Examination-corporation-2015-0045 ( November 03, 2015)

The latter part of Article 5(1) of the Protocol 2 to the Korea-China Tax Treaty shall be deemed to be 10% of the tax rate subject to the tax credit.

The purport of the Korea-China Tax Treaty stipulating the differential limited tax rate is to grant benefits to companies making more investments in China by applying a relatively lower tax rate, and to uniformly consider the tax rate subject to tax credits as 10%, thereby preventing unreasonable tax benefits. In addition, the latter part of Article 5(1) of the Protocol is a special agenda.

Article 57 (Foreign Tax Credit)

2015Guhap83054 Disposition of revocation of refusal to correct corporate tax

AAA, Inc.

BB Director of the Tax Office

October 25, 2016

November 10, 2016

1. Of the instant lawsuits, the part concerning the claim for revocation of a disposition rejecting rectification of corporate tax of KRW 000 for the business year 2010 shall be dismissed.

2. The Defendant’s disposition rejecting correction of KRW 000 and corporate tax of KRW 000 for the business year 2011 against the Plaintiff on January 6, 2015 shall be revoked.

3. Of the litigation costs, 15% is assessed against the Plaintiff, and the remainder is assessed against the Defendant, respectively.

Cheong-gu Office

Paragraph 2 and the defendant's disposition rejecting correction of KRW 000 of the corporate tax for the business year 2010 against the plaintiff on January 6, 2015 shall be revoked.

1. Details of the disposition;

A. From 2010 to 2012, the Plaintiff owned 60% of the capital of Non-PartyCC Limited (hereinafter “instant Chinese subsidiary”) as a Chinese subsidiary from 2010 to 2012.

B. From 2010 to 2012, the Plaintiff reported and paid corporate tax by applying the provisions on foreign tax credit under Article 57 of the former Corporate Tax Act (amended by Act No. 12850, Dec. 23, 2014; hereinafter “former Corporate Tax Act”) to the dividends paid by the instant Chinese subsidiaries from 2010 to 2012 (hereinafter “instant dividends”).

(unit: won)

Business year

Dividend Income

Direct

Foreign Tax Credit

Indirect

Foreign Tax Credit

deemed

Foreign Tax Credit

2010

00,000

-

00

-

2011

00,000

00

00

-

2012

00,000

00

00

-

C. On November 7, 2013, the Defendant issued a revised and notified the Plaintiff of KRW 000 corporate tax for the business year 2010, KRW 000 of corporate tax for the business year 2011, and KRW 000 of corporate tax for the business year 2012 (hereinafter “instant revised disposition”).

D. On February 4, 2014, the Plaintiff, who was dissatisfied with the instant disposition of increase, filed a request for adjudication with the Tax Tribunal (hereinafter “instant request for adjudication”) on February 4, 2014, but was partially dismissed on May 20, 2015. Thereafter, the Plaintiff filed a lawsuit seeking revocation of the instant disposition of increase under the court No. 2015Guhap71822, and is pending in this court.

E. On November 11, 2014, pursuant to Article 10(2) of the Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income between the Government of the Republic of Korea and the Government of the People's Republic of China (hereinafter referred to as the "Korea-China Tax Treaty"), the Plaintiff filed an application of the latter part of Article 23(3) of the Agreement as replaced pursuant to Article 5(1) of the former Corporate Tax Act for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income between the Government of the Republic of Korea and the Government of the People's Republic of China (hereinafter referred to as the "Protocol 2"), to the effect that the Plaintiff additionally recognized the foreign tax credit of 5% for the year 2010, corporate tax amount of 00 won for the business year 2011, and corporate tax amount of 00 won for the business year 2012 (hereinafter referred to as the "instant claim for rectification").

F. On January 6, 2015, the Defendant rendered a disposition rejecting the instant request for correction on the ground that the instant request for adjudication is pending (hereinafter “instant disposition rejecting the correction”).

G. On August 19, 2015, the Plaintiff filed a petition for review with the Commissioner of the National Tax Service on August 19, 2015, against the instant disposition rejecting the correction, but was dismissed on November 3, 2015.

[Ground of recognition] Facts without dispute, Gap evidence 1, 5 evidence, Eul evidence 4-1 through 3, Eul evidence 1-3 through 5, Eul evidence 2-1 through 3, and the purport of the whole pleadings

2. Judgment on the main defense of this case

A. An application for correction under Article 45-2(1) of the former Framework Act on National Taxes (amended by Act No. 12848, Dec. 23, 2014) is permitted only within three years after the statutory deadline for filing the tax base, etc. expires. If an application for correction is filed pursuant to Article 60(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010), the statutory deadline for filing the corporate tax base for the business year 2010 shall be until March 31, 2011. Thus, the portion relating to the corporate tax for the business year 2010, among the instant application for correction filed on November 11, 2014, which was later than three years thereafter, is unlawful as it was filed after the statutory deadline for filing the application for correction.

In such a case, even if there was a rejection disposition against an illegal claim for correction, it is not allowed to re-appeal the same through an appeal litigation (see, e.g., Supreme Court Decision 2014Du44830, Mar. 12, 2015). Of the instant lawsuit, the part pertaining to the corporate tax for the business year 2010 is unlawful. The Defendant’s main defense to the same purport is reasonable (see, e.g., Supreme Court Decision 2014Du4830, Mar. 12, 2015).

B. On the other hand, the Plaintiff asserts to the effect that the exception to the period of filing a claim for rectification should be recognized, inasmuch as the Plaintiff received a recommendation from the Tax Tribunal to the effect that the foreign tax credit for the business year 2010 to be deemed as corporate tax payable for the pertinent trial proceeding is a separate request for correction. However, the Plaintiff’s assertion does not fall under the grounds for extension of due date as prescribed in Article 6(1) of the Framework Act on National Taxes and each subparagraph of Article 2(1) of the former Enforcement Decree of the Framework Act on National Taxes (amended by Presidential Decree No. 26066, Feb. 3, 2015) and the method of filing

3. Whether the instant disposition is lawful

(a) Relevant statutes;

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

B. Determination

1) Article 57(3) of the former Corporate Tax Act provides that "the amount equivalent to the tax amount reduced or exempted for the relevant foreign source income in the counterpart to a tax treaty shall be deemed the amount of foreign corporate tax subject to the tax credit or inclusion in deductible expenses pursuant to paragraph (1) to the extent prescribed by the tax treaty." Article 23(1) of the Korea-U.S. Tax Treaty provides that "for Korean residents, double taxation shall be avoided as follows." Subject to the provisions of the Korea-U.S. Tax Act on the tax credit from Korean tax permitted for taxes paid in any country other than Korea, China's law and tax payable in accordance with this Agreement shall be allowed from the Korean tax payable for that income if the income in China would have been directly or through mutual aid, and Article 57(2) of the former Corporate Tax Act provides that "the amount of tax credit shall not exceed the portion of the Korean-U.S. tax credit equivalent to the ratio of the total income subject to the Korean tax payment, and Article 10(2) provides that "the Contracting Party which pays dividends shall be deemed to be more than 10% of the total dividend amount of the tax treaty:

2) Article 57(3) of the former Corporate Tax Act, Article 23(1) of the Korea-China Tax Treaty, and Article 5(1) of the Protocol No. 2 are deemed to provide for foreign tax credit for the language and structure thereof. Such deemed foreign tax credit is intended to ensure that, even if taxes are not actually paid or exempted in a foreign country but are actually paid or exempted, the said amount of reduction or exemption can be deducted as the taxes actually paid in accordance with the requirements under the tax treaty and the domestic law of the country of residence. The purpose of this provision is to preserve the effects of the tax reduction or exemption benefits granted by the country of residence in the country of residence so that

Meanwhile, Articles 3 and 4 of the Chinese Corporate Income Tax Act provide that the income tax shall be imposed at a rate of 20% on the income acquired by non-residents within the Chinese territory as the Plaintiff. Article 91 of the Chinese Corporate Income Tax Act provides that the said tax rate shall be 10%. However, as seen earlier, Article 10(2) of the Korea-China Tax Treaty applies 5% to the beneficial owners of dividends held by subsidiaries of the source country (in the case of this case, China) where the equity interest is 25% or more, and 10% where the equity interest is 25% or less, respectively. This also constitutes the maximum tax rate, i.e., the limited tax rate, which may be imposed on the residents or corporations of the Contracting State pursuant to the tax treaty. In general, the said limited tax rate does not apply to the dividend income paid by the residents of one Contracting Party to the other Contracting Party to the source country, within the scope of the tax rate imposed by the other Contracting Party, and it is difficult to view that the said provision does not apply any more benefits to the source country to the two countries.

Then, this paper examines the history of Article 5 (1) of the Protocol 2 and the relationship between the specialized company and the latter. Prior to January 1, 2008, in the situation where foreign capital investment companies are exempted from the total amount of taxes on dividend income under Chinese domestic law, and where only specialized provisions apply without any differential limited tax rate, a large amount of capital investment can be deemed as 5% foreign tax credit, while a company which has less capital investment can be allowed to receive 10% foreign tax credit, and more unfavorable than one company which has more than 10% of its capital investment, the latter part of Article 5 (1) of the Protocol 2 provides for the tax rate of 10% as well as the tax rate of 10% for the company which has more than 10% of its capital investment in China. However, since January 1, 2008, the above provision of tax exemption for foreign capital investment companies still applies to the company which has more than 10% of its capital investment credit than that of this case.

3) 또한 이 사건 제2의정서 제5조 제1항 후문의 문언 그 자체에 의하더라도, 이사건 한중 조세조약 제10조 제2항의 경우 배당금에 대한 세액의 세율은 10%로 간주된다고 명확히 규정하고 있는 점에서도 위와 달리 해석하기는 어렵다. 이에 대하여 피고는 이 사건 제2의정서 제5조 제1항 후문은 문언상 이 항의 목적상 이라고 규정하고 있어 전문과 후문을 별개로 해석할 수 없다고 하면서, ① 전문에서 조세경감, 면제 또는 경제발전 촉진을 위한 그 밖의 조세유인조치 관련 법률규정이 없었더라면 납부했어야 할 세액 에 대해서 간주외국납부세액공제를 할 수 있는 것으로 규정하고 있고, ② 2008. 1. 1. 이후에는 더 이상 중국 국내법상 조세감면규정을 두고 있지 아니하며, ③ 가사 이 사건 한중 조세조약 제10조 제2항을 조세유인조치라고 본다고 하더라도 이는 '조약'일 뿐 '법률규정'에는 해당하지 아니하므로 원고에 대하여 전문과 별개로 후문을 독자적으로 적용할 수 없다는 취지로 주장한다. 그러나 이 사건 제2의정서 제5조 제1항 후문의 이 항의 목적상 의 영어 원문이 For the purpose of this paragraph 라고 되어 있는 것에 비추어 볼 때, 이는 '전문에 해당하는 경우에 한하여'라는 식으로 제한적 해석을 할 것이 아니라 '전문의 입법취지를 살리기 위하여'라고 해석하는 것이 합리적이고, 따라서 이 사건 제2의정서 제5조 제1항이 전문 외에 후문을 추가로 규정한 것은 중국 국내법률보다 낮은 제한세율을 규정하여 조세감면혜택을 부여하고 있는 이 사건 한중 조세조약 제10조 제2항이 조세유인조치에는 해당하나 그 형식상 이 사건 제2의정서 제5조 제1항 전문의 '조세유인조치 관련 법률규정'에는 해당하지 아니하기 때문에 전문을 곧바로 적용할 수 없는 문제가 있어 이를 해소하기 위해 전문과 마찬가지의간주외국납부세액공제 효과를 부여하기 위하여 특별의제규정으로 둔 것으로 해석할 수있는 것이다.

4) If the latter part of Article 5(1) of the Protocol is interpreted to apply only when the Chinese domestic law rate is more reduced than the limited tax rate as alleged by the Defendant, it is interpreted that the latter part of Article 25(1) of the Protocol applies only to foreign-invested enterprises holding 25% or more of the Chinese domestic law rate is applied only to the foreign-invested enterprises holding 5% or more of the limited tax rate if there is no Chinese domestic law rate that reduces or lowers the reduced tax rate than 5%. However, if there is a Chinese domestic law rate that reduces or lowers the reduced tax rate than 5%, for example, if there is a provision that applies the reduced or exempted tax rate to 10% lower than 5% of the limited tax rate, the latter part of Article 5(1) of the Protocol becomes subject to the foreign-invested tax credit deemed to be applied to 10% of the reduced tax rate. This is not only very unfair result, but also the defendant's position to recognize the difference between the reduced tax rate and the reduced tax rate under the Chinese law provisions on the same.

5) Comparing the contents of the tax treaty established with the government of the Republic of Korea on similar matters other than the instant tax treaty, even if the latter part of Article 5(1) of the Protocol provides for a limited tax rate lower than that prescribed by the Internal Tax Act, it may be deemed that the said foreign tax credit is recognized as identical to that prescribed by the Internal Tax Act. For example, the Convention between the Government of the Republic of Korea and the Government of 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 “Convention”) separates Article 10 as 10% (paragraph 2(a) and 25% (paragraph 2(b)) of the limited tax rate related to dividend income from the Republic of Korea’s tax treaty, and it is difficult to interpret Article 23(1) of the said Treaty as 20% of the dividend income of the Republic of Korea’s tax treaty for the purposes of Article 23(3) of the said Treaty regardless of whether the said provisions are applicable to the said domestic tax treaty.

6) On the other hand, the defendant asserted that the tax authorities in China also held that when the plaintiff paid the tax to China to which the limited tax rate of Article 10(2)(a) of the Korea-China Tax Treaty is applied, only 5% of the tax actually paid should be eligible for foreign tax credit. However, it is difficult to conclude that the defendant's answer (No. 4-2) submitted by the Chinese tax authorities (No. 4-2) is an official expression of the Chinese government, and even in light of the expression and content thereof, it is nothing more than the defendant's assertion, rather than supporting the defendant's argument.

7) According to the latter part of Article 5(1) of the Protocol of this case, since the Plaintiff paid 10% of the total amount of dividend income that the Plaintiff should pay to China pursuant to the latter part of Article 5(1) of the Protocol of this case, or the Plaintiff paid to China the amount of tax that is subject to the application of Article 10(2)(a) of the Tax Treaty of Korea and China, it is reasonable to deem that the difference is 5% of the tax amount as the difference is eligible for tax credit under Article 5

C. Sub-committee

The disposition of this case to this different purport is unlawful, and the plaintiff's assertion disputing it is reasonable.

4. Conclusion

Therefore, among the plaintiff's lawsuit of this case, the part of the plaintiff's claim for revocation of correction refusal disposition of KRW 56,401,086 of corporate tax for the business year 2010 is dismissed as unlawful, and the remaining claims of the plaintiff are accepted as well as the decision as per Disposition.