Where an individual supplies a corporation with services, without any physical facilities, for which allowances or other rewards of a similar nature are paid to him/her in accordance with the performance of his/her duties independently, and a corporation fails to receive and keep documentary evidence of expenditure while withholding income tax on its business income, whether penalty tax may be imposed on the corporation under Article 76 (5) of the former Corporate Tax Act (negative)

Article 116(2) of the former Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006; hereinafter “former Corporate Tax Act”); Article 158(2)3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706 of Feb. 19, 2005); Article 127(1)3 of the former Income Tax Act (amended by Act No. 7528 of May 31, 2005); Article 184(1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18705 of Feb. 19, 2005); Article 12(1)13 of the former Value-Added Tax Act (amended by Act No. 8142 of Dec. 30, 206); Article 158(2)3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706 of the Corporate Tax Act); and Article 15 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 21636 of Dec. 161, , 166) cannot be imposed on employees’s.

Article 116 (2) of the former Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006); Article 158 (2) 3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706 of Feb. 19, 2005); Article 127 (1) 3 of the former Income Tax Act (amended by Act No. 7528 of May 31, 2005); Article 184 (1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18705 of Feb. 19, 2005); Article 12 (1) 13 (see current Article 12 (1) 14 of the former Value-Added Tax Act (amended by Act No. 8142 of Dec. 30, 206); Article 12 (1) 3 (m) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 181365 of Feb. 136 of the Value-Added Tax Act)

Nain Development Co., Ltd. (Law Firm Sejong, Attorneys Clerks-won et al., Counsel for the defendant-appellant)

Head of Guro Tax Office

Seoul High Court Decision 2009Nu13872 decided January 19, 2010

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

The grounds of appeal are examined.

1. Whether a business operator under the former Value-Added Tax Act (amended by Act No. 8142 of Dec. 30, 2006; hereinafter “former Value-Added Tax Act”) is misunderstanding of legal principles as to business operators

A. Article 2(1) of the former Value-Added Tax Act provides that a person who supplies goods or services independently for business purposes is a person liable for value-added tax, regardless of whether it is for profit-making purposes. Here, a person who supplies goods or services independently for business purposes is a person who supplies goods or services in the form of business to the extent that the value-added may be created (see Supreme Court Decision 2003Du5754, Jul. 15, 2005, etc.).

B. The lower court determined that the Nonparty’s provision of the instant service to the Plaintiff was part of business activities with continuity and repetition of social norms for the purpose of profit-making, and thus, even if the Nonparty was not registered as a business entity at the time of the instant service transaction, it constitutes an entrepreneur under Article 2(1) of the former Value-Added Tax Act, taking into account the following circumstances: (a) the Nonparty’s status and career; (b) the Nonparty’s content of the service provided to the Plaintiff; (c) the Nonparty’s business performance background; and (d) the process of paying

In light of the records, it is somewhat inappropriate for the court below to acknowledge that the non-party provided all specialized real estate consulting services through a wide range of areas, such as real estate development projects and commercial building sales activities. However, in full view of the following circumstances and records revealed by the court below, the non-party, who is the purchaser and seller of the commercial building of this case, performed an adjustment role in relation to the change of the terms and conditions of loan withdrawal between the plaintiff and the seller during the period of the plaintiff's business progress, and the non-party engaged in activities increasing service fees by amending the service contract of this case over several times during the plaintiff's business progress, the above judgment of the court below is just and acceptable. In so doing, it did not err by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, or by misapprehending the legal principles on the business operator under Article 2 (1) of the former Value-Added Tax

2. Legal principles concerning the scope of transactions subject to receipt and storage of documentary evidence of disbursement and omission of judgment

A. (1) Article 116(2) of the former Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006; hereinafter “former Corporate Tax Act”) provides that “In case of paragraph (1), where a corporation receives goods or services from a business operator prescribed by the Presidential Decree and pays for such goods or services, it shall receive evidential documents falling under any of the following subparagraphs and keep them: Provided, That this shall not apply to the case prescribed by the Presidential Decree.” Article 158(2) of the former Enforcement Decree of the Corporate Tax Act (amended by the Presidential Decree No. 18706 of Feb. 19, 2005) provides that “The case prescribed by the Presidential Decree” in the proviso of Article 116(2) of the former Corporate Tax Act refers to the case falling under any of the following subparagraphs” and subparagraph 3 of Article 127(1) of the Income Tax Act provides that “Where any service is provided from a business income earner subject to withholding tax under Article 127(3) of the Income Tax Act.”

Article 127 (1) of the former Income Tax Act (amended by Act No. 7528 of May 31, 2005) provides that "any person who pays any of the following income or income amount to a resident or nonresident in the Republic of Korea shall withhold income tax from such resident or nonresident pursuant to the provisions of this Section." Article 184 (1) 3 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18705 of Feb. 19, 2005) provides that "income amount from such business income as prescribed by Presidential Decree." Article 184 (1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18705 of Feb. 19, 2005) provides that "income from the provision of services under Article 127 (1) 3 and 144 (1) and (2) and Article 164 (1) 3 of the Act shall be excluded from the supply of services under Article 12 (1) 4 and 3 (f) of the Value-Added Tax Act.

Meanwhile, Article 12 (1) 13 of the former Value-Added Tax Act provides that "human resources services that are professionally provided by low-income earners, musicians or other persons prescribed by the Presidential Decree", and Article 35 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 18626, Dec. 31, 2004) provides that "human resources services under Article 12 (1) 13 of the former Enforcement Decree of the Value-Added Tax Act shall be services that are provided as independent business (including cases where several concurrent business operators supply services that are not essentially incidental to taxable business independently)" (Article 12 (1) 1 provides that "personal services that an individual supplies services in his/her own capacity and receives the price for such services in his/her own qualification, and (m) provides that "personal services that are provided with allowances or other services of a similar nature according to the outcome of his/her own work without physical facilities" (Article 12 (1) 1

(2) In light of the contents and purport of the above provisions, in a case where an individual supplies services without physical facilities for which allowances or other similar costs are derived from the individual’s business income by independently supplying them to the corporation without employing employees, and the corporation withheld at source income tax on the individual’s business income, the corporation is not obligated to receive and keep the documentary evidence of payment from the individual. Thus, even if the corporation did not receive and keep the documentary evidence of payment from the individual, the corporation cannot impose penalty tax under Article 76(5) of the former Corporate Tax Act (hereinafter “additional tax for lack of documentary evidence”) on the corporation.

B. (1) According to the reasoning of the lower judgment and the record, the Plaintiff: (a) paid the Nonparty the sum of KRW 13,450,915,686 under the instant service remuneration contract in around 2004; (b) the Plaintiff withheld income tax and paid it to the competent authority; and (c) the Plaintiff asserted to the effect that, inasmuch as the Plaintiff withheld income tax when paying the said service fees to the Nonparty, an individual entrepreneur, after indicating each provision of the aforementioned relevant statutes, the Nonparty did not receive and keep documentary evidence of payment from the Nonparty, even if he did not receive and keep documentary evidence of payment; and (c) the said warden was stated on the first date for pleading as of January 7, 2009; and (d) the Plaintiff was not equipped with office and human resources in the written brief as of June 24, 2009, and did not receive and keep documentary evidence of payment from the Nonparty, who was an individual entrepreneur without business registration; and (d) the said written brief was stated in the lower court on June 16, 2009.

Therefore, in light of the above legal principles, it cannot be readily concluded that the Plaintiff is obligated to receive and keep documentary evidence from the Nonparty solely on the ground that the Nonparty is a business operator under the former Value-Added Tax Act. As alleged by the Plaintiff, the validity of imposing additional tax for lack of evidence can be determined after deliberation and determination as to whether the supply of the instant services by the Nonparty constitutes a case where an individual provided a service, without employing a worker without physical facilities, for which allowances or other remuneration of a similar nature is paid independently according to work performance.

(2) Nevertheless, the lower court determined that the Plaintiff was obligated to receive and keep documentary evidence from the Nonparty solely on the ground that the Nonparty, without any deliberation and determination as to the Plaintiff’s above assertion, was an entrepreneur under the former Value-Added Tax Act, and that, insofar as the Plaintiff violated the said obligation, the Plaintiff may impose penalty on the Plaintiff for lack of documentary evidence. This is a matter of course by failing to exhaust all necessary deliberations by misapprehending the legal doctrine on the scope of transactions subject to receipt and storage of documentary evidence for disbursement, and omitting judgment, thereby adversely affecting the conclusion of the judgment.

3. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal, 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 Park Poe-young (Presiding Justice)