relevant books, documents and other things,” and Article 35(1) of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010; hereinafter the same) provides that “A public official engaged in the business of value-added tax may ask a taxpayer, a person engaged in a transaction, or a business association to which the taxpayer has joined or a similar organization, to question matters related to value-added tax or investigate books, documents and other things.”

B. The principle of due process, stipulated in Article 12(1) of the Constitution, is not limited to criminal proceedings, but applies to all state actions (see, e.g., Constitutional Court en banc Order 92Hun-Ga8, Dec. 24, 1992; Constitutional Court en banc Order 96Hun-Ba4, May 28, 1998). A tax investigation is a kind of administrative investigation for the realization of the State’s right to impose taxes, which is unnecessary for the collection of taxation data or for the verification of accuracy of reported matters, and ultimately prevents tax evasion and securing taxpayers’ faithful returns. The principle of due process should be observed in the exercise of the right to impose taxes.

Article 81-3(1) of the Framework Act on National Taxes (amended by Act No. 5189, Dec. 30, 1996; Article 81-2 of the same Act provides for the prohibition of duplicate investigations (Article 81-3); and Article 81-5 of the Special Act on National Taxes (amended by Act No. 6782, Dec. 18, 2002) for the first time to enhance taxpayers’ rights and interests; Article 81-2 of the same Act provides for the prohibition of double investigations (Article 81-3); Article 81-3(1) of the same Act provides for the period of tax investigation to ensure fairness and objectivity of tax investigation; Article 81-4 of the same Act provides for the period of tax investigation to be used for any purpose other than the purpose of taxation; Article 81-3(1) provides for a minimum extent necessary for the realization of fair taxation; and Article 81-3(2) provides for the special provisions of the same Act to be applied to the taxation authority to a minimum extent necessary for the purpose of tax investigation.

In full view of the background and purport of the introduction of Article 81-5 of the former Framework Act on National Taxes concerning the criteria and method of selection of the subject matter of tax investigation, and the relationship between the former Framework Act on National Taxes and the individual tax law on Chapter 7-2 including Article 81-5 of the former Framework Act on National Taxes, the right to ask questions and investigation prescribed by the individual tax law after the establishment of Article 81-5 of the former Framework Act on National Taxes shall be allowed only within the scope of the requirements and limit prescribed by Article 81-5 of the former Framework Act on National Taxes. In addition, the collection of taxation data by selecting the subject matter of tax investigation while there is no reason to select subject matter of tax investigation as prescribed by Article 81-5 of the former Framework Act on National Taxes and the subsequent taxation disposition is unlawful unless there is any special reason.

C. In the same purport, the judgment of the court below that held that a tax assessment is unlawful where a tax assessment is conducted by selecting a tax assessment subject and collecting taxation data, even though it does not fall under the grounds for selection of tax investigation subject to the former Framework Act on National Taxes. In so doing, it did not err by misapprehending the legal principles on the grounds for selection of tax investigation subject under Article 81-5 of the former Framework Act on National Taxes, the relationship between the right to ask questions and investigation under Article 170 of the former Income Tax Act, Article 35 of the former Value-Added Tax Act, and the validity

2. As to the grounds of appeal Nos. 2 through 5

A. Comprehensively taking account of the adopted evidence, the lower court: ① purchased the instant real estate from the Plaintiff on June 10, 2004 by the Nonparty’s wife and acquired it in KRW 2,867,00,000; ② the head of the Seoul Regional Tax Office, by acquiring it from the Plaintiff, deemed that there is a high possibility that the Nonparty would evade gift tax and that the Plaintiff would have evaded global income tax and value-added tax; and subsequently, on September 6, 2006, notified the Nonparty and the Plaintiff of the tax investigation subject to tax investigation on the tax item column subject to tax investigation (integrated investigation of related tax items, such as global income tax, value-added tax, source tax, etc.); ② based on the results of the tax investigation on the Plaintiff and the Nonparty, based on the results of the tax investigation on the Plaintiff and the Nonparty, the Seoul Regional Tax Office’s notice of revised tax assessment to the Plaintiff from 200 years to 20 years to 20 years to 20 years to 207, and then notified the Defendant’s notice of revised tax amount to the Plaintiff.

Furthermore, the lower court rejected the Defendants’ assertion that each of the instant dispositions against the Plaintiff was unlawful on the grounds that the Plaintiff’s content was revealed to be partly different from the facts, and that there was no evidence to acknowledge that the Plaintiff failed to perform its duty to cooperate with tax payment, such as a return under the former Framework Act on National Taxes. In light of the Nonparty’s property status on the Nonparty’s tax return data or electronic data, the head of the Seoul Regional Tax Office merely deemed the source of acquiring the instant real estate in light of the Nonparty’s property status on the Nonparty, and did not have clear evidence to acknowledge the Plaintiff’s content itself. As a result of the Plaintiff’s analysis of the Plaintiff’s content, the Defendants did not submit the data as a result of the analysis that was not bona fide, and thus, the Defendants did not constitute a false suspicion of omission or error in the Plaintiff’s content, and the tax items to be investigated against the Plaintiff did not constitute a tax base and amount of tax determined by the investigation by the tax authority on global income tax, value-added tax, etc.

B. Examining the above provisions and relevant legal principles and records, the judgment of the court below is just, and there is no error in the misapprehension of facts against the rules of evidence, or in the misapprehension of legal principles as to Article 81-5 (4) of the former Framework Act on National Taxes, contrary to the allegations in

3. Regarding ground of appeal No. 6

The court below determined that each of the dispositions of this case was unlawful since the plaintiff was selected as a subject of tax investigation without any grounds for selection under Article 81-5 of the former Framework Act on National Taxes, and that each of the disposition of this case was not unlawful since the tax officials erroneously stated the grounds for investigation in the investigator evidence presented by the Commissioner of the National Tax Service at the time of the tax investigation. Thus, the ground for appeal that there was an error of law in the misapprehension of legal principles

4. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim So-young (Presiding Justice)