Taxation and Responding to Tax Investigation

 

Taxation and Responding to Tax Investigation

Corporate Tax Issue: Corporate Tax Investigation

Get Your Solutions from the Corporate Tax Investigation Specialized Response Team!

 

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Corporate Tax Investigation, Tax Investigation Response Team, Tax Attorney | Dowoo Hwasan Attorneys & Counselors |

 

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Income per business year is the business year’s total earnings minus total deductible expenses

The key subject of corporate taxation is the income of each business year. Each business year’s income is the total amount of earnings pertaining to that business year, minus the total amount of deductible expenses. In general, earnings under corporate accounting correspond to revenues, while deductible expenses under tax law correspond to expenses. However, the scope of revenues under corporate accounting and that of earnings under corporate tax laws may vary in corporate management. Also, in some cases, the scope of expenses under corporate accounting and that of deductible expenses under corporate tax laws do not exactly match. In the end, figures on the balance sheet (B/S) need to be modified to fit the purposes under tax laws.

 

What is Deductible Expense?

‘Deductible Expenses’ are losses or expenses (hereinafter, “deductible expenses”) incurred by transactions that reduce the net assets of a corporation, excluding return of capital or financing, disposition of surplus funds, and what is provided for in the Corporate Tax Act (Article 19(1), Corporate Tax Act). The details of deductible expenses included are reserve under the laws, overseas market development reserve, securities transaction reserve, reserve for overseas investment loss, retirement benefit appropriation funds, and appropriation for bad debts, etc.

 

Non-Inclusion in Deductible Expenses?

Non-inclusion of deductible expenses refers to the accounting method that acknowledges the expenses as expenses under corporate accounting while not treating the same as deductible expenses under tax accounting pursuant to the tax law. The excess above the deprecation costs limitation and the excess above the entertainment expenses limitation are representative examples. Non-inclusion in deductible expenses causes the company’s net income to increase, leading to an increase in corporate tax. Thus, it is imperative for corporations to consider any tax law issues before spending expenses and spend wisely. 

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​Core of Corporate Tax Investigation

· The important issue is to determine whether the earnings by business year and deductible expenses of the corporation are reported as prescribed by the law

- Incomes and deductible expenses under taxes

- Attributable period of incomes/deductible expenses

- Requirements for qualified merger/qualified division

- Difference in transaction price and market price

 

· When the earnings and deductible expenses of a corporation by business year are not reported as prescribed by the law

- Repudiate the part that reflects earnings/deductible expenses under taxes upon corporate tax reporting = Inclusion of earnings or non-inclusion of deductible expenses

- By repudiating earnings/deductible expenses, increase the standard for taxation à Correction to increase corporate taxes

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Corporate Tax Investigation

When Issues Arise Concerning Transaction with Specially Related Persons?

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Here, “a specially related party” is a person who has an economic relationship with a corporation or a relationship prescribed by Presidential Decree, such as a management control relationship. As matters related to transactions with specially related persons, shareholders, and directors, issues such as repudiation of wrongful calculation, disposal of income, and transfer taxes occur.

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- The person himself/herself is also regarded as a specially related person of that person (Article 2(12), Corporate Tax Act)

- The real controlling person and his/her relatives (Article 2(5)-1, Enforcement Decree of the Corporate Tax Act)

- Non-minority shareholders and their relatives (Article 2(5)-2, Enforcement Decree of the Corporate Tax Act)

- Executives and employees of the corporation, family supporters (Article 2(5)-3, Enforcement Decree of the Corporate Tax Act)

- A corporation over which the corporation has a dominant influence on business management (Article 2(5)-4, 5, Enforcement Decree of the Corporate Tax Act)

- A corporation or individual that has invested over 30% consecutively (Article 2(5)-6, Enforcement Decree of the Corporate Tax Act)

- Affiliates belonging to the corporate group and executives of the affiliates (Article 2(5)-7, Enforcement Decree of the Corporate Tax Act)

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​· Scope of Relatives (Article 2(5)-1 of Enforcement Decree of the Corporate Tax Act, Article 1(2)-1 of Enforcement Decree of the Framework Act on National Taxes) <Scope of relatives under the Civil Act>

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For more details and inquiries regarding 'transactions with specially related persons’, the key corporate tax issue, or corporate tax law issues, please feel free to contact Dowoo Hwasan Attorneys & Counselors (Seoul Office) to receive legal solutions from our Tax Investigation Response Team’s dedicated attorneys.

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