When a South Korean company with operations in multiple countries claims a credit against its domestic corporate tax for taxes paid to foreign governments, losses incurred in a particular country must be factored into the credit limit, the Supreme Court has ruled. The reasoning is that failing to deduct one country's losses from income in other countries erodes South Korea's domestic taxing rights.
According to legal sources on the 10th, the Supreme Court's Second Division, with Justice Oh Kyung-mi as the presiding judge, recently upheld a lower court ruling that had gone against LG Chem in its appeal in a lawsuit against the head of the Yeongdeungpo Tax Office seeking to overturn a rejection of its request to have its corporate tax reassessed. The Supreme Court's Third Division, with Justice Roh Kyung-pil as the presiding judge, also upheld a lower court ruling against Hyundai Engineering & Construction (000720.KS) in an appeal on the same issue in a lawsuit against the head of the Jongno Tax Office.
At issue is how to calculate the foreign tax credit limit for a domestic company with overseas operations in two or more countries. The foreign tax credit is a system designed to prevent income earned abroad by a domestic company from being taxed twice, both abroad and in South Korea. But because allowing unlimited credits could undermine the country's right to tax domestic income, the credit limit is capped in proportion to the share of income earned overseas.
When LG Chem filed its corporate tax return in 2018, it calculated its credit limit by taking losses incurred in the United States, dividing them among its total income by each country's proportional share — including South Korea and China — and deducting the result from its foreign-source income before paying its tax. LG Chem then filed a request for reassessment demanding a refund of about 4.3 billion won ($3.1 million), arguing that "losses in a particular country should not be deducted from income in other countries." The tax authorities rejected the request.
Hyundai Engineering & Construction likewise claimed a corporate tax refund of about 32.5 billion won ($23.4 million), arguing that in calculating its tax credit limit for 2015 to 2017, losses incurred in a particular country should not be deducted from foreign-source income in other countries. When the tax office with jurisdiction rejected the claim, the company filed suit.
The courts of first and second instance sided with the tax authorities. They found that following LG Chem's argument would mean the losses were effectively deducted only from domestic income, eroding the country's domestic taxing rights and producing the same effect as granting a full credit for taxes paid abroad — contrary to the purpose of the system.
The Supreme Court upheld the lower courts' judgment. "In setting the foreign tax credit limit for a domestic company with two or more overseas operations, where a country's income shows a loss, the foreign-source income under the former Corporate Tax Act must be calculated by apportioning that loss according to each country's share of total income and deducting it from each country's income," the court said. "If the loss is not deducted at all from income in other countries, it is effectively deducted only from domestic-source income, which erodes the country's domestic taxing rights."
The Supreme Court said the ruling "is expected to serve as a precedent in similar cases in which companies with numerous overseas operations argue for an expanded credit limit on income in other countries on the grounds of a loss in a particular country."
