Ji-Hyun Yoon, A Critical Review of Case Law on Realization Principle in Korean Income Tax Law — with focus on the so-called “Doctrine of Fixed Right” and the concept of “Mature Fixation”, TAX and LAW, Vol. 13, No. 1 (2020), pp. 1-64.
<Abstract>
Timing of income realization and recognition is an invariably important issue in any modern income tax system, which is also true to Korean income tax law. Under the influence of early Japanese case law, the Supreme Court of Korea (the “Court”) has focused on the moment when the creditor becomes able to actually exercise its legal right against its debtor without any legal obstacle. This has been somehow referred to as “fixation of right,” so this position is usually called the “doctrine of fixed right.” It is often said that this “Doctrine” applies a type of legal test, which one expects to result in more legal certainty. However, the meaning of the term “fixation” has always been far from being certain or evident in Korean case law. The Court has indeed frequently shown its reluctance to apply the Doctrine as understood in its original form, and coined the term “mature fixation of right.” This term has never been clearly defined in case law either, and is most often used in the two following types of cases: (i) When a person lends money to someone else, the lender is usually required, under the Doctrine, to recognize interest income when his claim for interest payment becomes due. However, things may get complicated when the borrower later defaults on its debt. The Court, from hindsight, often holds that the lender’s “right” has in fact never been “maturely fixed,” which may result in an indefinite deferment of income recognition; and, (ii) Even if a legal claim becomes due, the debtor may still be arguing over the existence or content of its corresponding obligation. If this legal controversy is litigated at a court, case law states, income will be recognized when this controversy ends by way of court judgment which can no further be challenged or its equivalent (e.g. a settlement). To arrive at this outcome, the Court says the “right” becomes “maturely fixed” only when the court renders such a final judgment or the like. While this much is clear, the Court has thus far also used (or abused) the term in many other types of cases. The court in those cases often does not define the term at all, but simply jumps up to the conclusion. This article submits that this tendency cannot be justified, and the Court should attempt to give the term more concrete and better articulated meaning before it applies the term to any specific case. In addition, it is now often noted that taxpayers under Korean tax procedures are granted a right to rectify their tax liabilities based on the facts that occurred posterior to their filing of tax returns or the tax assessments by the tax authorities. Arguments based on this right has of late been extensively accepted by the Court, and many commentators nowadays point out that, in this relatively new environment, there is maybe no need to defer income recognition using the term of “mature fixation” as before, because even if the income is recognized at an earlier stage, the outcome might be readily rectified later by use of this new procedural right of taxpayers’. This article argues, in the same line of reasoning, that the term of “mature fixation of right” should be, to a large extent, discarded, and given a limited role in achieving the outcomes referred to in abovementioned (ii).
<Keyword>
realization principle, timing of recognition, realization based on legal test, “Doctrine of fixed rights,” “mature fixation of right”
Ji-Hyun Yoon, A Critical Review of Case Law on Realization Principle in Korean Income Tax Law — with focus on the so-called “Doctrine of Fixed Right” and the concept of “Mature Fixation”, TAX and LAW, Vol. 13, No. 1 (2020), pp. 1-64.
<Abstract>
Timing of income realization and recognition is an invariably important issue in any modern income tax system, which is also true to Korean income tax law. Under the influence of early Japanese case law, the Supreme Court of Korea (the “Court”) has focused on the moment when the creditor becomes able to actually exercise its legal right against its debtor without any legal obstacle. This has been somehow referred to as “fixation of right,” so this position is usually called the “doctrine of fixed right.” It is often said that this “Doctrine” applies a type of legal test, which one expects to result in more legal certainty. However, the meaning of the term “fixation” has always been far from being certain or evident in Korean case law. The Court has indeed frequently shown its reluctance to apply the Doctrine as understood in its original form, and coined the term “mature fixation of right.” This term has never been clearly defined in case law either, and is most often used in the two following types of cases: (i) When a person lends money to someone else, the lender is usually required, under the Doctrine, to recognize interest income when his claim for interest payment becomes due. However, things may get complicated when the borrower later defaults on its debt. The Court, from hindsight, often holds that the lender’s “right” has in fact never been “maturely fixed,” which may result in an indefinite deferment of income recognition; and, (ii) Even if a legal claim becomes due, the debtor may still be arguing over the existence or content of its corresponding obligation. If this legal controversy is litigated at a court, case law states, income will be recognized when this controversy ends by way of court judgment which can no further be challenged or its equivalent (e.g. a settlement). To arrive at this outcome, the Court says the “right” becomes “maturely fixed” only when the court renders such a final judgment or the like. While this much is clear, the Court has thus far also used (or abused) the term in many other types of cases. The court in those cases often does not define the term at all, but simply jumps up to the conclusion. This article submits that this tendency cannot be justified, and the Court should attempt to give the term more concrete and better articulated meaning before it applies the term to any specific case. In addition, it is now often noted that taxpayers under Korean tax procedures are granted a right to rectify their tax liabilities based on the facts that occurred posterior to their filing of tax returns or the tax assessments by the tax authorities. Arguments based on this right has of late been extensively accepted by the Court, and many commentators nowadays point out that, in this relatively new environment, there is maybe no need to defer income recognition using the term of “mature fixation” as before, because even if the income is recognized at an earlier stage, the outcome might be readily rectified later by use of this new procedural right of taxpayers’. This article argues, in the same line of reasoning, that the term of “mature fixation of right” should be, to a large extent, discarded, and given a limited role in achieving the outcomes referred to in abovementioned (ii).
<Keyword>
realization principle, timing of recognition, realization based on legal test, “Doctrine of fixed rights,” “mature fixation of right”