Ji-Hyun Yoon, A Review of the Supreme Court Decisions on the Issue of the so-called “Notice of Increase in Amount of Income” under Korean Income Tax Law — After the Court’s Landmark 2006 Decision, 租稅와 法 , Vol.15, No.2 (2022), pp.1-79.
<Abstract>
Under Korean corporate income tax law, when a tax assessment is made, the tax authorities are also required to further examine whether the corresponding corporate asset or profit is still inside the corporate solution. If it is not and found out to have gone out to the hands of someone else so that it has become his or her taxable income, the tax may be collected, according to income tax law, from the corporation. It is in line with the general tendency of Korean income tax law that withholding is expansively used as means of tax collection.
In truth, this is not a case of typical tax withholding in that the relevant asset or profit has already been transferred to the individual taxpayer without the corporation, the withholding agent, has never had any chance to withhold income tax. However, the Korean Income Tax Act insists on calling it withholding, and so as to facilitate the so-called withholding procedure, has invented a peculiar legal fiction. Under this fiction, the tax authorities serve a document titled “Notice of Increase in Amount of Income” (“NIAI”) on the corporation, and when this NIAI has been duly served, the relevant payment of income is deemed to take place. Consequently, the duty of withholding arises at this very moment.
This unique feature of Korean income tax act has long been in use, and effectively employed by the tax authorities in securing tax revenue when they have difficulty in collecting tax from individual taxpayers.
When it comes to procedural aspects of this NIAI, the controversial issue was what type of lawsuit the corporation whould file to dispute the withholding tax. The Korean system of tax litigation, which has largely been influenced by the German and the Japanese system, is in a large part built on the concept of “administrative act,” and usual tax assessments generally qualify as administrative acts. A refusal to correct a tax return made by a taxpayer may also falls under this category of “administrative act.” However, the Supreme Court of Korea before 2006, had consistently held that the NIAI is not an administrative act, thus cannot be invalidated by the court’s “cancelation decision.” Since the “cancelation lawsuit” was and still is by far the best known and most frequently used form of lawsuit under the Korean system of administrative procedure, this holding had given headache to the taxpayers and their legal advisers. The holding had long been subject to broad and intense criticism, and finally, the Supreme Court of Korea in 2006 overturned this old and well-established case law to hold that the NIAI is an administrative act, and thus can be invalidated by a court’s “cancelation decision.”
A new series of decisions followed, building on this new holding and gradually formed a new system of case law with respect to various procedural issues of the NIAI. Now that longer than fifteen years of time have passed since the 2006 decision, this article is an attempt to recollect and review those important decisions that constitute the foregoing new system of the NIAI. In all, twelve decisions are reviewed with their basic facts and the legal issues of each respective case, and given short comments by this author. The Supreme Court appears basically to have succeeded in forming a fairly coherent set of case law, but in a few decisions the author believes that more and better reasoning could and should have been presented to justify the final holdings. It is also submitted that, once the NIAI has been recognized as an important legal concept in the entire system of tax procedures, there are places where the relevant statutory acts should include more provisions that explicity regulate this concept.
<Keywords>
tax procedure, withholding tax, “notice of increase in amount of income” (NIAI), administrative act, cancelation procedure
Ji-Hyun Yoon, A Review of the Supreme Court Decisions on the Issue of the so-called “Notice of Increase in Amount of Income” under Korean Income Tax Law — After the Court’s Landmark 2006 Decision, 租稅와 法 , Vol.15, No.2 (2022), pp.1-79.
<Abstract>
Under Korean corporate income tax law, when a tax assessment is made, the tax authorities are also required to further examine whether the corresponding corporate asset or profit is still inside the corporate solution. If it is not and found out to have gone out to the hands of someone else so that it has become his or her taxable income, the tax may be collected, according to income tax law, from the corporation. It is in line with the general tendency of Korean income tax law that withholding is expansively used as means of tax collection.
In truth, this is not a case of typical tax withholding in that the relevant asset or profit has already been transferred to the individual taxpayer without the corporation, the withholding agent, has never had any chance to withhold income tax. However, the Korean Income Tax Act insists on calling it withholding, and so as to facilitate the so-called withholding procedure, has invented a peculiar legal fiction. Under this fiction, the tax authorities serve a document titled “Notice of Increase in Amount of Income” (“NIAI”) on the corporation, and when this NIAI has been duly served, the relevant payment of income is deemed to take place. Consequently, the duty of withholding arises at this very moment.
This unique feature of Korean income tax act has long been in use, and effectively employed by the tax authorities in securing tax revenue when they have difficulty in collecting tax from individual taxpayers.
When it comes to procedural aspects of this NIAI, the controversial issue was what type of lawsuit the corporation whould file to dispute the withholding tax. The Korean system of tax litigation, which has largely been influenced by the German and the Japanese system, is in a large part built on the concept of “administrative act,” and usual tax assessments generally qualify as administrative acts. A refusal to correct a tax return made by a taxpayer may also falls under this category of “administrative act.” However, the Supreme Court of Korea before 2006, had consistently held that the NIAI is not an administrative act, thus cannot be invalidated by the court’s “cancelation decision.” Since the “cancelation lawsuit” was and still is by far the best known and most frequently used form of lawsuit under the Korean system of administrative procedure, this holding had given headache to the taxpayers and their legal advisers. The holding had long been subject to broad and intense criticism, and finally, the Supreme Court of Korea in 2006 overturned this old and well-established case law to hold that the NIAI is an administrative act, and thus can be invalidated by a court’s “cancelation decision.”
A new series of decisions followed, building on this new holding and gradually formed a new system of case law with respect to various procedural issues of the NIAI. Now that longer than fifteen years of time have passed since the 2006 decision, this article is an attempt to recollect and review those important decisions that constitute the foregoing new system of the NIAI. In all, twelve decisions are reviewed with their basic facts and the legal issues of each respective case, and given short comments by this author. The Supreme Court appears basically to have succeeded in forming a fairly coherent set of case law, but in a few decisions the author believes that more and better reasoning could and should have been presented to justify the final holdings. It is also submitted that, once the NIAI has been recognized as an important legal concept in the entire system of tax procedures, there are places where the relevant statutory acts should include more provisions that explicity regulate this concept.
<Keywords>
tax procedure, withholding tax, “notice of increase in amount of income” (NIAI), administrative act, cancelation procedure