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Research on Punitive Taxation - Equitable Tax Exemption (Korean Version)


 Occasionally cases arise where the lawful and ordinary interpretation and application of tax laws result in a taxpayer finding himself in extreme and disproportionate distress. It is often the case that this does not stem from any flaw in the law itself, but that the law’s application to a specific case brought about an outcome that is difficult to justify. This study aims to explore, among others, the reason why cases arise where application of tax laws results in unjustifiable outcomes, how to remedy such cases, and whether and how the institution of equitable tax exemption (“Billigkeitserlass”) adopted in foreign countries could be one such means of a remedy if introduced in Korea.


 In a broad sense, equitable tax exemption refers to tax exemption measures in general which are designed to provide for “equity” and “case-specific validity” when assessing and collecting taxes. In a narrow sense, equitable tax exemption refers to the legislative attempt to exceptionally grant the authority to interpret the law by going beyond the general limitations of interpretation and application of ordinary tax laws, so that any inequitable result arising from the law’s conventional interpretation and application may be remedied. In essence, this issue relates to the question of whether to assess taxes in specific cases by use of applicable tax laws. As such, it is also closely related to the requirements imposed by the principle of no taxation without law, as well as the process of interpreting and applying tax laws. Considering the imperative and binding nature of tax laws, it is particularly important that institutional frameworks are put in place to provide for their equitable interpretation and application. In this regard, equitable tax exemption serves as an institutional safeguard which provides for equitable execution of the law.


 Meanwhile, Korea’s current legal system already contains various measures such as administrative appeals procedures or constitutional appeals procedures etc. which can serve to ensure equitable outcomes. However, these measures do not always guarantee that legal remedies are fully and completely provided, and it happens in actual practice that issues arise as to whether taxes should be exempted for reasons of equity (Supreme Court Decision 2010Du3138 dated December 29, 2016, Supreme Court Decision 2011Du10232 dated February 21, 2017, Supreme Court Decision 2011Du21447 dated April 20, 2017 and others). In order to resolve such cases and to provide for equitable enforcement of the law, active discussions are taking place which explore possible options such as the courts’ authority to examine equitable tax exemption based on Article 107-2 of the Constitution, the interpretation of tax laws under Article 18-1 of the National Tax Basic Act, or the introduction of the regulative equity system to Korea, for which actual legislative attempts were made in 2010.


 In the event that equitable tax exemption is introduced in Korea through legislation, the legislative examples of other countries will serve as useful reference materials. Germany, for instance, provides the German tax authorities with the authority to issue dispositions of equitable tax exemption by legislating relevant provisions in its basic tax law (“Abgabenordnung”). These provisions further enable taxpayers to request the tax authorities to issue dispositions of equitable tax exemption. The main requirements for the issuance of a disposition of equitable tax exemption prescribed by Germany’s Abgabenordnung consist of: (1) absence of a need for statutory regulation, (2) substantive inequity and (3) personal inequity. The German federal tax court has also accumulated a large body of case law which reviews these requirements as it accepted or rejected taxpayers’ requests for dispositions of equitable tax exemption. Similarly, Austria and Switzerland have also legislated statutory provisions which serve as the legal basis for dispositions of equitable tax exemption. Meanwhile, the tax law of the U.S.A. does not contain any general statutory provision providing for dispositions of equitable tax exemption. However, equity, a branch of case law found in common law, is applied in tax disputes to provide for similar remedies, and there are further individual legal provisions which are understood as serving to provide equitable relief.


 In the case that equitable tax exemption is to be introduced in Korea through legislation, it would be desirable to add new provisions to either the National Tax Basic Act or the National Tax Collection Act rather than to individual tax laws. Additionally, it will be necessary to provide for measures that prevent such new provisions from being abused.


 Nonetheless, there remain calls for careful judgement as to the legislative implementation of equitable tax exemption in Korea, as this institution still constitutes a material exception to the principle of no taxation without law and since there are views that relevant issues can be sufficiently addressed under the current legal system. Also, if legislation providing for equitable tax exemption is enacted and the relevant provisions are applied, controversies may arise regarding the scope of their application. While it is expected that the scope of application will be defined in the future through the accumulation of judicial precedents and case law, there are still concerns regarding the initial stages of implementation, as well as actual enforcement in practice. These concerns which will have to be resolved through detailed analysis going forward. It is in this regard that this study holds particular significance as the first of its kind reviewing the feasibility of equitable tax exemption in Korea.

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