Unused foreign tax credits from taxes paid in China cannot be applied against Korean income tax owed on earnings from Japan, the Supreme Court has ruled, holding that credits for taxes paid abroad must be calculated separately for each country.
According to legal sources on the 18th, the third division of the Supreme Court, with Justice Oh Seok-jun as the presiding judge, recently upheld a lower court ruling that dismissed a suit filed by a former national soccer team player identified as A against the head of the Ulsan tax office, seeking to overturn an income tax assessment.
When filing Korean comprehensive income tax returns on earnings made in Japan from 2019 to 2021, A claimed foreign tax credits not only for taxes paid in Japan but also for about 605 million won in taxes paid in China in 2018 that had exceeded the credit ceiling and been carried forward.
The Ulsan tax office rejected the carryforward, saying the ceiling on foreign tax credits must be calculated country by country, and in June 2023 issued a corrected assessment totaling about 830 million won in comprehensive income tax.
A sued, arguing the carryforward should be allowed. A contended that A was a non-resident for Korean tax purposes and that the presidential decree on the Income Tax Act setting country-by-country credit ceilings was invalid because it violated the principle that taxation must be based on statute. A also argued the country-by-country method did not apply because the tax years of activity in China and Japan differed.
The courts of first and second instance sided with the tax authorities. They found A to be a Korean resident, concluding that A's personal and economic ties were closer to Korea because most of the income was remitted to and spent in the country and A lived with family in Seoul. Noting that A faced a tax rate of about 43.9% in China and about 20.4% in Japan, the courts held that adding the carried-forward Chinese taxes to the credit ceiling for Japanese income would run counter to the purpose of the revised decree, which was to prevent excessive tax credits.
The Supreme Court upheld that ruling. A court official said the decision means that taxes paid in China that went uncredited cannot be deducted from the credit ceiling corresponding to Japanese income, and that taxes paid abroad must be credited separately for each country where they were paid.