2015Guhap70431 Disposition of revocation of refusal to correct corporate tax

C. C. C.C.

The superintendent of the tax office

November 10, 2016

December 15, 2016

1. On March 9, 2015, the Defendant’s rejection of each claim for correction of KRW 84,409,88 won of corporate tax for the business year 201, KRW 176,831,447 of corporate tax for the business year 2012, and KRW 195,445,031 of corporate tax for the business year 2013 shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

The same shall apply to the order.

1. Details of the disposition;

A. On November 18, 2004, the Plaintiff was established for the purpose of running the business of manufacturing, selling, etc. electronic parts, images, sound, and communications equipment. In the business year 201 to 2013, the Plaintiff received dividends (hereinafter referred to as “the dividends of this case”) from the company of the People’s Republic of China (hereinafter referred to as “China”) located in the subsidiary company (hereinafter referred to as “China”), and from the company of the Jinjin Electronic Co., Ltd. (hereinafter referred to as “Yinjin Co., Ltd.), the same corporation (hereinafter referred to as “Dongjin Co., Ltd.”) and the same company (hereinafter referred to as “the subsidiaries of this case”) and filed a corporate tax with the Defendant by applying the direct foreign tax credit (the amount of 5% applied to the dividend dividend of this case).

A person shall be appointed.

B. According to Article 5(1)(hereinafter referred to as the “instant provision”) of the Agreement between the Government of the Republic of Korea and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and the Government of the People’s Republic of China (hereinafter referred to as the “Convention”), the Plaintiff filed a claim for correction with the Defendant to the effect that not only the directly paid foreign tax but also the paid foreign tax should be additionally deducted on the ground that Article 5(1)(hereinafter referred to as the “instant provision”) of the said Agreement between the Government of the Republic of Korea and the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and the Government of the People’s Republic of China (hereinafter referred to as the “Convention”).

C. On March 9, 2015, the Defendant issued a notice of refusal (hereinafter “instant disposition”) to the Plaintiff on the ground that “The limited tax rates under Article 10(2)(a) of the Treaty are not applicable to those eligible for deemed foreign tax credit.”

A person shall be appointed.

D. On June 4, 2015, the Plaintiff appealed and requested for adjudication on June 4, 2015, but the Tax Tribunal rendered a decision to dismiss the Plaintiff’s claim on August 12, 2015.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 8, Eul evidence No. 2 (including each number, if any) and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

Even if the Plaintiff paid only 5% of the instant dividends to China pursuant to Article 10(2)(a) of the Treaty, the Plaintiff’s interpretation of the latter part of the latter part of the provision of this case is deemed to have paid 10% of the instant dividends to China. Therefore, the Plaintiff’s tax credit should be granted in addition to the amount of foreign tax directly paid on the instant dividends, as well as the amount of foreign tax deemed equivalent to 5% of the said dividends. Therefore, the instant disposition that the Defendant

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

(1) Article 57(3) of the Corporate Tax Act provides that "the amount equivalent to the amount of corporate tax reduced or exempted on the relevant foreign source income in the counterpart to a tax treaty by a domestic corporation with foreign source income shall be deemed to be the amount of foreign corporate tax subject to the tax credit or inclusion in deductible expenses pursuant to paragraph (1) within the scope prescribed by the relevant tax treaty." Article 4(1)(a) of the Protocol replacing Article 23(1) of the relevant treaty provides that "in the case of a Korean resident, double taxation shall be avoided as follows. In the case of a Korean resident, in accordance with the Korean tax law on the tax credit granted by a foreign country other than Korea, in the case of a mutual-aid, directly or indirectly with respect to the source income in China, the Chinese tax paid pursuant to the Chinese law and the relevant agreement shall be allowed from the Korean tax paid on such income. However, the amount of tax credit shall not exceed the Korean tax amount equivalent to the ratio of the source income in China to the total amount of income

On the other hand, Article 10(2) of the Treaty provides that "if the recipient is a beneficial owner of dividends, the taxes so imposed shall not exceed the following: Provided, That if the recipient owns 25% or more of the capital of the company paying the dividends, 5% of the total amount of dividends, and 10% of the total amount of dividends in all other cases" in item (a) and (b) of Article 23(3) of the Treaty provides that "3." Any tax paid by one Contracting Party referred to in paragraphs (1) and (2) of this Article shall be deemed to include any tax that would have had to have been paid if there had been no other tax reduction, exemption or other tax incentives for promoting economic development. For the purpose of this paragraph, for the purpose of Articles 10(2), 11(2) and 12(2), it shall be deemed that the amount of interest, rent and fee are 10% of the total amount of dividends, fees and fee for use, respectively."

(2) In light of the following circumstances that can be recognized by comprehensively taking into account the evidence and the purport of the entire pleadings as seen above, the latter part of the provision of this case cannot be deemed to apply only when the Chinese domestic law and regulations reduces more than the limited tax rate. Therefore, the Plaintiff is deemed to have paid 10% of the dividend in this case to China in accordance with the latter part of the provision of this case. Therefore, the Plaintiff is entitled to additionally reduce the tax amount equivalent to 5% of the dividend in this case pursuant to Article 57(3) of the Corporate Tax Act, etc., so the disposition of this case issued by the Defendant on a different premise is unlawful, and the Plaintiff’s assertion pointing this out has merit.

(A) Foreign tax credit system deemed as foreign tax credit system

Article 57(3) of the Corporate Tax Act, Article 4(1)(a) of the instant Protocol replacing Article 23(1) of the instant Treaty, and Article 23(3) of the instant Treaty appears to be providing for a foreign tax credit deemed as a systematic basis. Such a foreign tax credit is intended to provide for a tax credit deemed as a foreign country’s language and structure. Such a foreign tax credit system is intended to provide for the tax exemption as if it actually paid the tax amount under the conditions under the relevant tax treaty and the domestic law of the country of residence, even if the tax amount was not actually paid or exempted in a foreign country. As such, the purpose of the foreign tax credit system is to preserve the effects of the tax exemption benefits

(b)the purpose and purport of the differential limited tax rate;

1) Articles 3(3) and 4 of the Chinese Corporate Income Tax Act provide that a non-resident company, like the Plaintiff, shall impose corporate income tax at a rate of 20% on the income acquired in the Chinese territory, but shall be exempted or reduced from it under Article 27(5) of the same Act. Article 91 of the Chinese Corporate Income Tax Enforcement Ordinance provides that a non-resident company shall impose corporate income tax at a rate of 10% where it acquires income under Article 27(5) of the Income Tax Act. However, as seen earlier, Article 10(2) of the Treaty provides that a non-resident company shall impose corporate tax at a rate of 25% on the beneficial owner of dividends, which is a resident of the source country (in this case, China), if the equity interest is 25% or more, 5% of the total dividend amount, and 10% of the total dividend amount shall apply to all other cases including when the equity interest is 25% or less. This is reasonable to view that the maximum tax rate can be imposed on the residents or corporations in the country.

2) Such differential limited tax rates act within the scope of the tax rate imposed by the other Contracting Party, which is the source country of the dividend income, on the dividend income received by a resident of one Contracting Party from a corporation, etc. of the other Contracting Party. However, Article 10(2) of the Treaty does not provide the source country’s limited tax rate on dividend income as a single tax rate, but provides the source country’s limited tax rate as a differential tax rate depending on the source country’s investment level in the source country. This is the source country, namely, to attract an investment for the purpose of promoting the economic development of China, with a relatively lower limited tax rate than those of the other Contracting Party.

3) It is not so deemed that the above provision is about the distribution of the right to taxation between the Parties, but it is deemed that the above provision is about the distribution of the right to taxation between the Parties, from the perspective of the source country, that it would result in the yield of only the right to taxation to the other country, instead of granting any benefits to the company making more investments in the source country.

(C) The amendment process, etc. of Chinese laws and regulations

1) Before January 1, 2008, under the Chinese domestic law, foreign capital investment companies were exempted from the total amount of taxes on dividend income, and where only the specialized provisions apply without the latter part of the instant provision in circumstances where there are differential limited tax rates as above, a company which has a large amount of capital investment could be allowed to receive only the tax credit of 5% deemed as 5%, while a company which has a little amount of capital investment could be allowed to receive the tax credit of 10% deemed as 10%. The latter part of the instant provision also plays a role in preventing disadvantages in tax benefits by uniformly treating the tax rate subject to the tax credit as 10% even for a company which has a large amount of capital investment.

2) The latter part of the instant provision is not deleted even after January 1, 2008, where the provision on tax exemption on the dividend income of a foreign capital invested company was repealed, and is still maintained. This is to apply the latter part of the provision to a company which is a beneficial owner with at least 25% of the equity interest in the Chinese company, since the latter part of the provision continued to apply, it is to apply the foreign tax credit of 10% to the company

3) As to this, the defendant asserted that "in applying the latter part of the instant provision to a company which made a large amount of capital investment even after January 1, 2008, when applying the latter part of the instant provision, the company which made a little amount of capital investment at a rate of 10% in China is taxed at a rate of 10% in China, and the foreign tax credit of 10% in Korea is applied, while a large amount of capital investment is taxed at 5% in China, but 5% in addition to the foreign tax credit of 5% in China is additionally applied, which is more favorable than the one which made a little amount of capital investment." However, as seen above, the purport of Article 10(2) of the instant Treaty provides for the differential limited tax rate, which is set forth in Article 10(2) of the instant treaty, is to facilitate investment in the source country by granting a large amount of capital investment to a foreign company that made a little amount of investment in the source country a lower tax rate of tax reduction and exemption. Accordingly, this would rather correspond

(D) The relationship and interpretation between the main sentence of the instant provision and the post-examination

1) In its language and text, the latter part of the instant provision clearly provides that “In the case of Article 10(2) of the Treaty, the tax rate for dividends shall be deemed 10%.”

2) 이에 대해 피고는, 이 사건 조항 전문과의 관계 및 문언의 해석 등에 비추어 "중국의 국내법률이 제한세율보다 더 감면해주는 경우에만 이 사건 조항의 후문이 적용되는 것으로 해석하여야 한다"는 취지로 주장하나, 이 사건 조항 후문의 "이 항의 목적상"의 영어 원문이 "For the purpose of this paragraph"라고 되어 있어 '전문에 해당하는 경우에 한하여'라는 식으로 제한적 해석을 할 것이 아니라 '전문의 입법취지를 살리기 위하여'라고 해석하는 것이 합리적으로 보이고, 이 사건 조항 전문의 "법률규정"의 영어 원문이 "legal provisions" 이라고 되어 있어 중국의 국내법만을 한정하는 것이 아니라 '조약'도 포함하는 보다 포괄적인 개념으로 해석되어야 할 것으로 보인다(이 사건 조약 제23조 제1항을 대체하는 이 사건 의정서 제4조 제1항 가목은 "중국 국내법"을 "the laws of China"으로, "조약"을 "Agreement"로 위 '법률규정'과 달리 표현하고 있기 때문이다).

3) As alleged by the Defendant, the latter part of the instant provision is interpreted to apply only when the Chinese domestic law rate is more reduced than the limited tax rate. If there is no Chinese domestic law rate that reduces the limited tax rate of 25% or more to foreign-invested enterprises that own more than the limited tax rate of 5%, 5% is eligible for the direct foreign-invested tax credit of 5%. If there is a Chinese domestic law that reduces the limited tax rate of 5%, if there is a domestic law that reduces the lower tax rate of 5%, it would be subject to the reduction of the tax rate of 4% less than 5% which is the age and limited tax rate of 10%. This is also a very unfair result.

(e) Comparison, etc. with other tax treaties

1) Article 10 of the Convention between the Government of the Republic of Korea and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the “Korea- Philippines Tax Treaty”) provides that “The limited tax rate related to dividend income shall be 10% (paragraph 2(a) and 25% (paragraph 2(b)).” Article 23(1) provides that “The taxes of the Philippines payable in the Philippines, subject to the Korean law on the tax credit for the Korean tax payable in countries other than the Republic of Korea, shall be deducted from the Korean tax payable in relation to the income,” and Article 23(3) provides that “for the purpose of the tax credit under paragraph (1) of this Article, in the case of dividends to which Article 10(2)(a) applies, the taxes of the Philippines shall be deemed to have been paid at the rate of 20%

2) Article 10(2) of 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 “Korea- Vietnam Tax Treaty”) provides that “The limited tax rate on dividend income shall be 10% single,” but Article 23(1) of the Act provides that “The Korean tax law on the tax credit on Korean tax that is granted to taxes paid in countries other than Korea (it shall not affect the general principles of this paragraph) shall be governed by the provisions of the Korean tax law on the tax credit (it shall not be affected by the general principles of this paragraph), either directly or by the tax credit on the source income in Vietnam and by the tax credit under the Act of Vietnam and this Agreement (in the case of dividends, the tax credit on the profits on which the dividends are paid)” provides that “The tax payable in Vietnam shall be deemed to be the total amount of dividends and interest accrued in Vietnam, regardless of the actual amount of tax payable:

3) In other words, it is reasonable to interpret the instant treaty equally in light of the fact that, regardless of whether the provisions of tax reduction and exemption exist in the Philippines or in the Republic of Vietnam, the amount of dividend income corresponding to a certain rate of tax prescribed in each of the above treaties, which were concluded with the same purpose and purport as the instant treaty, are deemed to have been paid to the Philippines or Vietnam, and there is no special circumstance to deem that the instant treaty ought to be interpreted differently in the case of the instant provisions.

(f) Opinion of Chinese tax authorities

On the other hand, the defendant argues that the tax authorities in China also have the effect that when the plaintiff paid the tax amount to China to which the limited tax rate of 5% under Article 10 (2) (a) of the Treaty is applied, only the tax amount equivalent to 5% actually paid should be eligible for foreign tax credit. However, it is difficult to conclude that the defendant's answer (Article 4, 5-2) submitted by the Chinese tax authorities is the official and final expression of opinion of the Chinese government, and even if not, such interpretation is not binding on the determination as to whether the Republic of Korea's taxation requirements are satisfied.

3. Conclusion

Therefore, the plaintiff's claim is reasonable, and it is decided as per Disposition.

Judges Lee Sung-chul

Judges Kim Young-k

Judges Min Il-sung

A person shall be appointed.

A person shall be appointed.

A person shall be appointed.

A person shall be appointed.