Newsletter | April 2015, Issue 1
	Litigation
	Korean Supreme Court affirms corporations’ choice regarding when to include bad debt allowance as deductible expenses
	The Korean Supreme Court recently ruled in connection with a merger between a bank and its affiliated credit card company that the taxpayer’s choice regarding bad debt allowance should be respected.
	The bank in question had proceeded with a merger with its affiliated credit card company at the request of the Korean Financial Supervisory Service in 2003 to restructure the bank’s credit card business.  However, the credit card company had failed to set up a reserve for bad debt allowance against credit card loans as of the closing at the end of September 2003 (the merger date), for the maximum available amount of KRW 1,266.4 billion.  Thereafter, the bank assumed the assets and liabilities of the credit card company and set up a reserve for the bad debt allowance against the assumed loans after the merger, which was then included as its deductible expenses.  The tax authorities found that this was in breach of financial accounting standards that resulted in an inappropriate reduction of the bank’s tax burden after the merger, and imposed corporate income and local income taxes of approximately KRW 412.1 billion.
	The Supreme Court disagreed.  The Court noted that under the Corporate Tax Act, bad debt allowance is an item that is subject to closing adjustment only if it was reflected in the closing by the corporation, and ruled that it is up to the corporation to decide whether deductible expense in respect of a particular receivable should be recognized after the event of bad debt actually occurs, or before the event of bad debt is realized, by means of establishing a bad debt allowance based on estimated loss.  The Court reasoned that even if the credit card company had failed to establish a bad debt allowance in breach of applicable regulations, deductible expenses should not be imputed contrary to the corporation’s own determination.
	The Tax Audit & Tax Dispute Resolution Practice Group of Kim & Chang won the Supreme Court case on behalf of the taxpayer after an intense legal dispute with the tax authority.  Also, in a separate case involving the merger between a bank and a credit card company, where the credit card company had set up a bad debt allowance but only for the minimum statutory threshold amount and the bank assumed the excess amount equivalent to KRW 1,396.4 billion after the merger, Kim & Chang successfully obtained the Tax Tribunal’s decision of approval regarding the corporation’s tax treatment.
	Both these decisions are significant in that the taxpayer’s choice as to the treatment of the deductible expenses and bad debt under the Corporate Tax Act was respected, even where such choice resulted in a substantial reduction of tax burden for the tax payer.
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