The Constitutional Court ruled that the current Income Tax Act, which serves as the basis for determining that welfare points paid by corporations to executives and employees are subject to earned income tax, is constitutional.
On the 30th, the court said that on the 24th it ruled unanimously that Article 20, Paragraph 1, Item 1 of the Income Tax Act, which defines the scope of earned income, does not violate the principle of clarity in tax requirements and therefore is not unconstitutional.
The case traces back to a Supreme Court ruling in 2019. A total of 548 workers at Seoul Medical Center filed a wage claim lawsuit. Seoul Medical Center provided welfare points to workers, who used them on a dedicated online shopping site or at affiliated merchants. The lawsuit sought to reflect these welfare points in ordinary wages and to receive additional statutory allowances.
In Aug. 2019, the Supreme Court en banc held that the welfare points paid by Seoul Medical Center to workers "do not constitute wages as referred to in the Labor Standards Act and, as a result, do not constitute ordinary wages." It determined that welfare points are part of a flexible benefits program and are not intended to raise or preserve workers' wages.
Afterward, some corporations filed correction requests with tax offices, asking for refunds of earned income tax paid when providing welfare points to workers. When the tax offices refused, they filed lawsuits against the tax authorities to cancel the rejection of their correction requests.
In this litigation, the Supreme Court ruled in Jan. last year that welfare points can be subject to earned income tax as compensation for work. The court said, "Even if welfare points are not direct compensation for work, they constitute remuneration that is recognized as having a compensatory relationship based on a certain correlation with the work provided by executives and employees or on economic rationality."
Among the corporations that sued the tax authorities seeking refunds of earned income tax on welfare points, some filed a constitutional complaint, arguing that the Income Tax Act is unconstitutional. Article 20, Paragraph 1, Item 1 of the Income Tax Act defines as earned income "salary, pay, compensation, parliamentary allowance, wage, bonus, allowance, and remuneration of a similar nature received by providing labor."
The corporations that filed the constitutional complaint argued that "remuneration of a similar nature" cannot be limited in subject or scope as to what money or goods it means, and that "by providing labor" is unclear as to the required relationship between the provision of labor and remuneration, thereby violating the principle of clarity in taxing power.
In response, the Constitutional Court determined that the "earned income" defined by the Income Tax Act is not excessively abstract or unclear, and that it is hard to see a possibility of arbitrary interpretation by the taxing authority, so it does not violate the principle of clarity in taxing power.
The Constitutional Court said, "The legislature included in earned income all remuneration received in return for providing labor," adding, "This was to promote fairness in taxes by preventing avoidance of earned income tax by using different titles or labels even when it is compensation for labor."