Korean Tax Newsletter (February, 2014)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
The Ministry of Strategy and Finance (“MOSF”) and the African Tax Administration Forum ("ATAF") co-hosted the 2nd Korea-ATAF conference in Johannesburg, South Africa. At this conference, they came to an agreement to increase the exchange of tax information and expand tax treaty networks. The ATAF is a council providing cooperation on Pan-African tax policy, tax administration practices, tax research, etc., which was established in September, 2009 and currently has 36 member countries.
At this conference, the MOSF signed a draft agreement for tax information exchange with Mauritius, the economic gateway of the African region where many offshore finance centers are located. The MOSF has also agreed to expedite the process for entering tax treaties into force with major African countries including Nigeria, Madagascar, and Ghana. The MOSF plans to expand international tax cooperation between Korea and African countries continuously.
OECD plans to prevent tax evasion
The OECD announced a plan for prevention of tax evasion by sharing foreign account information of a taxpayer between countries for the purpose of preventing illegal concealment of offshore assets and tax evasion. Under this plan, financial companies, such as banks, insurance companies, investment funds, should report financial information (i.e., account balance, interest income, dividend income, investment income, etc.) to a taxpayer's home country's government. The financial information will be shared automatically with the countries that implement this plan, which allows tax authorities to easily access the information of taxpayer’s overseas account. The plan also requires the financial companies to disclose the ultimate beneficial owner of a shell company, which is commonly used for offshore tax evasion. Extension of carryover period for statutory donations.
Statutory donation expenses exceeding the statutory limit for deduction used to be carried forward for three years, however, under the revised CITL the carryover period will be extended to five years. It is the same carryover period as that of designated donation expenses exceeding the statutory limit for deduction.
News from tax authorities
On February 21, 2014, MOSF announced revisions to the Presidential Decree (“PD”) on the tax laws, including the Corporate Income Tax Law (“CITL”), Tax Incentive Limitation Law (“TILL”), Individual Income Tax Law (“IITL”), National Tax Basic Law (“NTBL”), etc. The revised PD was promulgated on February 21, 2014 and the changes generally would be effective as of January 1, 2014. The major revisions include the following:
Presidential Decree on CITL
Qualified tax free spin-off condition
One of the conditions to be met for the qualified tax free spin-off is that the business to be spun-off should be a separable and independent business unit. Previously, there were no specific provisions in connection with the determination of such condition. The revised PD provides a specific rule as shown below. In the case where the business to be spun-off falls under one of the following cases, it will not meet the condition:
- Case of where the main business to be spun-off is a real estate leasing business;
- Case of where 80% or more of fixed assets to be transferred are real estate properties; or
- Case of where the business unit's assets are mainly comprised of shares and share-related assets/liabilities only (but, certain exceptions would be available, such as set-up of a holding company under the relevant acts, etc.)
Unrealized foreign exchange (“FX”) valuation gain/loss
The previous PD provided that, when a non-financial company has unrealized FX valuation gain/loss on monetary assets/liabilities and certain derivatives for purpose of hedging exchange risk, the non-financial company is allowed to choose one of the following FX valuation methods by election with the tax office for tax purposes;
- valuate foreign currency monetary assets/liabilities by using the standard exchange rate as of the acquisition date or historical transaction date; or
- valuate foreign currency monetary assets/liabilities by using the standard exchange rate as of the fiscal year-end date
If the non-financial company does not elect a method, the method i) is a default method to be used for tax purposes. Under the previous PD, if a non-financial company elected a method, the non-financial company was expected to continue to use the same method and was not allowed to change it to another method.
Under the revised PD, it is allowed to change the previous election method to another method after five tax years.
Reinforcement of submitting information on directly invested overseas companies for loss transactions
Under the revised CITL, a domestic company which makes a direct investment into an overseas company and it or its invested company has large amount of loss transactions, it should submit the statement of loss transaction to the tax office when it files a CIT return. The revised PD provides further detail for the rule. If the amount of each loss transaction is KRW 5 billion or more in a fiscal year or the accumulated loss amount for the recent 5 years is KRW 10 billion or more, it should submit the statement of loss transaction together with a statement of overseas subsidiaries and financial statements of overseas subsidiaries to the tax office.
Presidential Decree on TILL
Scope of middle-sized company for application of investment tax credits
Under the revised PD, a different investment tax credit rate is applied to companies based on their business size. A company can be classified as a middle-sized company, which can qualify for more favorable tax credit rates than a large company, if the company meets all of the following conditions;
Under the revised TILL, alternative minimum tax rate for non-SMC will be changed as follows;
- The company should not fall under a Small and Medium-sized Company (“SMC”);
- The main business should be a business within the scope of qualified SMC’s business listed in TILL;
- The company should not belong to a conglomerate group company subject to the limitations on cross investment under the relevant acts; and
- The average sales revenue for the recent 3 years is less than KRW 300 billion.
Presidential Decree on IITL
Exclusion of dividend income sourced from the reduction of capital reserve
Under the Korea Commercial Code ("KCC"), capital reserve exceeding 150% of the paid-in capital can be distributed as a dividend or converted into a paid-capital upon resolution of the shareholder's meeting. Under the revised PD, dividend income which is sourced from such capital reserve made according to the KCC is not treated as dividend income for tax purposes.
Revisions to Presidential Decree on Tax Laws
Arm’s length price of the guarantee fee (Josim 2013gu3277, 2014.01.24)
The Tax Tribunal (“TT”) has made a decison of reinvestigation on an arm’s length price of the guarantee fee, which did not accept the National Tax Service ("NTS")'s assessment. Under this case, TT has concluded that, in determining the arm’s length price of the guarantee fee, various factors of a taxpayers such as financial conditions (e.g., sales revenue, operating income, etc.), borrowing terms and interest rate, credit rating, etc. should be considered, rather than simply applying the TP model developed by the NTS only.
Updates of Tax Rulings and Cases
In the previous newsletter of January 2014, it needs to be corrected the effective date of the revised law in connection with the foreign investment tax incentives as below.
|In January newsletter||Correction|
In the case where a foreign investor obtains the approval for tax exemption from MOSF, one of the foreign investment tax incentives was the withholding tax exemption on the dividend received from the foreign invested company. However, under the revised TILL, tax exemption on the dividend income is no longer applicable. The revision would apply to foreign investment with a tax exemption approval obtained from MOSF after January 1, 2014.
In addition, the foreign investment tax incentives are not granted to a foreign investor who is a resident of a country where neither a tax treaty nor investment promotion and protection agreement is made with Korea. The revision would apply to foreign investment with a tax exemption approval obtained from MOSF after January 1, 2015.
In the case where a foreign investor obtains the approval for tax exemption from MOSF, one of the foreign investment tax incentives was the withholding tax exemption on the dividend received from the foreign invested company. However, under the revised TILL, tax exemption on the dividend income is no longer applicable. The revision would apply to foreign investment with a tax exemption application made to MOSF after January 1, 2014.
In addition, the foreign investment tax incentives are not granted to a foreign investor who is a resident of a country where neither a tax treaty nor investment promotion and protection agreement is made with Korea. The revision would apply to foreign investment with a tax exemption application made to MOSF after January 1, 2015.