Korean Tax Newsletter (May, 2015)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
Advanced Pricing Agreement with Chinese tax authorities
The commissioner of the National Tax Service (“NTS”) and its Chinese counterpart at the State Administration of Taxation (“SAT”) had a conference, which has been held since 1996 to exchange opinions on major tax administration matters and enhance mutual cooperation, in Seoul on April 22, 2015.
They presented recent tax administration trends and shared ideas for strengthening of collaboration. In addition, they singed an Advance Pricing Agreement (“APA”), which would enable a Korean company entering into the Chinese market to get an exemption from tax audits in relation to transfer pricing issues by both the NTS and the SAT.
They also agreed to create tax environments which encourage more active trades and investments between Korea and China, and to strengthen international mutual assistance in a tax administrative area.
News from tax authorities
Revisions to Value Added Tax Law
VAT on inbound digital supplies
Under the revision to the Value Added Tax Law (“VATL”) made last December, digital supplies (e.g., games, audio and video files, electronic documents or software, etc.) provided in Korea directly by foreign digital suppliers or through overseas open market (e.g., Google Play Store, Apple App Store, etc.) or agents would be subject to VAT in Korea. The foreign digital suppliers, overseas open market operators or agents who provide the digital supplies in Korea (the “Foreign Digital Suppliers”) would be required to apply for a simplified VAT registration and fulfil quarterly VAT filing and payment obligations through the Home Tax Service System. Before the revision, only digital supplies provided by domestic digital suppliers or through domestic open market were subject to the VAT in Korea.
The Foreign Digital Suppliers would be exempt from requirements for issuance of statutory VAT invoice. In addition, VAT penalties for failure to report and for underpayment would not be levied to the Foreign Digital Suppliers. However, in the case where the Foreign Digital Suppliers fail to pay the VAT within the initial due date, the Korean tax authority would issue a notice of tax payment to them and impose additional dues (i.e., 3% plus additional 1.2% per month) after the due date specified on the notice of tax payment.
The revised VATL will be effective from July 1, 2015.
Revisions to the Tax Law
Extension of filing due date for amended local tax returns
Under the previous Local Tax Basic Law (“LTBL”), amended tax returns for claim of local tax refund were able to be filed within 3 years from the original filing due date. In order to enhance taxpayers’ rights, the LTBL extended the filing due date for the amended tax returns for claim of local tax refund to 5 years from 3 years. This revision will be effective from May 18, 2015 and will be applied to the amended tax returns for which filing due date under the previous LTBL has not been passed as of May 18, 2015.
Limitation on the interest penalty
For avoidance of the excessive burden on taxpayers, the limitation on the interest penalty was introduced in the LTBL. Under the previous LTBL, the interest penalty was imposed based on number of unpaid outstanding days (i.e., from the next day of the filing due date until paid) multiplied by the interest rate (i.e. 0.03% per day) without any limitation. According to the revised LTBL, the interest penalty will be capped at 75% of an underpaid tax amount. The revision will be effective from May 18, 2015.
Revisions to Local Tax Basic Law
Security Transaction Tax on the transfer of treasury stock (Seomyunsobi-426, 2015.05.01)
In the case where a surviving company succeeded the treasury stock which a merged company (a parent company of the surviving company in this ruling) had owned before a merger, and distributed the treasury stock to shareholders of the merged company in consideration for the merger, the distribution of the treasury stock by the surviving company to the shareholders of the merged company would not be subject to the Security Transaction Tax (“STT”), since it is not viewed as a taxable transfer transaction of the shares, but a non-taxable capital transaction under the STT Law.
Beneficial owner of capital gains from share transfer (Josim2014jung461, 2015.04.27)
The Tax Tribunal (“TT”) has made a decision on a beneficial owner of capital gains from transfer of real estate shares issued by a Korean company and imposed penalties for failure to withhold tax to a share transferee (i.e., a withholding agent).
In this case, a share transferor, a Dutch company whose ultimate parent companies are offshore funds based in the US and Cayman Islands (the “Funds”), submitted the application for treaty based tax exemption on the capital gains from transfer of the Korean real estate shares to the share transferee. The transferee regarded the share transferor as the beneficial owner of the capital gains based on review of information stated in documents attached to the application, and did not withhold income tax on the capital gains under the Korea-Netherlands tax treaty accordingly.
However, the TT ruled that a beneficial owner of the capital gains is the Funds and thereby the Korean source capital gains derived by the Funds from the transfer of the real estate shares should be subject to Korean withholding tax under the Korea-US tax treaty and domestic income tax laws, based on the reasons including the followings:
- The initial investment funds were contributed from the Funds to the share transferor and the sales consideration was passed on to the Funds through the share transferor without tax leakage within a short period of time;
- Based on the field investigation by the Korean tax authorities, the share transferor did not maintain any physical substance in the Netherlands, and there are no decisive factors showing that the share transferor exercised authorities to independently make important investment decisions; and
- The Netherlands is a typical jurisdiction where many offshore private equity funds have used to get favorable treaty benefits under the Korea-Netherlands tax treaty.
The TT also upheld the Korean tax authorities’ decision which imposed the penalties for failure to withhold income tax on the share transferee, considering the facts that i) the tax penalties are designed to be imposed for various non-compliances of filing and payment obligations under the tax laws without reasonable causes (in this regard, a lack of tax knowledge or mistake is not considered as reasonable causes); and ii) it is viewed that there are no reasonable causes for failure to withhold income tax on the capital gains since a representative of the share transferor and his spouse are shareholders of the share transferee, in which case the share transferee might know or be able to know the beneficial owner of the capital gains in substance.
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.