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| 국제법 연구자료 ㅡ 미국 대법원 법인세 철회 결정 Revocation of Imposition of Corporate Tax, etc. |
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Supreme Court Decision 2014Du335 Decided November 26, 2015
Revocation of Imposition of Corporate Tax, etc,
Lee Nak-yong et al. established Pacific Gate Company Limited, an investment holding company (hereinafter “PGC”) in Labuan, Malaysia, in which Lee Nak-yong et al. are shareholders with 83% of the equity. With neither physical facilities nor employees, PGC is merely a “base company,” which only carries out relevant affairs under the instructions of Lee Nak-yong et al. Meanwhile, Plaintiff company is a domestic corporation, the entire stocks of which are held by PGC. Plaintiff company forwent the call option on the stocks of MagiNet Pte. Ltd., a Singaporean corporation (hereinafter “MPL”), thereby having PGC independently exercise the call option, even when it could have acquired them jointly with PGC, with which it is in special relationship. Separately, Plaintiff company transferred MPL stocks in its possession to PGC. At this, Defendant National Tax Service (NTS) Yeoksam District Tax Office Chief: (a) imposed corporate tax on Plaintiff company, on the ground that taxable revenues arose under the provisions on the repudiation of wrongful calculation, inasmuch as the Plaintiff company transferred without consideration the value corresponding to the difference between the call option exercise price and the market price by having PGC exercise the entire call option, and transferred MPL stocks to PGC at a low price, thereby apportioning the profits corresponding to its difference from the market price; and (b) deeming the above a bonus income, notified the Plaintiff company of the income amount change, on the ground that PGC is a mere conduit company, and thus, taxable revenues are attributable to Lee Nak-yong et al.
【Main Issues and Holdings】
[1] The meaning of the principle of substantial taxation under Article 14(1) of the former Framework Act on National Taxes / Whether the principle of substantial taxation is applicable to an international transaction in which a resident or domestic corporation establishes, and uses only the corporate form of, a merely formal “base company” in a tax haven to avoid domestic taxes (affirmative)
[2] In cases where it is difficult to apply the transfer price tax system under the former Adjustment of International Taxes Act to an international transaction between persons in special relationship, and the substance of the transaction constitutes a transfer of domestic corporate profits to a foreign related person without consideration, whether said transaction falls under any of the items under Article 3-2 of the former Enforcement Decree of the Adjustment of International Taxes Act (affirmative) / In cases where a domestic corporation jointly holding derivative-based rights with a foreign related party distributes profits to said foreign related party by allowing it to exercise the entire right, whether such an act falls under the scope of the repudiation of wrongful calculation under Article 52(1) of the former Corporate Tax Act and Article 88(1)7-2 of the former Enforcement Decree of the Corporate Tax Act (affirmative)
[3] In cases of a corporate transfer of issued stocks together with its managerial control, whether the transaction price may be deemed an ordinary market price (negative) / In cases of stock transactions involving a complete transfer of managerial control, whether the transaction price may be deemed an arm’s length price (negative in principle)
【Summary of Decision】
[1] The principle of substantial taxation as provided under Article 14(1) of the former Framework Act on National Taxes (Amended by Act No. 9911 of Jan. 1, 2010) means that, when there is a person to whom such taxable items as income, profit, property, or transaction substantially accrue, apart from the one nominally designated, tax authority shall deem liable for tax the one to whom such items substantially accrue, instead of the nominally designated person in formality or appearance. Thus, in cases where: (a) the person to whom a property nominally accrues lacks the capacity to control/manage the property; (b) there is another person who substantially controls/manages the property by means of governance, etc. of the nominal owner; and (c) the disparity between name and substance arose out of the intent to avoid tax, the income on property shall be deemed attributable to the person substantially controlling/managing the property, rendering said person liable for taxation. In addition, the principle of substantial taxation may be applicable not only to those international transactions in which a non-resident or foreign corporation establishes, and uses only the corporate form of, a nominal corporation in a country eligible for tax treaty benefits in order to avoid domestic taxes as the source country, but also to those international transactions in which a resident or domestic corporation establishes a so-called “base company” only in form without the capacity to carry out business activities in a tax haven where income tax is exempted or imposed at a low rate, and uses only the corporate form of said base company as a means to avoid domestic taxes as the country of residence, thereby unfairly reserving the income which ought to have accrued to the substantial controller/manager.
[2] In cases where it is difficult to apply the transfer price tax system under the former Adjustment of International Taxes Act to an international transaction between persons in special relationship, and the substance of the transaction constitutes a transfer of domestic corporate profits to a foreign related person without consideration, said transaction shall be construed to fall under each of the items under Article 3-2 of the former Enforcement Decree of the Adjustment of International Taxes Act, in full view of the following: (a) chronology of the enactment and amendment of the Adjustment of International Taxes Act; (b) developments leading up to the establishment of Article 3(2) of the former Adjustment of International Taxes Act (Amended by Act No. 9914 of Jan. 1, 2010; hereinafter the “former International Taxes Adjustment Act”); (c) interrelationship between the former Corporate Tax Act (Amended by Act No. 10423 of Dec. 30, 2010; hereinafter the “Corporate Tax Act”) and the former International Taxes Adjustment Act; and (d) features and organization of each items under Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 20720 of Feb. 29, 2008; hereinafter the “Corporate Tax Act Enforcement Decree”), setting out the object and types of the repudiation of wrongful calculation, and those under Article 3-2 of the former Enforcement Decree of the International Taxes Adjustment Act (Amended by Presidential Decree No. 21299 of Feb. 4, 2009; hereinafter the “former International Taxes Adjustment Act Enforcement Decree”), setting out the scope of exclusion from the applicability of the former International Taxes Adjustment Act.
Therefore, it falls under the scope of the repudiation of wrongful calculation under Article 52(1) of the Corporate Tax Act and Article 88(1)7-2 of the Corporate Tax Act Enforcement Decree for a domestic corporation jointly holding derivative-based rights with a foreign related party to abstain from exercising its rights corresponding to its holding ratio, and to instead distribute profits to said foreign related party by allowing it to exercise the entire right, which is tantamount to an asset transfer without consideration under Article 3-2 subparag. 1 of the former International Taxes Adjustment Act Enforcement Decree.
[3] The transaction price of a corporate transfer of issued stocks together with its managerial control may not be deemed an ordinary market price reflecting the objective exchange value in a transfer of stocks only. Likewise, it is difficult to regard a stock transaction involving a complete transfer of managerial control as a transaction highly comparable to a domestic corporate transfer of only a part of the stocks to a foreign related party. Thus, barring any special circumstances, the transaction price in such a context may not be deemed an arm’s length price.
【Reference Provisions】
[1] Article 14(2) of the former Framework Act on National Taxes (Amended by Act No. 9911 of Jan. 1, 2010) / [2] Articles 2(1)1 and 3(2) of the former Adjustment of International Taxes Act (Amended by Act No. 9914 of Jan. 1, 2010), Article 3-2 of the former Enforcement Decree of the Adjustment of International Taxes Act (Amended by Presidential Decree No. 21299 of Feb. 4, 2009), Article 52(1) of the former Corporate Tax Act (Amended by Act No. 10423 of Dec. 30, 2010), Article 88(1)7-2 of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 20720 of Feb. 29, 2008), Article 42-3 of the former Enforcement Rule of the Corporate Tax Act (Amended by Ordinance of the Ministry of Strategy and Finance No. 10 of Aug. 31, 2008; see current Article 42-4), Article 46(4) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 14861 of Dec. 30, 1995; deleted) / [3] Articles 4(1) and 5(1)1 of the former Adjustment of International Taxes Act (Amended by Act No. 9914 of Jan. 1, 2010), Article 5(1)1 of the former Enforcement Decree of the Adjustment of International Taxes Act (Amended by Presidential Decree No. 21299 of Feb. 4, 2009)
Article 14 of the Framework Act on National Taxes (Actual Taxation)
(1) If any ownership of an income, profit, property, act or transaction which is subject to taxation, is just nominal, and there is other person to whom such income, etc., belongs, the other person shall be liable to pay taxes and tax-related Acts shall apply, accordingly.
Article 2 of the Adjustment of International Taxes Act (Definitions)
(1) The terms used in this Act shall be defined as follows:
1. The term "international trade" means a trade for which either or both parties to a transaction are nonresidents or foreign corporations (excluding domestic business places of nonresidents or foreign corporations), including trading or leasing tangible or intangible assets, providing services, lending or borrowing money, and all other trades related to profits or losses and assets of the parties involved[.]
Article 3 of the Adjustment of Int’l Taxes Act (Relationship to other Acts)
(2) Article 41 of the Income Tax Act and Article 52 of the Corporate Tax Act shall not apply to international trades: Provided, That the same shall not apply to the gift, etc. of assets prescribed by Presidential Decree.
Article 4 of the Adjustment of Int’l Taxes Act (Tax Adjustment by Arm's Length Price)
(1) Where the trade price in an international trade in which either party to the trade is a foreign related party is lower or higher than the arm's length price, a tax authority may determine or modify the tax base and tax amount of a resident (including a domestic corporation and a domestic business place; hereafter the same shall apply in this Chapter) on the basis of the arm's length price: Provided, That the same method of calculating arm's length prices among those set forth in Article 5 applies to calculating an arm's length price, and the tax base and tax amount for part of taxable years are determined or modified on the base of such arm's length price, the tax base and tax amount of the remaining taxable years shall also be determined or modified on the base of the same arm's length price.
Article 5 of the Adjustment of Int’l Taxes Act (Method of Computing Arm's Length Price)
(1) The arm's length price shall be calculated by the most reasonable method among the following methods: Provided, That the method of subparagraph 6 shall be limited to cases where the arm's length price may not be computed by the methods of subparagraphs 1 through 5:
1. Method with a comparable third party's price: A method to regard a trade price between the independent unrelated parties in a trade situation similar to the relevant trade, as the arm's length price in the international trade between a resident and a foreign related party[.]
Article 3-2 of the Enforcement Decree of the Adjustment of Int’l Taxes Act (Applicable Scope of Rejection of Unfair Act and Calculation)
The term "gift, etc. of assets prescribed by Presidential Decree" as referred to in the proviso to Article 3(2) of the Act means any of the following cases:
1. Conveying an asset without consideration (excluding a case of conveying it at a significantly low price) or discharging an obligation;
2. Purchasing assets which do not yield any profit, receiving the contribution of such assets in kind, or bearing expenses for such assets;
3. Bearing contributions by proxy;
4. Other trade of capital which fall under any of the items of Article 88(1) 8 of the Enforcement Decree of the Corporate Tax Act or under subparagraph 8-2 of the same Article 88(1).
Article 5 of the Enforcement Decree of the Adjustment of Int’l Taxes Act (Selection of Arm's Length Price Computation Method)
(1) In computing the arm's length price under Article 5(1) of the Act, the most rational method shall be selected by taking into account any of the following standards :
1. Possibility for comparison shall be high between the international trade among the related parties and the trade among the unrelated parties. In such cases, "high possibility for comparison" means any of the following cases:
(a) Where a difference in the compared circumstances has no serious effect upon the compared price or net profit of the trade;
(b) Where a rational adjustment, which is capable of removing a difference due to the relevant effects, is possible, even where the difference in the compared circumstances has a serious effect upon the compared price or net profit[.]
Article 52 of the Corporate Tax Act (Repudiation of Wrongful Calculation)
(1) Where the head of the district tax office having jurisdiction over the place of tax payment or the Commissioner of the competent Regional Tax Office deems that the tax burden of a domestic corporation has been unjustly reduced through the wrongful calculation of the income amount of the corporation in transactions with a related party, as prescribed by Presidential Decree (hereinafter referred to as "related party"), he/she may calculate the amount of income for each business year of the relevant corporation regardless to wrongful calculation of the amount of income of the corporation (hereinafter referred to as "wrongful calculation").
Article 88 of the Enforcement Decree of the Corporate Tax Act (Type of Wrongful Calculation)
(1) "Where … deems that the tax burden … has been unjustly reduced" in Article 52 (1) of the Act means any of the following cases:
7-2. Where profits are distributed in such a manner as not exercising the derivative-based rights prescribed by Ordinance of the Ministry of Strategy and Finance or as adjusting the period of such exercise[.]
Article 42-4 of the Enforcement Rule of the Corporate Tax Act (Derivatives)
“Derivative-based rights prescribed by Ordinance of the Ministry of Strategy and Finance” under Article 88(1)7-2 of the Enforcement Decree means forward trade under corporate accounting standards, futures, swaps, options, and other similar trade or contract.
[Article inserted Mar. 30, 2007]
[Moved from Article 42-3 ]
Article 46 of the Enforcement Decree of the Corporate Tax Act (Non-Inclusion of Travel Expenses in Calculation of Losses)
Travel expenses or education and training expenses paid by a corporation to controlling stockholders, etc. (including the persons in a special relationship pursuant to Article 43 (8)) other than executives or employees shall not be included in losses in the calculation of the taxable income for the relevant business year.
【Reference Cases】
[1] Supreme Court en banc Decision 2008Du8499 decided Jan. 19, 2012 (Gong2012Sang, 359) / [3] Supreme Court Decision 89Nu558 decided Jan. 12, 1990 (Gong1990, 471)
【Plaintiff-Appellee】 MagiLink Co., Ltd. (Attorneys Son Ji-yol et al., Counsel for plaintiff-appellee)
【Defendant-Appellant】 National Tax Service Yeoksam District Tax Office Chief and one other (Sehan LLC, Attorneys Kang Nam-kyu et al.)
【Judgment of the court below】 Seoul High Court Decision 2013Nu8976 decided December 6, 2013
【Disposition】 The judgment below is reversed, and the case is remanded to Seoul High Court.
【Reasoning】
The grounds of appeal are examined (to the extent of supplement in case of any supplemental appellate brief not timely filed).
1. As to the grounds of appeal Nos. 1 and 5
A. The principle of substantial taxation as provided under Article 14(1) of the former Framework Act on National Taxes (Amended by Act No. 9911 of Jan. 1, 2010) means that, when there is a person to whom such taxable items as income, profit, property, or transaction substantially accrue, apart from the one nominally designated, tax authority shall deem liable for tax the one to whom such items substantially accrue, instead of the nominally designated person in formality or appearance. Thus, in cases where: (a) the person to whom a property nominally accrues lacks the capacity to control/manage the property; (b) there is another person who substantially controls/manages the property by means of governance, etc. of the nominal owner; and (c) the disparity between name and substance arose out of the intent to avoid tax, the income on property shall be deemed attributable to the person substantially controlling/managing the property, rendering said person liable for taxation (see, e.g., Supreme Court en banc Decision 2008Du8499, Jan. 19, 2012). In addition, the principle of substantial taxation may be applicable not only to those international transactions in which a non-resident or foreign corporation establishes, and uses only the corporate form of, a nominal corporation in a country eligible for tax treaty benefits in order to avoid domestic taxes as the source country, but also to those international transactions in which a resident or domestic corporation establishes a so-called “base company” only in form without the capacity to carry out business activities in a tax haven where income tax is exempted or imposed at a low rate, and uses only the corporate form of said base company as a means to avoid domestic taxes as the country of residence, thereby unfairly reserving the income which ought to have accrued to the substantial controller/manager.
B. Reviewing the reasoning of the judgment below and the duly admitted evidence reveals the following facts.
(1) (a) On May 2, 2000, Non-Party 1, Non-Party 2, Non-Party 3, and Hoon-Jin Industries Co., Ltd. established Pacific Gate Company Limited, an investment holding company (hereinafter “PGC”) in Labuan, Malaysia. Thereafter, Non-Party 1 and Non-Party 2 remained as its shareholders, with the one holding 17% of the equity and the other, 83%, respectively.
(b) Back in around April 2000, Non-Party 1 and Non-Party 2 initiated the establishment of PGC, based on their decision to establish an investment holding company in Labuan, Malaysia, where they thought the likelihood of local taxation would be low, without any obligation to report tax or any local requirement to file financial statements or audit reports.
(c) With neither physical facilities nor employees in Labuan, Malaysia, PGC only has its Hong Kong office carry out relevant affairs under the instructions of Non-Parties 1 and 2, without ever properly conducting major corporate decision-making procedures, such as a resolution of the board of directors.
(d) PGC failed to prepare a reliable accounting book, even though it depended on Non-Party 1 for its asset management, as evidenced by Non-Party 1’s frequent deposit and withdrawal between PGC’s account and Non-Party 1’s account.
(e) Meanwhile, the number of days spent in Korea for Non-Party 1, a permanent resident of Singapore, stood merely between nine to 112 days a year from 2000 to 2007. Although a domestic resident, Non-Party 2 only holds 17% of PGC stocks. As such, PGC’s income did not fall under the category of deemed dividend of a specific foreign corporation under the former Adjustment of International Taxation Act then in effect.
(2) The Plaintiff is a domestic corporation, the entire stocks of which are held by PGC. On September 14, 2007, the Plaintiff forwent the call option in its joint possession with PGC, which would have enabled it to acquire the stocks of MagiNet Pte. Ltd., a Singaporean corporation (hereinafter “MPL”), thereby having PGC independently exercise the entire call option at around that time.
In addition, the Plaintiff transferred MPL stocks in its separate possession over to PGC, and settled and liquidated the account on February 1, 2008.
(3) On July 1, 2010, Defendant Yeoksam District Tax Office imposed corporate tax on the Plaintiff for business years 2007 and 2008, respectively (hereinafter the “Corporate Tax Imposition”), on the following grounds: (a) by forgoing the call option, which could have enabled the Plaintiff to acquire MPL stocks at a low price, and letting PGC, a related company, exercise the entire call option, the Plaintiff transferred without consideration the value corresponding to the difference between the call option exercise price and the market price; and (b) inasmuch as the Plaintiff transferred MPL stocks to PGC at a low price, thereby allocating the profits corresponding to its difference from the market price, taxable revenues arose under the provisions on the repudiation of wrongful calculation. In addition, Defendant Seoul Regional Tax Office Chief deemed the above to be a bonus income attributed to business years 2007 and 2008, respectively, and notified the Plaintiff of the income amount change on July 1, 2010 (hereinafter the “Income Amount Change Notification”), on the ground that PGC is merely a conduit company whose substance is not recognized, and thus, its taxable revenues are directly attributed to Non-Parties 1 and 2, who are officers of the Plaintiff.
C. Examining such facts regarding the purpose and developments leading up to the establishment of PGC, the personnel and physical structure of PGC and the content of its business activities, the ways in which PGC’s decisions are made and assets are managed, and PGC’s governance structure, in light of the legal doctrines as noted earlier, it is reasonable to deem as follows: (1) as a company established in a tax haven where entities are exempt from, or liable for a low rate of, income tax, PGC has neither the capacity to control and manage property in its name, nor the capacity to carry out substantial business activities, which is instead carried out by Non-Parties 1 and 2 in PGC’s name by making decisions and managing the assets of PGC through their control over PGC; such a disparity between name and substance is solely aimed at tax avoidance by reserving in PGC the taxable income under domestic tax laws by involving PGC as an agent of trade and action, thereby shifting the entity to which income is accrued from Non-Parties 1 and 2 to PGC; as such, PGC constitutes the so-called “base company,” the substance of which cannot be recognized under the principle of substantial taxation; and (2) the allocation of profits from the Plaintiff’s abstention from exercising the call option, or the profit from transfer at a low price, which the Defendant included in taxable revenues, are directly attributed to Non-Parties 1 and 2, who substantially control and manage them.
Therefore, the determination whether the Corporate Tax Imposition and the Income Amount Change Notification were unlawful shall be based on the deliberation and determination of the following: (a) whether Non-Parties 1 and 2 constitute residents under the Income Tax Act and whether the profit allocation arising from the Plaintiff’s abstention from exercising the call option and the Plaintiff’s transfer of MPL stocks at a low price are domestic or international transaction; and on that basis, (b) whether the transactions meet the requirements for taxation under the Corporate Tax Act or the Adjustment of International Taxation Act (hereinafter the “International Taxation Adjustment Act”).
D. Nevertheless, the court below reasoned otherwise, determining the lawfulness of the Corporate Tax Imposition and Income Amount Change Notification on the erroneous premise of a conclusive assumption that the above taxable revenues accrue to PGC, a foreign corporation, and thus, the above profit allocation and low-price transfer only constitute international transactions, on the ground of its erroneous determination in disregard of the existence of PGC that it can be deemed neither that Non-Parties 1 and 2 held PGC out as a nominal agent of action even when Non-Parties 1 and 2 traded with the Plaintiff in their individual capacities, nor that the above taxable revenues directly accrue to Non-Parties 1 and 2, instead of PGC.
In so doing, the court below erred by misapprehending the legal doctrines on the principle of substantial taxation and the scope of its applicability, which led to the failure to exhaust all necessary deliberations, thereby affecting the conclusion of the judgment. The ground of appeal assigning this error is with merit.
2. As to the grounds of appeal Nos. 2 and 3
A. (1) Article 2(1)1 of the former Adjustment of International Taxes Act (Amended by Act No. 9914 of Jan. 1, 2010; hereinafter the “former International Taxes Adjustment Act”) provides, “The term ‘international trade’ means a trade for which either or both parties to a transaction are nonresidents or foreign corporations […] including trading or leasing tangible or intangible assets, providing services, lending or borrowing money, and all other trades related to profits or losses and assets of the parties involved.” Article 3(2) of said Act provides, “Article 41 of the Income Tax Act and Article 52 of the Corporate Tax Act shall not apply to international trades: Provided, That the same shall not apply to the gift, etc. of assets prescribed by Presidential Decree.”
In addition, Article 3-2 of the former Enforcement Decree of the International Taxes Adjustment Act (Amended by Presidential Decree No. 21299 of Feb. 4, 2009; hereinafter the “former International Taxes Adjustment Act Enforcement Decree”) provides, “The term ‘gift, etc. of assets prescribed by Presidential Decree’ as referred to in the proviso to Article 3(2) of the Act means any of the following cases.” Said Article enumerates the following Subparagraphs: “Conveying an asset without consideration (excluding a case of conveying it at a significantly low price) or discharging an obligation” (subparag. 1); “Purchasing assets which do not yield any profit, receiving the contribution of such assets in kind, or bearing expenses for such assets” (subparag. 3); “Bearing contributions by proxy” (subparag. 4); and “Other trade of capital which fall under any of the items of Article 88(1)8 of the Enforcement Decree of the Corporate Tax Act or under subparagraph 8-2 of the same Article 88(1)” (subparag. 5).
(2) Meanwhile, Article 52(1) of the former Corporate Tax Act (Amended by Act No. 10423 of Dec. 30, 2010; hereinafter the “Corporate Tax Act”) has a clause on the repudiation of wrongful calculation, which provides, “Where the head of the district tax office having jurisdiction over the place of tax payment or the Commissioner of the competent Regional Tax Office deems that the tax burden of a domestic corporation has been unjustly reduced through the wrongful calculation of the income amount of the corporation in transactions with a related party, as prescribed by Presidential Decree (hereinafter referred to as ‘related party’), he/she may calculate the amount of income for each business year of the relevant corporation regardless of the wrongful calculation of the amount of income of the corporation (hereinafter referred to as ‘wrongful calculation’).”
In addition, Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 20720 of Feb. 29, 2008; hereinafter the “Corporate Tax Act Enforcement Decree”) delineates the types of wrongful calculation, including Subparagraph 7-2, which provides, “Where profits are distributed in such a manner as not exercising the derivative-based rights prescribed by Ordinance of the Ministry of Strategy and Finance or as adjusting the period of such exercise.” Article 42-3 of the former Enforcement Rule of the Corporate Tax Act (Amended by the Ordinance of the ministry of Strategy and Finance No. 10 of Mar. 31, 2008) defines the derivative rights as “forward trade pursuant to corporate accounting standard, futures, swaps, options, and other similar transactions or contracts.”
(3) Article 46(4) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 14861 of Dec. 30, 1995), in effect before the enactment of the International Taxes Adjustment Act, provided for the computation method of the market price as a standard for the repudiation of wrongful calculation in an international transaction, thereby extending the applicability of the repudiation of wrongful calculation under the Corporate Tax Act to international transactions as well.
Meanwhile, the International Taxes Adjustment Act, which was enacted as Act No. 4981 on Dec. 6, 1995, gave the International Taxes Adjustment Act precedence over other statutes with a view to complying with internationally accepted standards on international transaction between related parties, while deleting all pertinent provisions from the Corporate Tax Act, etc.
However, as there was room for debate over the scope of applicability of said provisions due to the incongruity between the criteria for applying transfer price taxation under the International Taxes Adjustment Act and the criteria for the repudiation of wrongful calculation under the Corporate Tax Act, the amended International Taxes Adjustment Act, No. 6779 of Dec. 18, 2002, inserted Article 3(2), allowing for the application of only the provision on the repudiation of wrongful calculation under the Corporate Tax Act to gift, etc. of specific assets, to which the application of transfer price taxation is difficult.
(4) In cases where it is difficult to apply the transfer price tax system under the former International Taxes Adjustment Act to an international transaction between persons in special relationship, and the substance of the transaction constitutes a transfer of domestic corporate profits to a foreign related person without consideration, said transaction shall be construed to fall under each of the items under Article 3-2 of the former Enforcement Decree of the Adjustment of International Taxes Act, in full view of the following: (a) chronology of the enactment and amendment of the Adjustment of International Taxes Act; (b) developments leading up to the establishment of Article 3(2) of the former Adjustment of International Taxes Act (Amended by Act No. 9914 of Jan. 1, 2010; hereinafter the “former International Taxes Adjustment Act”); (c) interrelationship between the former Corporate Tax Act (Amended by Act No. 10423 of Dec. 30, 2010; hereinafter the “Corporate Tax Act”) and the former International Taxes Adjustment Act; and (d) features and organization of each items under Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 20720 of Feb. 29, 2008; hereinafter the “Corporate Tax Act Enforcement Decree”), setting out the object and types of repudiation of wrongful calculation, and those under Article 3-2 of the former Enforcement Decree of the International Taxes Adjustment Act (Amended by Presidential Decree No. 21299 of Feb. 4, 2009; hereinafter the “former International Taxes Adjustment Act Enforcement Decree”), setting out the scope of exclusion from the applicability of the former International Taxes Adjustment Act.
Therefore, it falls under the scope of the repudiation of wrongful calculation under Article 52(1) of the Corporate Tax Act and Article 88(1)7-2 of the Corporate Tax Act Enforcement Decree for a domestic corporation jointly holding derivative-based rights with a foreign related party to abstain from exercising its rights corresponding to its holding ratio, and to instead distribute profits to said foreign related party by allowing it to exercise the entire right, which is tantamount to an asset transfer without consideration under Article 3-2 subparag. 1 of the International Taxes Adjustment Act Enforcement Decree.
B. Reviewing the reasoning of the judgment below and the duly admitted evidence reveals the following facts.
(1) The Plaintiff and PGC transferred MPL stocks (26% of those held by the Plaintiff, 13% of those held by PGC) to MP Technologies, a Japanese corporation (hereinafter “MPT”) at USD 4.2110 per share. On May 10, 2005, the Plaintiff and PGC signed a shareholders’ agreement with MPT, under which the Plaintiff and PGC would receive a call option enabling them to purchase between 1% and 35% of MPT stocks at a price 70% that of MPT’s acquisition price, in case MPT fails to list MPL stocks to the Japanese stock market by June 30, 2007.
(2) MPT failed to list MPL stocks to the Japanese stock market within the timeframe set by the agreement.
(3) Meanwhile, the Plaintiff chose not to exercise the call option (hereinafter the “Call Option Give-up”), and PGC independently exercised the entire call option, purchasing from MPL 35% of MPL stocks at USD 2.7944 per share, and 10% of MPL stocks at the market price of USD 5.5342 per share.
C. Examining these facts in light of the legal doctrines as noted earlier, it can be deemed that the Plaintiff allocated to a related party through PGC the profits amounting to the Plaintiff’s call option equity multiplied by the difference between the call option exercise price and the market price, by giving up the call option exercise rights and having PGC exercise it entirely, even though the Plaintiff could have exercised the call option itself to acquire MPL stocks at USD 2,7944 per share, which is lower than the market price. As such, the allocation of profits may be subject to the repudiation of wrongful calculation under Article 52(1) of the Corporate Tax Act and Article 88(1)7-2 of the Corporate Tax Act Enforcement Decree, even if it were to be found an international transaction with a foreign related party, as the court below found.
D. Nevertheless, the court below reasoned otherwise and determined the lawfulness of the Corporate Tax Imposition and the Income Amount Change Notification on the erroneous premise that, insofar as the profits from the Call Option Give-up constitute an international transaction, even if they were allocated to a related party, they are not subject to the repudiation of wrongful calculation under the Corporate Tax Act, as they do not fall under any of the subparagraphs under Article 3-2 of the former Enforcement Decree of the International Taxes Adjustment Act.
Therefore, in so doing, the court below erred by misapprehending the legal principles on the statutory construction and the scope of applicability of Article 3-2 of the former Enforcement Decree of the Adjustment of International Taxes Act or Article 88(1)7-2 of the Enforcement Decree of the Corporate Tax Act. The ground of appeal assigning this error is with merit.
3. As to the ground of appeal No. 4
A. Article 4(1) of the former International Taxes Adjustment Act provides that, in an international transaction in which one party is a foreign related party, where the transaction price falls short of, or exceeds, the arm’s length price, the tax base and tax amount for the resident (including domestic corporation and domestic place of business) may be determined or corrected against the standard of the arm’s length price. Article 5(1)1 of the same Act cites the following as one of the means to calculate such an arm’s length price: “The comparable third party price method: Deeming the transaction price between unrelated business entities without any special relationship in a situation similar to the international transaction between a resident and a foreign related party to be the arm’s length price.”
Meanwhile, Article 5(1) of the former International Taxes Adjustment Act Enforcement Decree provides, “In computing the arm's length price under Article 5(1) of the Act, the most rational method shall be selected by taking into account any of the following standards.” Subparagraph 1 of said provision states, “Possibility for comparison shall be high between the international trade among the related parties and the trade among the unrelated parties. In such cases, ‘high possibility for comparison’ means any of the following cases.” Said subparagraph further delineates the specific cases under the following Items: (a) “Where a difference in the compared circumstances has no serious effect upon the compared price or net profit of the trade”; and (b) “Where a rational adjustment, which is capable of removing a difference due to the relevant effects, is possible, even where the difference in the compared circumstances has a serious effect upon the compared price or net profit.”
In full view of the text and purport of these provisions, in order for a tax authority to impose tax against the standard of an arm’s length price by applying Article 4(1) of the International Taxes Adjustment Act to a transaction between a resident and a foreign related party, it has to choose the most reasonable method to calculate the arm’s length price, taking account of comparability based on the materials gathered by summoning documents from the taxpayer. In cases where the difference between the comparable situations has a serious effect on the compared price or net profit, the arm’s length price should be calculated by reasonably adjusting the difference. The burden of proving that the arm’s length price, as a standard of taxation, was lawfully calculated through such a process lies with the tax authority (see, e.g., Supreme Court Decision 2011Du6127, Dec. 26, 2012).
In addition, the transaction price of a corporate transfer of issued stocks together with its managerial control may not be deemed an ordinary market price reflecting the objective exchange value in a transfer of stocks only (see, e.g., Supreme Court Decision 89Nu558, Jan. 12, 1990). Likewise, it is difficult to regard a stock transaction involving a complete transfer of managerial control as a transaction highly comparable to a domestic corporate transfer of only a part of the stocks to a foreign related party. Thus, barring any special circumstances, the transaction price in such a context may not be deemed an arm’s length price.
B. The court below: (1) found that, on Dec. 12, 2007, the Plaintiff transferred 20% of MPL stocks in its possession to PGC at USD 3.4032 per share (hereinafter the “Stock Transfer”) and settled the account by paying off the balance on Feb. 1, 2008; meanwhile, on Sept. 21, 2007, PGC transferred 10.47% of MPL stocks in its possession to NIF SMBC Ventures Co., Ltd., a Japanese corporation, at USD 5.5342 per share; and on Dec. 21, 2007, PGC transferred 69% of MPL stocks in its possession to DoCoMo interTouch, a Japanese corporation (hereinafter “interTouch”) at USD 5.79 per share (hereinafter the “Price”); and (2) deemed that the stock transaction between PGC and interTouch entails a complete transfer of managerial control of MPL, as PGC was responsible for arranging and guaranteeing that the rest of the shareholders would transfer the stocks in their possession over to interTouch, and that stock options, etc. would be purchased from each rights-holders and written down; and (3) on the premise that the former International Taxes Adjustment Act is applicable because the Stock Transfer is a domestic corporation’s international transaction with a foreign related party, determined that the Price can hardly be deemed an arm’s length price highly comparable to the present stock transfer.
C. Reviewing the reasoning of the judgment below in light of the duly admitted evidence, the part where the court below determined that the Price can hardly be deemed an arm’s length price under the International Taxes Adjustment Act seems to be based on the above legal doctrine. In so determining, the court below did not err by misapprehending the legal principles on the designation of comparable transaction for the purpose of computing the arm’s length price, etc., contrary to what is alleged in the grounds of appeal. However, as noted already, the court below erred by making determinations on the conclusive premise that the Stock Transfer only constitutes an international transaction.
4. Conclusion
Therefore, the judgment of the court below is reversed, and the case is remanded to the court below for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices.
Justices
Kim Shin (Presiding Justice)
Kim Yong-deok (Justice in charge)
Park Poe-young
Kwon Soon-il
ㅡㅡㅡㅡㅡㅡㅡㅡㅡㅡㅡㅡㅡㅡㅡㅡ
고도의 국제법 전문가 그룹
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