Cost of Goods Sold Can Be Estimated Through Alternative Investigation
Denying the Entire Amount Contradicts Common Experience
A court has ruled that a tax authority’s decision to reassess corporate tax on the grounds that related expenses were not accompanied by actual transactions, despite acknowledging the company’s revenue, should be overturned.
The ruling is based on the finding that it is unlawful for the tax authority to fail to provide any evidence, even though it was required to calculate the amount of income using alternative methods such as an estimated investigation. On April 17, the Seoul Administrative Court’s Administrative Division 2 (Presiding Judge Ko Eunsul) ruled in favor of Company A in a lawsuit (2024GuHap63885) seeking to overturn the corporate tax assessment imposed by the head of the Gwanak Tax Office. The court stated, “The Gwanak Tax Office’s reassessment of 650.14 million won in corporate tax for the 2020 business year, imposed on Company A in July 2022, is hereby canceled.”
[Facts]
Company A is engaged in the sale of telecommunications devices and operates an e-commerce business. From January to December 2020, it purchased used mobile phones and either sold them domestically or exported them overseas.
The Seoul Regional Tax Office conducted a comprehensive corporate tax audit of Company A for the 2020 business year from September 2021 to May 2022. The audit found that, in the second half of 2020, Company A received purchase tax invoices totaling 2,192.68 million won from 24 suppliers without any actual transactions, and reported this information to the Seoul Regional Tax Office. The tax authority denied Company A’s deduction of the purchase amount from the tax invoices as cost of goods sold under the Corporate Tax Act, and increased the corporate tax base by 2,157.94 million won. The corporate tax was also reassessed and notified at 650.14 million won.
Company A argued, “It is unreasonable for the tax authority to recognize the revenue as legitimate, but to deny in full the cost of purchasing used mobile phones on the grounds that the transactions were suspected to be fabricated.” Article 66(3) of the Corporate Tax Act and Article 104 of its Enforcement Decree stipulate that, if the amount of income cannot be calculated based on books or other supporting documents, it should be calculated using alternative methods such as estimated taxation. Company A contended that, if the tax authority acknowledged the revenue, it should have also recognized the corresponding cost of goods sold to the extent possible through estimated investigation, even in the absence of supporting documents, and that denying the entire amount was a mistake.
[Court’s Judgment]
The Seoul Administrative Court accepted Company A’s argument. The court stated, “It is unlawful for the Gwanak Tax Office to deny the entire cost of goods sold based on the tax invoices, while failing to provide any evidence regarding the cost of goods sold that could have been calculated through an estimated investigation. Therefore, the tax assessment in this case must be canceled.”
The court further explained, “Through the IMEI, a unique identification number assigned to each device, it is possible to match revenue and cost of goods sold on a one-to-one basis. If the revenue is actually recognized, it is consistent with common experience to conclude that the corresponding cost of goods sold also exists.” The court continued, “The necessary expenses claimed by Company A are the actual purchase costs of used mobile phones corresponding to the revenue, and it is clear that these expenses occurred but were not reflected in the income amount. Therefore, presuming their nonexistence simply because Company A, as the taxpayer, could not submit objective evidence, is contrary to common experience. It is also reasonable to regard this as a case where ‘books or supporting documents do not exist, or important parts are missing or false,’ as stipulated in Article 104(1) of the Enforcement Decree of the Corporate Tax Act.” The court concluded, “Within the range that can be calculated using the method of estimated investigation, the tax authority must provide evidence of the amount.”
Hong Yoonji, Law Times Reporter
※This article is based on content supplied by Law Times.
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