"Welfare Points Are Not Earned Income" Constitutional Complaint Rejected; Constitutional Court Rules Unanimous Constitutional

▲ The Constitutional Court of Korea

A constitutional complaint filed by companies arguing that tax authorities are taxing welfare points as earned income due to vague provisions in the Income Tax Act has been rejected.

On June 24, the Constitutional Court of Korea consolidated 21 constitutional complaints seeking a ruling of unconstitutionality regarding Article 20, Paragraph 1, Subparagraph 1 of the Income Tax Act and reached a unanimous decision that the law is constitutional.

The petitioners are companies that have provided a set amount of welfare points to their employees annually.

These companies had filed requests for tax reassessment with tax authorities, arguing that welfare points do not constitute earned income subject to taxation under the Income Tax Act and seeking a refund of the difference. However, their requests were denied.

Following the denial, the companies filed lawsuits to cancel the refusal and requested the courts to refer the matter to the Constitutional Court for a review of the constitutionality of the Income Tax Act provisions defining the scope of earned income. After those requests were dismissed, they filed a direct constitutional complaint with the Constitutional Court.

Article 20, Paragraph 1, Subparagraph 1 of the Income Tax Act defines the scope of earned income as "salaries, wages, remuneration, stipends, pay, bonuses, allowances, and other payments of a similar nature received for providing labor."

The companies argued that the phrase "other payments of a similar nature" is vague. They claimed, "The ambiguity of this provision allows tax authorities to interpret welfare points for public officials as non-taxable, while interpreting welfare points for private sector employees as taxable."

However, the Constitutional Court ruled that welfare points provided by private companies also fall under the category of earned income under the Income Tax Act.

The Court rejected the companies' arguments, stating, "'Payments of a similar nature' refers to all payments that are in a compensatory relationship with the provision of labor in an employment contract or a similar relationship, regardless of the frequency, form of payment, or name of the benefit."

The Court determined that while the scope of "payments" can be difficult to define, the provision clearly limits the scope of earned income to payments "received for providing labor."

The Constitutional Court further ruled that the legislative intent behind using an illustrative, rather than an exhaustive, list for taxable items in the Income Tax Act is to "prevent the avoidance of earned income tax and promote tax equity by including all payments received in exchange for labor within the scope of earned income, regardless of their name or purpose."

The Court added, "It is difficult to view the earned income defined in the provision as excessively abstract or vague, making it impossible to predict, nor can it be seen as an ambiguous concept prone to arbitrary interpretation or application by tax authorities." The Court concluded, "It cannot be considered a violation of the principle of clarity in taxation."

(Photo: Yonhap News)

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