[1] Whether an exporter who knew or did not know by gross negligence that there is a malicious entrepreneur with intent to evade the output tax amount in a series of consecutive transactions, and that the deduction and refund of his/her input tax amount would cause losses to other tax revenues (affirmative)

[2] In a case where Gap corporation established for the manufacture, sale, and export and import business of precious metals exported gold bullion purchased from Eul corporation for two times or more without any processing, and sought deduction and refund of input tax amounts, the case holding that Gap corporation's seeking deduction and refund of input tax amounts cannot be permitted in violation of the principle of good faith under Article 15 of the former Framework Act on National Taxes, even though Gap corporation knew of, or was negligent in, the fact that there was a malicious business operator who makes illegal transactions for the purpose of evading output tax amount in the entire series of transactions in gold bullion transactions, and that the exporter corporation's deduction and refund of input tax amounts for itself, who is the exporter, would have caused the decrease of other tax revenues,

[1] Articles 1, 3(1), and 15 of the former Framework Act on National Taxes (Amended by Act No. 911, Jan. 1, 2010); Articles 15 and 17 of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010); / [2] Articles 1, 3(1), and 15 of the former Framework Act on National Taxes (Amended by Act No. 9911, Jan. 1, 201); Articles 15 and 17 of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010)

[1] Supreme Court en banc Decision 2009Du13474 Decided January 20, 201 (Gong2011Sang, 454)

C&T Co., Ltd. (Law Firm Daeil, Attorneys Jeong Sung-sung et al., Counsel for the defendant-appellant)

Head of the District Tax Office

Supreme Court Decision 2008Du21034 Decided March 12, 2009

Seoul High Court Decision 2009Nu8528 decided August 26, 2009

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Regarding ground of appeal No. 1

After compiling the adopted evidence, the lower court determined that each of the tax invoices of this case entered the amount equivalent to 10/11 of the purchase price as the supply price, and the amount equivalent to 1/11 of the purchase price as the value-added tax amount, and that there is no other evidence to acknowledge it otherwise, on the grounds that the Plaintiff merely paid the purchase price while purchasing each of the gold bullion of this case, and did not have any value-added tax.

In light of the records, the judgment of the court below is just, and the allegation in the grounds of appeal disputing it is not a legitimate ground of appeal, because it leads to the misunderstanding of evidence or fact-finding belonging to the court below's exclusive jurisdiction.

2. Regarding ground of appeal No. 2

A. Article 15 of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010; hereinafter “Framework Act on National Taxes”) declares that the principle of trust and good faith should be the basic guiding ideology in the field of tax law by stipulating that “A taxpayer shall perform his/her duty in good faith and sincerity. This shall also apply to a tax official performing his/her duty.” Therefore, the application of the provisions of tax law to individual cases would result in an unreasonable consequence which would result in a failure to pay attention, and rather, in light of the universal sense of justice and ethics, the application of such provisions may be exceptionally restricted or excluded pursuant to the principle of trust and good faith, and such principle may also be applied to legal relations concerning value-added tax (Article 1 and Article 3(1) main text of the Framework Act on National Taxes).

Article 15 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010) provides that when an entrepreneur supplies goods or services, the value-added tax on the value of the supply thereof shall be collected from the person who receives the supply thereof. Article 17(1) of the same Act provides that the value-added tax to be paid by an entrepreneur shall be the amount obtained by deducting the input tax amount from the output tax amount, and that the input tax amount exceeding the output tax amount shall be refunded. This is based on the fact that an entrepreneur who receives the goods or services at each transaction stage prior to reaching the final consumer collects the output tax amount from the entrepreneur who receives the supply and pays it to the State, and that the entrepreneur subject to the collection of the tax amount shall pay it to the final consumer in the following following order through the process of deducting and refunding the input tax amount from the input tax amount (see, e.g., Supreme Court Decision 9Da3984, Nov. 12, 199).

If a malicious business operator in a series of continuous transactions does not pay the value-added tax collected by him/her by attempting to make an abnormal transaction that only causes losses if he/she does not evade or evade value-added tax (hereinafter “illegal transaction”) from the beginning with intent to evade value-added tax from the beginning, the country has no choice but to make a refund of the input tax without the burden of the output tax amount due to applying the zero-rate tax rate, such as the exporter in the next transaction stage. As such, if a business operator is entitled to deduct or refund the input tax without the burden of the output tax amount due to the application of the zero-rate tax rate, the country has no choice but to do so with other tax revenues. Such a result exceeds the passive gap of tax revenues and constitutes an outflow to the National Treasury, and thus, the burden exceeds the damage of the value-added tax system itself

Of course, even if there are the above reasons, if an exporter is in a situation where the existence of an illegal transaction is unknown at all, he/she may not, in principle, deny that the exporter is entitled to deduct or refund an input tax amount under the conditions as prescribed by the Value-Added Tax Act. However, even if the exporter was aware that there was an illegal transaction at the pre-stage stage, he/she would have made transactions with the intent to promote his/her own interest without vagasing the opportunity. Furthermore, his/her transaction profit would be attributable to the aforementioned illegal transaction, and his/her participation in the transactions would ultimately be a critical factor that makes it possible to make an illegal transaction ultimately by taking advantage of the input tax deduction and refund system, which is the premise thereof, and thus, it would be an act of pursuing unjust profits by taking such an exporter’s tax revenue into other tax revenue into account as the source of an illegal transaction to guarantee the profits accrued from the illegal transaction through the National Treasury, and it cannot prevent any serious harm to the overall tax system as seen above.

In such a case, seeking input tax deduction and refund cannot be made remarkably in light of the universal sense of justice and ethics. Thus, this is not permissible as it goes against the principle of good faith as stipulated in Article 15 of the Framework Act on National Taxes. Such a legal doctrine is reasonable to deem that the same applies to a case where an exporter was unaware of such an illegal transaction due to gross negligence in light of the perspective of fairness, the gravity of the outcome, and the universal sense of justice, and thus, if the exporter was aware of the existence of such illegal transaction due to gross negligence, it is reasonable to deem that the same applies to a case where the exporter was unaware of such illegal transaction due to gross negligence, namely, the relationship with a malicious business, and if the exporter was aware of the fact that he could have sufficiently known of such fact, and even if he was unaware of such fact, he did not have clearly violated the duty of due care to the extent close to the intention of the exporter, and it is not limited to a case where there was a specific conspiracy or an accomplice relationship with the malicious

B. According to the reasoning of the judgment below and the records, the plaintiff is a corporation established for the purpose of manufacturing, selling, and exporting and importing precious metals on July 8, 2004, and the non-party 1's representative director establishes the plaintiff corporation without any special knowledge of the gold bullion import and export business. All of the transactions in this case on September 16, 2004 and September 20, 2004, the plaintiff exported gold bullion 1,765,050,000 won in total purchased from the plaintiff corporation as it is without any processing. The non-party 2, who is the representative director of the non-party 2, who is the plaintiff's former trader and the non-party 2, who is the representative director of the plaintiff's representative director, provided advice to establish the plaintiff corporation, and the non-party 2, who is the non-party 4, who is the non-party 2, who is the non-party 1,000 won in the second sale of gold bullion and the non-party 2, who was declared 1 and the export price of gold bullion.

If the facts are the same, the fact that the Plaintiff could have purchased or exported each gold bullion of this case in a short time with profit margin is due to the malicious business operator in the middle stage supplied the gold bullion of this case at a low price, thereby evading the output tax amount. In light of the structure of the transaction, it is almost impossible for the Plaintiff to engage in fraudulent trade without securing the market by exporting a large amount of gold bullion of this case. Accordingly, the Plaintiff and malicious business operator are in an inevitable mutual dependence relationship. In addition, if the Plaintiff cannot obtain the deduction or refund of the input tax amount, the burden of the tax amount would exceed the profit margin, and thus, trade relationship is presumed to be impossible. Accordingly, the Plaintiff’s mutual dependence is premised on receiving the deduction or refund of the input tax amount from the State through the application of zero-rate tax rate. Moreover, since such a series of transactions are made within a short period of time, it is difficult for the State to block it in advance.

Examining these circumstances in light of the legal principles as seen earlier, if the Plaintiff, an exporter, has a malicious entrepreneur who makes an illegal transaction for the purpose of evading the output tax amount in the course of a series of transactions previously conducted prior to the transaction, and thus, seeks the deduction and refund of the input tax amount even though he knew of or was unable to know the fact that the Plaintiff’s deduction and refund of the input tax amount would result in a decrease in other tax revenues by gross negligence, it is not only intended for a malicious entrepreneur to take part of the output tax amount evaded by a malicious entrepreneur by abusing the input tax deduction and refund system, but also would undermine the foundation of the VAT system and the overall tax justice under Article 15 of the Framework Act on National Taxes.

C. Therefore, the lower court should have sufficiently deliberated on whether the Plaintiff knew or was unaware of the aforementioned circumstances in trading each gold bullion of this case by gross negligence, and should have determined whether the Plaintiff’s assertion on the deduction and refund of the Plaintiff’s input tax amount violates the principle of good faith. Without such deliberation and determination, the Plaintiff’s assertion on the deduction and refund of the Plaintiff’s input tax amount should be allowed solely on the ground that the instant tax invoice does not constitute a false tax invoice. In so doing, the lower court erred by misapprehending the legal doctrine on the principle of good faith under Article 15 of the Framework Act on National Taxes, thereby failing to exhaust all necessary deliberations

3. Conclusion

Therefore, 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 Lee In-bok (Presiding Justice)