A company that was imposed with taxes worth around 300 million KRW due to suspicions of ‘fictitious transactions’ in a merger and acquisition case has partially won a cancellation lawsuit against the tax office, resulting in a tax reduction.
According to the legal community on the 15th, the Administrative Division 2 of the Seoul Administrative Court (Chief Judge Shin Myung-hee) ruled partially in favor of Corporation A in the lawsuit filed against the Dobong Tax Office head to cancel the value-added tax (VAT) imposition. The court judged that the tax imposition amounting to about 276 million KRW out of the approximately 350 million KRW VAT imposed on the plaintiff should be canceled.
Corporation B (which was absorbed by Corporation A in February 2019) received tax invoices with a supply value of about 730 million KRW from trading company C during the second VAT taxable period of 2015 and filed a final VAT return with the Dobong Tax Office. Additionally, in the first VAT taxable period of 2016, Corporation B reported transactions with trading companies D and E, with supply values of 510 million KRW and 452 million KRW respectively, in its final VAT return.
As a result of a VAT tax investigation on Corporation A, the tax authorities concluded that the tax invoices issued by Corporation B before the merger were fabricated tax invoices issued without actual supply of goods, and issued a revised VAT assessment notice totaling about 350 million KRW to Corporation A. Corporation A filed this lawsuit in objection to the decision.
Corporation A argued, “Corporation B actually received mobile phone chargers and tripod phone holders, paid for them, and received tax invoices, so these are not fictitious transactions.” They further claimed, “Even if the tax invoices are ‘factually incorrect,’ Corporation A was unaware of this and cannot be considered negligent.” Although the names of the suppliers on the tax invoices differed from the actual trading companies, Corporation A maintained that they were unaware that these companies were disguising their names and conducting transactions, thus there was no negligence.
They also argued, “Even if Corporation A’s negligence is recognized, since Corporation A conducted transactions under the belief that it was legitimately deducting input tax, the 40% underreporting penalty should be canceled.”
Regarding the transactions with Corporation E, Corporation A rebutted that although they received tax invoices from Corporation E as a supply commitment, Corporation E ultimately failed to meet the delivery deadline, leading to order cancellations and issuance of revised tax invoices for the canceled portions. They acknowledged that the timing of the tax invoice issuance was factually inaccurate but denied that it was a fictitious transaction, arguing that the penalty was excessive.
The court accepted most of Corporation A’s claims. The court stated, “Corporation A did not know, nor was it negligent in not knowing, that the actual suppliers and the suppliers named on the tax invoices were different due to name disguise when Corporation B transacted with companies C and D. It is reasonable to consider that there are special circumstances for the lack of negligence,” and ruled that the revised VAT assessment by the Dobong Tax Office was unlawful.
However, regarding the transactions with Corporation E, the court noted, “Although it appears that the tax invoices were issued somewhat earlier than the actual delivery of goods, there is no evidence of intent to evade VAT,” and recognized the legitimate tax amount as approximately 74 million KRW, which corresponds to a 10% underreporting penalty. The court ruled that the portion exceeding this amount should be canceled.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
