If there is a reason to mistakenly believe 'VAT exemption'... Supreme Court says 'additional tax is excessive'

[Financial News] Even if one mistakenly did not pay taxes thinking they were subject to VAT exemption, the Supreme Court ruled that imposing additional tax is excessive if there is a legitimate reason.
According to the legal community on the 13th, the Supreme Court's first division (Chief Justice No Tae-ak) overturned the lower court's ruling, which dismissed the plaintiff's case, and sent the case back to the Seoul High Court in a lawsuit filed by Mr. A against the head of Yeonsu Tax Office to cancel the VAT imposition.
Mr. A, who creates and installs art works such as sculptures, signed contracts with two construction companies in 2016 and 2018 for the production and installation of art works. Mr. A believed that the supply of art works was subject to VAT exemption under the VAT Act and issued electronic invoices instead of tax invoices based on this.
However, the tax authorities determined that it was not subject to VAT exemption and imposed VAT and additional tax together. Mr. A filed a petition with the Tax Tribunal, but when it was not accepted, he filed an administrative lawsuit.
Both the first and second trials judged that the VAT imposition was justified. They determined that Mr. A's contract went beyond the mere supply of art works and involved comprehensive tasks such as preparing a cost estimation plan for art work installation and a usage plan for the installation amount, thus not qualifying for exemption.
However, opinions differed on the exemption of additional tax. The first trial saw a legitimate reason for Mr. A's misunderstanding that the service supply was subject to VAT exemption and decided that the additional tax should be canceled, but the second trial did not recognize this and judged the imposition of additional tax to be justified.
However, the Supreme Court judged that Mr. A might have mistakenly believed that his contract was subject to VAT exemption and that imposing additional tax was excessive. The court noted that the criteria for VAT exemption were mixed, which could cause difficulty in judgment.
The Supreme Court stated, "Additional tax is an administrative sanction imposed according to the law when a taxpayer violates various obligations such as reporting and paying taxes without a legitimate reason," and "If there is a legitimate reason that cannot blame the taxpayer for neglecting the tax obligation, such sanctions cannot be imposed."
The fact that art works accounted for a significant portion of the entire contract was also considered. The Supreme Court noted, "The value corresponding to the approval of the relevant authorities was significantly smaller than the value of the art works themselves, so it cannot be ruled out that the plaintiff recognized each contract in this case as mainly involving the production of art works and mistakenly believed it was subject to VAT exemption."

jisseo@fnnews.com Seo Min-ji Reporter