National High Court Decision 2012Gu4710 ( December 28, 2012)

due to delayed recovery of claims, which constitutes a wrongful calculation panel.

It is reasonable to apply the rule of wrongful calculation in light of the fact that there is no specific effort to recover the outstanding amount related to a person with a special relationship after the lapse of a maximum of 604 days, but it is reasonable to re-examine the settlement date of similar cases of the same type of business and calculate the recognized interest accordingly.

Article 52 of the Corporate Tax Act

2013Guhap1609

AA Construction Corporation

Head of Ansan Tax Office

March 26, 2014

April 25, 2014

1. The plaintiff's claim is dismissed.

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

On August 7, 2012, the Defendant revoked each taxation of the corporate tax for the business year of 2007, the corporate tax for the business year of 2008, the corporate tax for the business year of 2009, the corporate tax for the business year of 2009, the corporate tax for the business year of 2010, the corporate tax for the business year of 2010, the corporate tax for the business year of 2011, and the value-added tax for the second year of 2008, and the value-added tax for the first year of 2010.

1. Details of the disposition;

A. Plaintiff’s establishment, transfer of shares, etc.

1) A founder of BB medical foundation (hereinafter referred to as “B hospital”) established on December 19, 200 with capital of 30,000 shares for construction works ordered by BB hospital, and held 15,000 shares and 3,00 shares for B as stated in the separate sheet No. 2, respectively. 2) the Plaintiff issued 0,00 shares for 10,00 shares for 00 shares and 00 shares for 00 shares under the name of 20,00 shares for 00 shares for 20,000 shares for 20,00 shares for 20,000 shares for 20 shares for 30,00 shares for 30,00 shares for 20 shares under the name of 5,00 shares for 20,00 shares for 30,000 shares for 20 shares for 30,000 shares for 20 shares for 30,000 shares for each of the Plaintiff’s shares under its own name.

1) On May 16, 2012 through July 14, 2012, the director of the regional tax office rendered occasional investigations of corporate tax against the Plaintiff, and subsequently notified the Defendant of the imposition of gift tax, corporate tax, etc. against the Plaintiff.

(2) It is confirmed that the title trust of the Plaintiff’s stocks to B, C, D, E, F, H, J, K, L, and M (hereinafter “B”) by means of the Plaintiff’s establishment, 1, 200 to 209, 209, 1, 2000, 2000, 2000, 2000, 1000,0000,000 won and 11,0000 won were to be the purpose of tax avoidance. ○○ is confirmed that the Plaintiff’s dividends in 207 to 200,000,000 won and 200,000,000 won and 100,000 won and 20,000,000 won and 20,000,000 won and 20,000,000 won and 20,000,000 won and 200,000,0000 won.

It additionally imposes OOO on global income tax on the ground that ○ acquired dividend income from the Plaintiff in 2007 to 2010 from the Plaintiff.

1) On October 19, 2012, A and B were dissatisfied with the imposition of gift tax, and requested for adjudication on October 19, 2012. The Tax Tribunal decided that the assessment of gift tax on August 7, 2012 by the Defendant, etc. against A, B, and 11; the assessment of gift tax on August 7, 2012 by the Plaintiff’s shares issued at the time of secondary capital increase; the assessment of gift tax on the Plaintiff’s shares 10,000 shares (F: 5,00 shares, D, C: 2,00 shares, E 1,00 shares); the assessment base of the assessment was revised on December 30, 204; the Plaintiff and the head of the tax office of the same Daegu determined that the initial assessment base and the amount of the tax should be revised on the basis of the average of the construction work on the basis of the 20th anniversary of the 20th anniversary of the re-assessment of the construction work; and the Plaintiff and the head of the same tax office of the same tax office of the same.

4) After investigating similar cases on May 7, 2013 through May 13, 2013 according to the above decision, the Daegu Regional Tax Office: (a) calculated the average number of days for the delayed payment of construction works ordered by BB Hospital; (b) calculated the interest rate for delayed recovery; and (c) calculated the interest rate for delayed recovery based on the total construction amount; (d) determined the defect repair bond for a construction work contract concluded between the Plaintiff and BB Hospital as the property based on the total construction amount; and (e) determined the amount of the corporate tax refund to the Plaintiff, the Defendant and the Nam Daegu District Tax Office (“the Plaintiff”) determined that the stock assessment value was changed due to the occurrence of the cause for corporate tax refund against the Plaintiff, but (e) notified that the amount of the initial gift tax determination for I, J, K, L, and M was to be reduced or corrected as follows (hereinafter “each of the dispositions of this case”).

6) In addition, the defendant and the director of the tax office of South Daegu shall decide to correct the initial amount of tax credit for I, J, K, L, and M on October 30, 2013 and November 19, 2013 (hereinafter referred to as "the second decision to correct the amount of tax credit") as follows; the defendant notified A of the second decision to correct the amount of tax credit on March 31, 2014; the director of the tax office of Nam Daegu notified A of the second decision to correct the amount of tax credit on April 18, 2014; the defendant did not have any dispute over the grounds for recognizing that he/she notified A of the second decision to correct the amount of tax credit; the evidence Nos. 1, 2, and Nos. 1 through 3, and 8 (including each number); and

2. Whether each of the dispositions of this case is legitimate

A. The plaintiff's assertion

1) Even if the collection of the construction cost to the Plaintiff’s BB Hospital is somewhat delayed, the Plaintiff’s delay in the collection of the construction cost is not considered an abnormal transaction without economic rationality in light of the following: (a) the Plaintiff is a company established only for the performance of the construction works ordered by the BB Hospital; (b) the BB Hospital partially repaid the construction cost each month; (c) the balance of the construction cost as the warranty bond was maintained; (d) the BB Hospital paid the construction cost after 270 days in average in the case of drug transactions; and (e) the construction cost is paid in excess of 60 days in the case of a small and medium enterprise in light of the reality of construction works; and (e) the Plaintiff’s delay in the collection of the construction cost does not constitute an abnormal transaction without economic rationality in light of sound social norms and commercial practices. Moreover, even if the delayed collection of the construction cost is an abnormal act without economic rationality, the results of the

2) Determination of wrongful calculation in accordance with the criteria for interior construction design fees (hereinafter referred to as “association remuneration criteria”) of the Korea Specialized Construction Association indoor construction business council when calculating the cost of outsourcing service (design service) which is a related party company is illegal, since there is no legal basis, and there is no practice to set indoor interior interior interior interior interior interior interior interior design service costs according to the Association remuneration criteria, it is unlawful. Even according to the criteria, the Defendant’s calculation method is erroneous and illegal.

(b) Related statutes;

It is as shown in the attached Table related statutes.

(c) Fact of recognition;

1) Since its establishment on December 19, 200, the Plaintiff, the president of the BB Hospital, held 100% of the shares, entered into several construction contracts with BB Hospital as follows, and there was no other performance in the construction works other than those ordered by BB Hospital.

2) The Plaintiff determined the defect repair rate of 3% at the time of concluding the construction contract with the BB Hospital as set forth in the foregoing Nos. 1 through 3. However, there is no fact that the Plaintiff submitted or deposited a warranty bond for the defect repair bond. 3) In concluding the construction contract with the B Hospital, the Plaintiff agreed to receive the construction payment within 14 days from the date of completion of the inspection after the Plaintiff filed a claim for the payment of the completed payment, but did not recover the construction payment from the B Hospital for a long time, such as receiving the

4) Meanwhile, since January 2005, N, A’s wife, operated “CC,” which is an indoor building design firm. On August 31, 2006 and February 19, 2008, the Plaintiff andCC entered into a contract for design and supervision of interior design on two occasions as follows. (5) The Plaintiff’s “the Plaintiff shall pay 30% of the design remuneration under Article 1 as the down payment, and pay 30% as the design work is made in interim payment, and the balance shall be paid at the time of completion of design work (see Article 3(5) of the interior designer’s Association Remuneration Standards).

6) The criteria for remuneration of the interior architecture association for the interior architecture designer refer to the criteria for remuneration for interior architecture design prepared by the Korean Specialized Construction Association and the Indoor Building Construction Business Council. The Council is a voluntary organization in which only interior architecture construction companies are members.

7) Although the standards for remuneration of the Association are not binding due to the lack of legal basis, it is presented as a recommendation if the private ordering entity conducts related affairs, Article 3(5) of the Institute Remuneration Standards provides for "payment method of remuneration".

(1) Re-investigation pursuant to the decision made on April 15, 2013 by the Tax Tribunal (Evidence B(8))

○ Review of the Average Settlement Date of Construction Costs

- The plaintiff cannot find any similar case because there is no transaction partner except the BB hospital and the Adong Hospital as a related corporation.

- Of the construction works ordered by the Plaintiff et al. BB hospital, the number of payment dates for construction works by non-special-related enterprises (14) with an annual construction cost exceeding 10 million won is calculated on an weighted average basis as follows: - applying the above average number of payment dates for the construction works calculated on an annual basis to re-calculated the interest rate for the recovery of the outstanding amounts for the construction works, applying the above average

○ Review of Standards for Calculation of Warranty Bonds

- Article 72(1) of the Enforcement Rule of the Act on Contracts to Which the State is a Party provides that the rate of security deposit for repairing defects shall be determined for the contract amount under Article 72(1) of the Enforcement Rule of the National Tax Service, and Article 4(2) provides that the amount of security deposit for repairing defects shall be between 2/100 and 10/100 (general construction works: 3/100) of the contract amount under the conditions as prescribed by the Ordinance of the Ministry of Finance and Economy. Thus, it is reasonable to calculate the rate of security deposit for repairing defects based on the total cost of construction. 8) The calculation of security deposit for repairing defects shall be based on the contract amount as determined by the Tax Tribunal on April 15, 2013, and the Defendant

9) According to the result of the second investigation, the Defendant: (a) determined the recognized interest as the property of the pre-existing OOO members from the pre-existing OO members; and (b) decided to refund the total amount of corporate tax reduced to the pre-existing OO members in addition to the annual income; and (c) made a resolution on the refund of the pre-existing KRW 1 to 8, 11, 13, 15, 16, 17, and evidence Nos. 1 to 11 (including each number); and (d) the purport of the entire pleadings.

D. Determination

1) Determination on the first argument

Since delay in the collection of claims that a corporation should receive from a specially related person without justifiable grounds brings the same effect as the amount equivalent to the claims was recovered within the time limit for the performance of the obligations and the amount equivalent to the unrepaid claims is not included in deductible expenses as the amount of interest paid by the corporation constitutes "provisional payment, etc. without connection with the business under Article 28 (1) 4 (b) of the Corporate Tax Act". In addition, in cases where the delay in the collection of claims is deemed to reduce the tax burden unfairly due to the lack of economic rationality in light of sound social norms and commercial practices, it is equivalent to acts under Article 52 of the Corporate Tax Act and Article 88 (1) 6 of the former Enforcement Decree of the Corporate Tax Act, and thus, the recognition of the amount of interest paid by a person with a special relationship is unfairly included in gross income (see, e.g., Supreme Court Decisions 2007Du5646, Jan. 14, 2010; 205Du15686, Oct. 28, 20105).

① Although the Plaintiff did not receive the construction cost within a reasonable period from the date of payment, the Plaintiff did not take any measures to recover claims, such as requesting for performance and seizure, against the BB hospital, and did not separately claim compensation for delay.

② From around 2005, BB hospital had not paid the construction cost for a long period of time, even though it had sufficient enough enough to pay the construction cost, such as the occurrence of net income for the amount of KRW O-O billion per year.

③ As a result of the investigation of similar cases, etc. on May 7, 2013 through May 16, 2013 by the Tax Tribunal, the Daegu regional tax office verified the average number of annual settlement days (66 days) of 14 construction companies that have traded at least 10 million won a year with BB hospital, and re-calculated the number of annual amounts of delayed payment of construction accounts on the basis of such fact.

④ The Plaintiff asserted that the above case cannot be seen as a similar case in comparison with the contract for construction works entered into between BB Hospital and the Plaintiff. However, it was impossible for the Plaintiff to investigate the Plaintiff’s other case because there was no other construction work except the construction work ordered from BB Hospital. Accordingly, it was impossible for BB Hospital to investigate the case of construction works ordered from another company. Accordingly, it is considerably erroneous for the method of such investigation.

It does not seem to be the case.

⑤ The Plaintiff asserted that the transaction of pharmaceutical products, the main transaction at BB hospital, should be compared to the case of pharmaceutical products (the average payment date of approximately 270 days). However, there is no evidence that the average payment date of pharmaceutical products is about 270 days, not only the construction contract and pharmaceutical transaction are not subject to a direct comparison, since the purpose and implementation process of the contract and the method of payment are entirely different.

6. Regarding the warranty bond to be considered at the time of calculating the recognized interest, the Defendant first calculated only the direct construction cost by type of work, but determined the total construction cost based on the Plaintiff’s assertion as a result of the second investigation.

7. The warranty period of an emergency medical center is three years for a new construction. However, there is no agreement on the remaining construction works, and it is reasonable to calculate the respective detailed period of warranty according to Article 28(1) of the Framework Act on the Construction Industry and Article 30 [Attachment 4] of the Enforcement Decree of the same Act. The defendant calculated and calculated the warranty period by detailed process pursuant to

2) Judgment on the second argument

In applying Article 52(2) of the Corporate Tax Act, the standard for determining that a sound common sense and commercial practice and a normal transaction between persons who are not specially related persons is applied or deemed to be applied (including the rate, interest rate, rent, exchange rate and other equivalent rate). In applying Article 89(1) of the Enforcement Decree of the same Act, Article 52(2) of the same Act provides that, in cases where there is a price generally traded between a person who is not a specially related person and a large number of unspecified persons who are not specially related persons in the situation similar to the relevant transaction and a third party who is not a specially related person, the relevant corporation shall be deemed to be based on the price, and Article 52(5) of the Enforcement Decree of the same Act provides that, in cases falling under wrongful calculation under Article 88 of the Enforcement Decree of the same Act, the difference between the market

The income amount for each business year is calculated.

In light of the following circumstances, the Plaintiff’s payment of an amount exceeding approximately KRW 2.8 times the Institute’s remuneration standard to the representative N, a person with a special relationship, for the design service of DD hospital, is unreasonable compared to the price determined as applicable in the normal transaction with a person without a special relationship. Therefore, it is legitimate to include the portion of the design fee paid in excess of the Institute’s remuneration standard in the calculation of gross income. Therefore, the Plaintiff’s assertion on this part is without merit.

① The design cost OOOOE paid by the Plaintiff when entering into the CC and DD hospital interior construction is much more than the amount of OOOOOE for the Institute’s remuneration standard. ② Even if the Institute remuneration standard is not a standard to enforce said standard, the purpose of Article 1(1) is to stipulate the standards for interior construction to be observed in performing the duties at the request of another person, and other standards for contracts to be entered into incidental thereto. The purpose of this case’s interior construction is to stipulate the standards for interior construction to be observed in performing the duties at the request of another person, and the remuneration to be claimed by the requester and other standards for contracts to be entered into in relation thereto. As the standard design contract for interior construction and indoor construction are mentioned in each interior construction contract of this case as reference to the Institute remuneration standard, it appears to be a recommended standard used in the related industry. Meanwhile, there is no evidence that the Institute remuneration standard is much much lower than the amount for interior construction services.

③ There is no big difference between the amount calculated on the basis of the standards for remuneration of the Association with respect to the agreed design cost for an emergency medical center interior works that the Plaintiff entered into withCC. ④ Since the Plaintiff entered into a contract for the design of the interior design rather than for the entire construction at the time of entering into the contract for the design of the interior design for the interior design (No. 6-2), it is difficult to deem that there was an error in calculating the ratio of the anticipated cost for interior works, out of the amount obtained by subtracting the installation cost from the planned cost for the net construction, which is the estimated cost for the interior works, to the estimated cost for the interior works. ⑤ Since the representative N is a father of the Plaintiff’s private company, from March 200 to February 205, 200, obtaining bachelor’s bachelor’s degree as the industrial design at the EE University Art College’s university’s industrial college’s industrial college’s college’s college’s industrial design, or obtained a master’s degree from the indoor design “U.S.,” the Plaintiff did not obtain a master’s degree or other services.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.