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Tax Credits upon Correction of Wrongful Accounting


Tax Credits upon Correction of Wrongful Accounting


Date: September 30,2019


I. Introduction

Thispaper presents brief overview of tax credits upon correction of wrongfulaccounting


II. Overview

(1)Tax Credits

Wherea domestic corporation has its tax base or tax amount corrected upon filing anapplication pursuant to Article 45-2 of the framework Act on National Taxes onthe ground that the tax base and tax amount were overstated because of itswrongful accounting, which meet all the following criteria, the overpaid taxshall not be refunded but shall be deducted from the corporate tax for thebusiness year in which the tax amount is corrected and subsequent businessyears. In such cases, the deductible amount for each business year shall notexceed 20/100 of the overpaid tax, and the overpaid tax that remains afterdeduction shall be carried over to subsequent business years for deduction


1. Profits or assets wereoverstated or deductible expenses or liabilities were understated on a businessreport submitted pursuant to Article 159 of the Financial Investment Servicesand Capital Markets Act or an audit report submitted pursuant to Article 8 ofthe Act on External Audit of Stock Companies;


2. The domestic corporation,its auditor or certified public accountant has been subject to any of thesanctions prescribed by Presidential Decree, such as a warning or caution.


(2)Calculation of overpaid tax amount

1. Where a domesticcorporation applies for tax credits for different reasons thereof:

Overpaidtax amount * (overstated tax base due to wrongful accounting / the total ofoverstated tax base)


2. Where a domesticcorporation has any tax payable according to a revised return:

Theoverpaid tax should be first deducted from the tax payable by up to 20/100 ofthe overpaid tax


3.Where a domestic corporation that has overpaid tax deducted has any remainderof the overpaid tax, such remainder shall be disposed of as follows:

-Where a domestic corporation is dissolved after a merger of division: Thesurviving corporation or the corporation established through the division(including the counterpart corporation to a division and merger) shall succeedto the remainder of the overpaid tax and shall have the tax deducted inaccordance with paragraph (1);

-Where the domestic corporation is dissolved by any method other than thosereferred to in subparagraph 1: The head of the tax office having jurisdictionover its place of tax payment or the commissioner of the competent regional taxoffice shall immediately refund the remainder after deducting the corporate taxpayable on liquidation income under Article 77 from the overpaid tax to suchdomestic corporation.


(3)Case study


Adomestic corporate had in 2015 as follows (unit: KRW):

Taxbase: 4000,000,000, tax amount 60,000,000 (No tax break, deduction)

Thiscompany had its tax base corrected according to wrongful accounting of profitsand assets in 2018 as follows:

Taxbase: 100,000,000, overstated tax base: 300,000,000 (120,000,000 by accountingfraud and 180,000,000 by correction)



Thiscompany's overpaid tax amount:

60,000.000-(100,000,000*10%)= 50,000,000

Taxcredits upon correction of wrongful accounting

50,000,000*(120,000,000/300,000,000)= 20,000,000

MIN(20,000,000*20%, paid tax in 2018) = 4,000,000 (Assume that the tax amount paidin 2018 is greater)


(4)Detailed methods and procedures relating to tax credits under paragraphs (1)and (3), methods for carryover and deduction of any remainder of an overpaidtax after deduction, and other related matters, shall be prescribed byPresidential Decree.


Article95-3 (Tax Credits upon Correction of Wrongful Accounting)

(1)  "Sanctions prescribed by PresidentialDecree, such as a warning or caution" in Article 58-3 (1) 2 of the Actmeans any of the following measures:

1.  Measures specified in the subparagraphs ofArticle 175 of the Enforcement Decree of the Financial Investment Services andCapital Markets Act, such as recommending dismissal of an executive;

2.  Imposing a penalty surcharge under Article429 (3) of the Financial Investment Services and Capital Markets Act;

3.  Sentencing to imprisonment or a fine undersubparagraph 13 of Article 444 or subparagraph 28 of Article 446 of theFinancial Investment Services and Capital Markets Act;

4.  Cancelling registration of an auditor or anyof its certified public accountants, recommending suspension of service or performanceof duties, or restricting the performance of audit for specified companiesunder Article 16 (1) of the Act on External Audit of Stock Companies;

5.  Recommending dismissal of an executive at thegeneral meeting of stockholders or restricting the issuance of securities underArticle 16 (2) of the Act on External Audit of Stock Companies;

6.  Sentencing to imprisonment or a fine underArticle 20 of the Act on External Audit of Stock Companies.

(2)  Where any ground for requiring a correction,other than the grounds for requiring a correction under the main sentence ofArticle 58-3 (1) of the Act, exists in applying Article 58-3 of the Act, theamount of the tax credit shall be computed by the following formula: 

Overpaidtax amount x (Overstated tax base due to wrongful accounting under Article 58-3(1) of the Act ÷ Sum of overstated tax bases)

 [This Article Newly Inserted by PresidentialDecree No. 27828, Feb. 3, 2017]




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