A Giant Leap for Fairer Tax or Blind Compromise with Public Opinion? – A Review on the New Case Law on “Substance-over-Form” by the Supreme Court of Korea

Abstract

This Article discusses recent developments pertaining to the substance-over-form principle in Korean tax law, which is sometimes regarded as a general anti-avoidance doctrine. In particular, this Article focuses on a recent judgment by the Supreme Court of Korea (the “SC”). After reviewing the relevant facts, the SC’s holding, and its dissenting and supplementing opinions, this Article points out that this new case law is clearly a departure from the SC’s old case law. This Article attempts to identify those theoretical factors and social incidents that influenced this radical change of direction. It is argued that this change in case law has to do with some real cases where sophisticated tax avoidance schemes were involved, but the tax authorities had difficulty in striking them down. Hostile public sentiment against these taxpayers led the legislature to enact statutory anti-avoidance rules of a general nature, and the administration to challenge the avoidance schemes employed by the taxpayers. In brief, it is argued that the new case law should be understood in conjunction with all those social incidents and their aftermath. However, whether this change can also be supported from legal perspectives is yet a difficult question to answer, and should be subject to further discussions.