[Edaily Reporter Shin Ha-yeon ] On the 24th, iM Securities assessed that while DL E&C CO., LTD.(375500)recently received a notice from Saudi Arabian tax authorities imposing 8533억원 in corporate income tax and surcharges, the likelihood of this actually resulting in payment is low. The firm maintained its “Buy” investment rating and target price of 12만원.

Bae Se-ho, an analyst at iM Securities, stated, “We view the Saudi tax notice as unreasonable and believe the likelihood of it becoming a reality is low,” adding, “DL E&C CO., LTD.’s appeal is fully justifiable based on applicable laws and regulations.”

Previously, DL E&C CO., LTD. received a notice from the Saudi tax authority (ZATCA) regarding corporate income tax and surcharges totaling 8533억원 (4392억원 in base tax and 4141억원 in surcharges) related to EPC projects carried out between 2006 and 2019. This amount represents 16.27% of the company’s equity. The company plans to contest the tax assessment and maintains that the likelihood of actually having to pay the tax is low.

Analyst Bae explained, “It is highly likely that the amount of back taxes will be significantly reduced through a settlement with the Saudi tax authorities or the tax appeal process,” adding, “From an accounting perspective, given the high uncertainty regarding the final confirmation of the tax assessment and the estimation of the amount, we expect the likelihood of recognizing a large provision for liabilities to be low.”

In particular, he analyzed that DL E&C CO., LTD.’s grounds for appeal are sufficiently valid. The key issue is the authority to tax income from engineering (E) and procurement (P) work performed in South Korea.

Researcher Bae stated, “For this project, the E and P work was performed in Korea by personnel assigned to DL E&C CO., LTD.’s headquarters, and corporate income tax on that income has already been reported and paid in Korea.” He added, “Saudi Arabia’s claim to tax this income raises the potential for ‘double taxation,’ which violates the tax treaty between Korea and Saudi Arabia.”

He also pointed out an issue regarding the statute of limitations for taxation. “Under Saudi tax law, the maximum period for imposing income tax is 10 years, but the tax assessment notice included business activities from 2006 to 2015,” he explained. “If projects exceeding the 10-year period are excluded, the tax amount would decrease to around 16 billion won.”

He further added, “The company argues that the tax authorities failed to provide the basis for their tax calculation method and the criteria for allocating services between South Korea and Saudi Arabia, which constitutes grounds for revoking the tax assessment.”

Researcher Bae explained, “According to Article 7, Paragraph 1 of the tax treaty between South Korea and Saudi Arabia, the profits of an enterprise of one Contracting State are taxable only in the State of residence unless the enterprise carries on business through a permanent establishment in the other Contracting State.”

He continued, “The scope of taxation by Saudi Arabia is limited to income attributable to DL E&C CO., LTD.’s permanent establishment in Saudi Arabia.”

He noted, “DL E&C CO., LTD.’s argument is entirely valid based on the laws of both countries,” and emphasized, “According to Article 7, Paragraph 1 of the tax treaty between South Korea and Saudi Arabia, the profits of an enterprise of one Contracting State are taxable only in the State of residence unless the enterprise carries on business through a permanent establishment in the other Contracting State.” He further concluded, “There is a high likelihood that the tax assessment will be revoked or the tax amount significantly reduced.”