Whether a fixed business operator in Vietnam is eligible for foreign tax credit, such as foreign contractor tax, if the fixed business operator in Vietnam is a deficit.

Since the Vietnam source income is negative due to the loss in the business year in 2015, it cannot be deemed that there exists a foreign source income itself, and it cannot be deemed that the foreign contractor's tax amount satisfies all the requirements to be eligible for foreign tax credit. Thus, it is not eligible for foreign tax credit.

Article 57 of the Corporate Tax Act

2018Guhap20582

AA Construction Co., Ltd.

BB Director of the Tax Office

March 28, 2019

May 9, 2019

1. The plaintiff's claim is dismissed.

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

On May 8, 2017, the disposition of reduction or correction of KRW 1,252,494,843 of the amount of foreign tax carried forward to the Plaintiff for the business year 2015, which was rendered by the former Defendant to the Plaintiff shall be revoked.

1. Details of the disposition;

A. The Plaintiff, a corporation that runs a construction business in Korea and abroad, has a large number of permanent establishment at construction sites in Vietnam while providing the construction services of highways, ports, general hospitals, etc. in Vietnam.

B. The Plaintiff paid KRW 1,252,494,843 (hereinafter “instant foreign contractor’s tax amount”) on the import, etc. of construction services from Vietnam to 2015.

C. Meanwhile, when the Plaintiff reported corporate tax for the business year 2015 to the Defendant, the Plaintiff reported that the foreign contractual self-employed income tax of this case is subject to foreign tax credit, and that the total amount exceeds the foreign tax credit limit for the business year 2015 and carried forward.

D. On April 17, 2017, the Board of Audit and Inspection issued a request to the National Tax Service to deduct the foreign contractual amount of this case from the carried-over amount of foreign tax credit under Article 57 of the Corporate Tax Act on the ground that the said corporation did not have the right to impose tax on the foreign contractor even if it paid the foreign contractor tax to the corporation, on the grounds that the said corporation did not have the right to impose tax on the foreign corporation, even if it had no income from the source belonging to the permanent establishment in Vietnam.

E. Accordingly, on May 8, 2017, the Defendant reduced the amount of foreign tax carried forward for the business year 2015 (hereinafter “the instant disposition”) by reducing the amount of foreign tax carried forward to the Plaintiff on the following grounds: “The Board of Audit and Inspection, in relation to foreign tax credit on foreign contractor tax in Vietnam, provided that “if the income is a loss, the amount of tax paid in Vietnam shall not be eligible for foreign tax credit” (hereinafter “the instant disposition”).

F. On August 8, 2017, the Plaintiff filed a request for review with the National Tax Service on August 8, 2017, but the said request for review was dismissed on November 17, 2017. The fact that there is no dispute with recognition, Gap’s 1 through 3, Eul’s 1, and Eul’s 1, and the purport of the entire pleadings.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The instant disposition should be revoked on the grounds that it is unlawful for the following reasons.

1) Notwithstanding the Agreement between the Government of the Republic of Korea and the Government of the Socialist Republic of Viet Nam for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korean Tax Treaty”) and the former Corporate Tax Act, the foreign contractor’s tax amount in the instant case was legally paid under the Vietnam Tax Act, and thus, the Defendant determined otherwise and rendered the instant disposition.

2) As the instant foreign contractor’s tax amount is eligible for foreign tax credit as above, the foreign contractor’s tax amount should be carried over to the next period exceeding the foreign tax credit limit for the business year 2015, but was excluded or reduced without any grounds.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Key issue of the instant case

The key and preferential issues of this case are whether the foreign contractor tax amount of this case is eligible for foreign tax credit under Article 57 (1) of the former Corporate Tax Act.

Article 57 (1) of the former Corporate Tax Act (amended by Act No. 1608, Dec. 24, 2018; hereinafter the same shall apply) provides that "where the tax base of a domestic corporation for each business year includes income generated from sources in foreign countries and the amount of foreign corporate tax prescribed by Presidential Decree is paid or payable, any of the following methods may be selected and applied, notwithstanding subparagraph 1 of Article 21," and "the method of deducting the amount of foreign corporate tax from the amount of corporate tax for the relevant business year within the limit of the amount calculated by multiplying the amount of corporate tax for the relevant business year by the ratio of income generated from foreign countries to the tax base for the relevant business year," which provides that "the amount of foreign corporate tax shall be deducted from the amount of corporate tax for the relevant business year, in order to be eligible for foreign corporate tax credit under Article 57 (1) of the former Corporate Tax Act (amended by Act No. 16008, Dec. 24, 2018; 2.

First of all, we will see whether the foreign contractor tax amount in this case satisfies the above requirements in sequence.

D. Determination

1) The principle of strict interpretation derived from the principle of no taxation without the law is applicable not only to cases meeting the taxation requirements, but also to cases meeting the requirements for non-taxation and tax reduction and exemption. Thus, extensively interpreting or analogical interpretation with the benefit of taxpayers without any justifiable reason leads to a result contrary to the principle of no taxation, which is the basic ideology of the tax law, and thus, it is not allowed (see Supreme Court Decision 2005Da19163, May 25, 2006). 2) As to whether the Plaintiff’s tax base of a domestic corporation for each business year constitutes a case where a foreign source income is included in the domestic corporation’s tax base, the following circumstances revealed by the overall purport of each of the statements and arguments as follows: (a) the Plaintiff does not constitute a case where the domestic corporation’s tax base of each business year includes a foreign source income, and (b) the foreign contractor’s tax amount does not constitute a foreign source income subject to a foreign tax credit under Article 57(1) of the former Corporate Tax Act, and thus, the Plaintiff’s assertion is not reasonable.

(1) Article 14(1) of the former Corporate Tax Act provides that "the income of a domestic corporation for each business year shall be the amount calculated by deducting the total amount of losses incurred during the pertinent business year from the total amount of earnings accrued during the pertinent business year," and Article 94(15) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 27828, Feb. 3, 2017; hereinafter the same shall apply) also provides that "the income generated abroad to which the provisions of Article 57(1) of the former Corporate Tax Act are applied, shall be the amount calculated by applying mutatis mutandis the provisions on the calculation of income of the domestic corporation for each business year, as income generated abroad, which is the income generated abroad." Article 57(1) of the former Corporate Tax Act provides that "foreign source income shall be calculated by deducting the total amount of losses incurred abroad

② Upon filing a corporate tax return with the Defendant, the Plaintiff stated to the effect that the total amount of deductible expenses related thereto is KRW 30,259,357,374 from the total amount of gross income derived from the sources of foreign tax credit for each country located in Vietnam for the business year 2015, which falls under Vietnam. The Plaintiff’s income is difficult to be deemed to exist because “amount of income derived from Vietnam” is “amount of income generated from Vietnam”. ③ The Plaintiff asserts that the amount of income generated from overseas sources is included in the tax base even if the amount of loss was incurred due to the negative payment of the amount of income generated from overseas sources, but the former Corporate Tax Act provides that “amount of losses of each domestic corporation for each business year exceeds the total amount of gross income falling under the business year” under Article 14(1) of the former Corporate Tax Act provides that “where the total amount of deductible expenses for the business year exceeds the total amount of gross income falling under the business year, it does not constitute “amount of income subject to taxation” and “amount subject to taxation.” According to the regulations of the Corporate Tax Act.

④ The Plaintiff asserts that the foreign contractor’s tax amount in this case was legally paid in Vietnam, and thus, is subject to tax credit for foreign countries. However, the purpose of the treaty for avoidance of double taxation, such as the Korea and Vietnam Tax Treaty, is to prevent double taxation by properly allocating and adjusting the tax authority of the resident country and the tax authority of the source country (see, e.g., Supreme Court Decision 2013Du7704, May 28, 2015). Therefore, even if the foreign contractor’s tax in this case was paid in Vietnam in the source country, it is not subject to tax credit for foreign income, but is likely to cause double taxation issues by including the foreign source income in the tax base in accordance with the Korean corporate tax system.

(5) Article 23 of the Korea- Vietnam Tax Treaty also provides that "Subject to the provisions of the Korean tax law on the tax credit granted by countries other than Korea with respect to Korean taxes, the tax credit shall be granted on the source income in Vietnam, either directly or by mutual aid, on the source income in Vietnam, on which the law of Vietnam and the agreement shall be paid on such income." Accordingly, matters concerning the requirements and scope of the tax credit shall be determined pursuant to the provisions of Article 57 (1) of the former Corporate Tax Act.

(6) The purport of Article 57 (1) of the former Corporate Tax Act allowing the deduction of the amount of foreign corporate tax from the amount of corporate tax for the pertinent business year is to coordinate double taxation by paying the amount of corporate tax in a foreign country with respect to the income on which corporate tax is levied in Korea. In this case, there is no income generated from overseas sources and there is no corporate tax that should be paid in Korea.

In other words, it is consistent with the contents and purport of the above provision that if the plaintiff did not have income as the source of Vietnam, the foreign contractor tax in Vietnam shall not be considered as the subject of foreign tax credit. The reasons why the plaintiff determined the payment method of foreign contractor tax in Vietnam as a fixed rate rather than the deductible method, are not affected by such judgment.

7) Rather, even if Vietnam does not have income as a source, if it is deemed that the foreign income tax of Vietnam is subject to foreign tax credit, it would be unfairly deducted the corporate tax to be paid in Korea by extensively interpreting the requirements for tax credit under Article 57(1) of the former Corporate Tax Act without reasonable grounds, which leads to a result contrary to the principle of tax equity, which is the basic ideology of the tax law.

(8) In addition, the Plaintiff’s losses incurred at Vietnam’s place of business are reflected in the tax base as deductible expenses pursuant to Article 14 of the former Corporate Tax Act. Accordingly, the Plaintiff enjoys the effect of reducing a considerable portion of corporate tax pursuant to the provisions of the former Corporate Tax Act. Therefore, it cannot be deemed that the Plaintiff suffers unfair losses, even if the amount of foreign contractor’s tax

3) Even if the Plaintiff’s tax base for each business year of a domestic corporation falls under “where a foreign source income is included”, Article 57(1) of the former Corporate Tax Act provides that “if the foreign source income is paid or payable, the foreign source income is not the income under the Corporate Tax Act that is derived from Vietnam. In other words, even if the Plaintiff paid the foreign contractor’s tax in Vietnam, it cannot be deemed that the foreign source income is the foreign source income tax.

The plaintiff argues that it cannot be concluded that there was no income in Vietnam according to the claim that he made earnings in some construction sites of Vietnam or the accounting standards of Vietnam. However, as seen earlier, Article 57 (1) of the former Corporate Tax Act shall apply mutatis mutandis to the provisions on the calculation of income for each business year of a domestic corporation, the amount of income generated from overseas shall be deducted from the total amount of income generated overseas in the corresponding business year of a domestic corporation by deducting the total amount of losses related thereto from the total amount of income generated overseas in the corresponding business year of a domestic corporation. The plaintiff's above assertion

4) Furthermore, inasmuch as the Plaintiff’s tax base for each business year of a domestic corporation cannot be deemed as falling under “the case where the foreign contractor’s tax amount in this case is included in the tax base for each business year of a foreign corporation, and cannot be deemed as having paid “foreign corporation’s tax amount on the foreign source income,” the foreign contractor’s tax amount in this case is a type of “foreign corporation’s tax amount under Article 57(1) of the former Corporate Tax Act, which constitutes “tax amount levied on the same tax item as the tax amount imposed on the corporate income under Article 94(1)3 of the Enforcement Decree of the former Corporate Tax Act, which constitutes “tax amount imposed on the same tax item as the tax amount imposed on the corporate income, other

3. Conclusion

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

Judges in the future;

Judges So-young

Judges No. 54