Korean Tax Newsletter (March, 2015)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
Local Income Tax Return Filing Requirement
In accordance with the revision to the Local Tax Law, a company is required to file the local income tax return for a tax year beginning on or after January 1, 2014 to the relevant local tax authority. Before the revision, a separate filing of the local income tax return was not required. In addition, a company is no longer eligible for a tax credit or exemption, which is available under the Corporate Income Tax Law (“CITL”), for local income tax purposes.
Exchange of Financial Information between National Tax Service and Internal Revenue Service
The National Tax Service (“NTS”) will trace the offshore tax evasion by enhancing infra systems for offshore financial information including exchange of financial information with the Internal Revenue Service ("IRS") from September 2015. Under the Foreign Account Tax Compliance Act (“FATCA”) concluded last year, the NTS would report Korean financial account information of US taxpayers to the IRS and in exchange receive US financial account information of Korean taxpayers from the IRS. The FATCA was introduced in the US to prevent offshore tax evasion and to gather offshore financial information in July 2014, under which financial institutions both in the US and foreign countries are required to report information of US taxpayers holding certain amount of financial accounts to the IRS.
According to a NTS official, NTS is currently implementing systems to receive information from financial institutions in Korea to be sent to the IRS under the FATCA, and information to be obtained through the exchange of financial information with the IRS will be of a great help to trace the offshore tax evasion.
News from tax authorities
On March 13, 2015, the Ministry of Strategy and Finance promulgated the revised Ministerial Decree (“MD”) of the tax laws, including the MD of the CITL (“CITL-MD”) and the MD of the International Tax Coordination Law (“ITCL-MD”). Major revisions made to the MD of the tax laws include the followings.
Corporate Income Tax Law
Detailed scope of investment under Earnings Accumulation Tax Regime
A newly constructed building or building with new expansion for business purposes (“Business Purposes Building”) qualified as investment under the Earnings Accumulation Tax (“EAT”) regime, which imposes additional corporate income tax at 10% on the excessive accumulation of earnings to encourage a company to use earnings on investment, payroll increase and dividends, is referred as manufacturing facilities, business places, offices, etc. directly related to business operation of the company. If the building is used by the company for both business purposes and other purposes, qualified investment amount would be calculated by multiplying total investment amount for the building by a direct utilization ratio for business purposes. 90% or more of the direct utilization ratio for business purposes would be deemed to be 100%, in which case the total investment amount for the building would be fully allowed as qualified investment under the EAT regime.
Land attached to the Business Purposes Building within three times of floor area of the Business Purposes Building would also be allowed as qualified investment for a fiscal year in which the land is acquired, if one of the following conditions is met: i) the land is used for construction by the end of the fiscal year in which the acquisition is made; ii) according to the investment plan for the Business Purposes Building and land, the land can be verified to be used for construction by the fiscal year following the year in which the acquisition is made; or iii) the land can be verified to be used for construction within two years from the acquisition of the land when there are inevitable causes for delay in construction and approval from the relevant district tax office is obtained thereon.
The company would be subject to claw-back provision in certain cases including the followings: i) the Business Purposes Building and attached land are disposed or leased within 2 years after construction; ii) the construction is halted without reasonable causes; iii) the construction does not start within the period specified in the investment plan; or etc.
Changes in tax useful life of patent right
To enable companies to recover acquisition amount of patent right earlier, the revised CITL-MD reduced a tax useful life of the patent right from 10 years to 7 years.
International Tax Coordination Law
Submission of the summarized income statements of the foreign related parties
Before the revision, a taxpayer who has cross-border transactions with a foreign related party is required to submit the summarized income statements of the foreign related party that the taxpayer had transactions with if goods transaction amounts with the foreign related party exceed KRW 1 billion or service transaction amounts with the foreign related party exceed KRW 100 million. Under the revised ITCL-PD, the threshold amounts for the service transaction required for submission of the summarized income statements of the foreign related party increase to KRW 200 million.
Revisions to Ministerial Decree of Tax Laws
Application of Reduced Treaty Rate on Dividend (Josim2014Seo2998, 2015.03.02)
The Tax Tribunal (“TT”) has made a decision on the application of reduced treaty rate on dividend income under the Korea-Germany tax treaty.
A German investment fund made a 100% equity investment in a Korean company through an asset management company due to a restriction on direct acquisition of shares under the relevant laws and was considered to own the investment in substance. A withholding agent withheld a withholding tax (“WHT”) on dividend paid by the Korean company to the asset management company at 5% applicable to a beneficial owner of the dividend income holding directly at least 25% of the capital of the company paying the dividend under the Korea-Germany tax treaty. In all other cases, 15% WHT rate is applied on dividend under the Korea-Germany tax treaty.
The Korean tax authority assessed the additional WHT by applying 15% WHT rate to the dividend income on the basis that the German investment fund, a beneficial owner of the dividend income, indirectly holds the shares in the Korean company.
The TT judged that the investment fund does not own any shares of the Korean company directly and as such does not satisfy the direct holding conditions under the Korea-Germany tax treaty so that the WHT rate on the dividend income should be 15%, whereas the TT denied the claim from the German investment fund that the German investment fund and the asset management company should be treated as de facto one entity.
Delayed Collection of Receivables from Related Parties (Josim2014Jeon2757, 2015.02.23)
Concerning the case where a collection of receivables by a domestic company from its wholly owned subsidiary in Canada was delayed for a period exceeding an average collection period of the domestic company due to inevitable financial difficulties of the subsidiary, the Korean tax authority made a transfer pricing (“TP”) adjustment on delayed collection of the receivables from the foreign subsidiary by applying arm’s length interest rate under the International Tax Coordination Law (“ITCL”).
The TT concluded that the TP adjustment was properly made on the delayed collection of the receivables from the subsidiary, a foreign related party for tax purposes, which would be subject to deemed interest income to be calculated based on arm’s length principle under the ITCL, since the TP adjustment does not require tax avoidance intentions or realization of taxable income and any reasonable causes for the delayed collection of the receivables from the foreign subsidiary were not identified.
Updates of Tax Rulings and Cases
If you have any questions concerning the items in this month’s newsletter, please contact your tax advisor at Deloitte Anjin LLC or the following tax professionals.