Ji-Hyun Yoon, A Review of Selected Decisions by the Supreme Court of Korea in the Field of International Taxation, Journal of IFA, Korea, Vol.40, No.1(2024), pp.1-56.
<Abstract>
This article is based on the author’s presentation made at the Conference commemorating the 40th anniversary of the Korean branch of IFA that was held last year. The author reviewed overall fourteen (14) decisions rendered on international tax issues by the Supreme Court of Korea (“SC”) in the 21st Century, adding brief evaluation at the end of each review. The first part of the review with five (5) SC decisions is titled as “General Theory on Tax Treaty,” which begins by discussing such issues as attribution of income and entity classification (sometimes, in light of the principle of substance over-form). This leads to the SC’s peculiar case law on so-called “divisible resident,” and afterwards, the focus is shifted to the treatment of “intermediate” holding companies and Luxembourgian mutual funds under tax treaties and Korean domestic law. Although all these five decisions are interlinked with a certain degree of coherence, the “divisible resident” case law, in particular, cannot be justified in terms of both theoretical and practical considerations, which seems to warrant further discussions on the broader issue of income attribution in general. Under the title of “Selected Issues of Tax Treaty,” diverse aspects of tax treaties are put together with four (4) SC decisions, which includes such well-known issues as finding of permanent establishment and the OECD definition of beneficial ownership as well as some other issues unique to Korean law. With respect to the latter, the source of royalty payment made by a Korean enterprise to a U.S. patent holder has been, and still is, a particularly hot issue in the Korean community of international tax experts, and this article not only revisits the various aspects of the debate (albeit very briefly), but also poses a new and intriguing question of whether the case law is consistent with its other case law on the income classification of compensation for late payments, a theoretical link that has yet to be properly recognized and analyzed. As to the part with the title of “Transfer Pricing,” this article presents two (2) cases, each of which demonstrates how the SC applies respectively the so-called CUP method and the TNMM in accordance with the OECD Transfer Pricing Guidelines. The final part of the review, under the title of “Other Issues,” deals with the decisions regarding the residency rule and the issue of thin capitalization. Against the backdrop of the exceptionally rapid economic growth of Korea and the unprecedented trend of globalization, the SC has demonstrated commendable efforts in rapidly acquiring expertise in the field of international taxation, and endeavor necessary for the accurate adjudication of cases presenting complicated issues. In this regard, its herculean efforts warrant proper recognition and commendation. However, not all of its decisions can be justified in terms of theory or end-results, which necessitates further critical review. Some of them should be revisited in due course and their holdings be reconsidered, especially in light of the current period of sudden upheaval within this area of law—a field that has been relatively stable for near a century.
<Keywords>
Tax Treaty, Income Attribution, Entity Classification, Substance-over form, Resident, Permanent Establishment, Beneficial Ownership, Source of Income, Transfer Pricing, Place of Effective Management, Thin Capitalization.
Ji-Hyun Yoon, A Review of Selected Decisions by the Supreme Court of Korea in the Field of International Taxation, Journal of IFA, Korea, Vol.40, No.1(2024), pp.1-56.
<Abstract>
This article is based on the author’s presentation made at the Conference commemorating the 40th anniversary of the Korean branch of IFA that was held last year. The author reviewed overall fourteen (14) decisions rendered on international tax issues by the Supreme Court of Korea (“SC”) in the 21st Century, adding brief evaluation at the end of each review. The first part of the review with five (5) SC decisions is titled as “General Theory on Tax Treaty,” which begins by discussing such issues as attribution of income and entity classification (sometimes, in light of the principle of substance over-form). This leads to the SC’s peculiar case law on so-called “divisible resident,” and afterwards, the focus is shifted to the treatment of “intermediate” holding companies and Luxembourgian mutual funds under tax treaties and Korean domestic law. Although all these five decisions are interlinked with a certain degree of coherence, the “divisible resident” case law, in particular, cannot be justified in terms of both theoretical and practical considerations, which seems to warrant further discussions on the broader issue of income attribution in general. Under the title of “Selected Issues of Tax Treaty,” diverse aspects of tax treaties are put together with four (4) SC decisions, which includes such well-known issues as finding of permanent establishment and the OECD definition of beneficial ownership as well as some other issues unique to Korean law. With respect to the latter, the source of royalty payment made by a Korean enterprise to a U.S. patent holder has been, and still is, a particularly hot issue in the Korean community of international tax experts, and this article not only revisits the various aspects of the debate (albeit very briefly), but also poses a new and intriguing question of whether the case law is consistent with its other case law on the income classification of compensation for late payments, a theoretical link that has yet to be properly recognized and analyzed. As to the part with the title of “Transfer Pricing,” this article presents two (2) cases, each of which demonstrates how the SC applies respectively the so-called CUP method and the TNMM in accordance with the OECD Transfer Pricing Guidelines. The final part of the review, under the title of “Other Issues,” deals with the decisions regarding the residency rule and the issue of thin capitalization. Against the backdrop of the exceptionally rapid economic growth of Korea and the unprecedented trend of globalization, the SC has demonstrated commendable efforts in rapidly acquiring expertise in the field of international taxation, and endeavor necessary for the accurate adjudication of cases presenting complicated issues. In this regard, its herculean efforts warrant proper recognition and commendation. However, not all of its decisions can be justified in terms of theory or end-results, which necessitates further critical review. Some of them should be revisited in due course and their holdings be reconsidered, especially in light of the current period of sudden upheaval within this area of law—a field that has been relatively stable for near a century.
<Keywords>
Tax Treaty, Income Attribution, Entity Classification, Substance-over form, Resident, Permanent Establishment, Beneficial Ownership, Source of Income, Transfer Pricing, Place of Effective Management, Thin Capitalization.