In a case where Company A, which is engaged in the manufacture and sale of various vehicles and parts, concluded joint research and development agreements with Company B, an affiliated company of the same business group, and imposes value-added tax by deducting the input tax amount of the relevant amount from the input tax amount for the immediately preceding business year based on the ratio of sales for the immediately preceding business year, the case affirming the lower court’s determination that Article 48 of the former Enforcement Decree of the Corporate Tax Act, which applies mutatis mutandis under Article 60(3) of the Enforcement Decree of the Value-Added Tax Act, was lawful on the ground that: (a) Company A, which is an affiliated company of the same business group, shared all joint expenses incurred in relation to the development of technology in accordance with the ratio of sales for the immediately preceding business year (total expenses are classified as personnel expenses, etc. and external expenses include not only expenses subject to value-added tax but also expenses subject to tax exemption); and (b) Company A received a settlement payment from the other party for the amount paid in excess of the ratio of sales amount; and (c) the head of the competent tax office calculated the input tax amount exceeding the aforementioned ratio.

Article 17(2)2 of the former Value-Added Tax Act (wholly amended by Act No. 915, Jan. 1, 2010; see Article 39(1)4); Article 17(1)1 (see Articles 37(2) and 38(1)1 of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013); Article 37(2)3 (see current Article 39(1)4); Article 39(7) (see current Article 39(2)); Article 60(3) (see current Article 77 of the former Enforcement Decree of the Value-Added Tax Act (Amended by Presidential Decree No. 24359, Feb. 15, 2013); Article 17(1)1 of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 24359, Feb. 28, 2010)

Hyundai Automobile Co., Ltd. (Bae, Kim & Lee LLC, Attorneys Cho Il-young et al., Counsel for the defendant-appellant)

The Head of the District Tax Office (Law Firm Aionion, Attorneys Gangnam-gu et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2016Nu39186 decided September 22, 2016

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

The grounds of appeal are examined.

1. Article 17(1)1 of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013) provides that “the tax amount for the supply of goods or services used or to be used for one’s own business shall be deducted from the output tax amount.” Paragraph (2) 3 provides that “the input tax amount for expenditures not directly related to a business” as one of the input tax amount not deducted from the output tax amount (Article 17(2)2 of the former Value-Added Tax Act, amended by Act No. 915, Jan. 1, 2010; Article 17(7) of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Presidential Decree No. 24359, Feb. 15, 2013; hereinafter the same shall apply) provides that “the sales amount of a corporation exceeds the total input tax amount for expenditures not directly related to a business” under Article 48(2)1 of the former Enforcement Decree of the Corporate Tax Act.

2. The lower court acknowledged the following facts by citing the reasoning of the first instance judgment.

A. The Plaintiff and the Aeronautical Automobile Co., Ltd. are companies that carry on the manufacture and sale of various vehicles and parts, and are affiliated companies belonging to the Hyundai Automobile Business Group.

B. From June 2004, the Plaintiff entered into a joint research and development agreement with Abandoned Automobile Co., Ltd. and the instant joint research and development agreement with the Plaintiff to share all the joint expenses incurred in relation to the development of technology according to the ratio of sales during the immediately preceding business year, and was paid a settlement amount from the other party

C. The total amount of common expenses is divided into internal and external expenses, including personnel expenses (hereinafter “instant research expenses”), and external expenses include not only the expenditure subject to value-added tax but also the expenditure subject to tax exemption. However, the Plaintiff reported and paid value-added tax by deducting the entire input tax amount related to the expenditure subject to value-added tax (hereinafter “instant input tax amount”) from the output tax amount.

D. Accordingly, the Defendant calculated the amount exceeding the Plaintiff’s share ratio based on the sales ratio of the immediately preceding business year on the basis of the instant research expenses, and issued the instant disposition to deduct the input tax amount for the pertinent amount among the input tax amount, on the ground that the excess amount falls under an expenditure not directly related to the business.

3. Following the lower court determined that: (a) corporate tax shall be calculated as deductible expenses, including internal expenses, if there are business relations among the expenses paid by the pertinent corporation and ordinary expenses; (b) the value-added tax may only be deducted as input tax amount from the supplier of goods or services in the form of output tax; (c) there is no room to issue as to whether the input tax should be deducted since the transaction is not subject to value-added tax, if the transaction is not subject to value-added tax; and (c) Article 48(1) of the former Enforcement Decree of the Corporate Tax Act is related to the scope of expenditure allowed to deduct input tax among the transactions that are subject to value-added tax; (d) the Plaintiff’s joint expenses, which are the basis for calculating the sales share of the immediately preceding business year, should be limited to the amount subject to value-added tax-added tax, including the total expenses, including personnel expenses, or the research expenses, including the input tax, should be calculated based on the research expenses that are not subject to value-added tax-added tax-added tax-related tax-related tax-related tax-related tax-related tax-related tax-related tax-related tax-related tax-related tax-related tax-related tax-related tax-related tax exemption.

Examining the foregoing provisions and relevant legal principles and records, the lower court’s aforementioned determination is justifiable. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the deduction of input tax amounts, no taxation without law,

4. Therefore, the appeal is 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 Jae-hyung (Presiding Justice)