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Korean Tax Newsletter (June, 2015)

Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.

Korea-Georgia tax treaty

On June 3, 2015, the Ministry of Strategy and Finance (the "MOSF") has signed the draft tax treaty with Georgia. The main features of the draft tax treaty are as follows:

Description Withholding Tax Rates
Dividends 5% (with ownership of at least 25%) / 10%
Interest 10%
Royalties 10%

 

According to the draft tax treaty, a construction site of a Korean company which exists for less than 9 months in Georgia would not constitute a permanent establishment of the Korean company in Georgia and vice versa. In addition, the draft tax treaty contains provisions on mutual exchange of information and cooperation for the collection of taxes, allowing competent authorities to exchange on financial information or support for the collection of taxes.

The treaty will enter into force once officially singed by both countries and ratified by the National Assembly.


Korea-US agreement on automatic exchange of tax information

On June 10, 2015, an agreement on automatic exchange of tax information with the US has been officially signed by the MOSF. The agreement would enable the National Tax Service (the “NTS”) to regularly gather financial information of taxpayers from the Internal Revenue Service (the “IRS”) on an annual basis, which would help trace offshore tax evasion. Due to the agreement, Korean financial institutions will be exempt from 30% withholding tax on the US sourced income, which is intended to be imposed to non-compliant financial institutions that fail to provide financial account information of US taxpayers under the Foreign Account Tax Compliance Act (known as, “FATCA”).

The agreement will be submitted to the National Assembly for its ratification and main contents of the agreement are summarized as below:

Description US -> Korea Korea -> US
Financial
accounts
to be
reported
Individual
  • Bank accounts with annual interest over USD 10 balance
  • Other financial accounts related to US sourced income
  • Bank accounts with over USD 50 thousands balance (in case of existing savings insurance, USD 250 thousands)
Company
  • Financial accounts related to US sourced income
  • Bank accounts with over USD 250 thousands balance (no limitation for new accounts)
Financial information to be reported
  • Interest, dividend, and other sourced income
Interest, dividend, other sourced income and account balance
Financial institutions obliged to report
  • Bank, financial investment company, insurance company, etc.
  • Government organization, central bank, international organization and public pensions are excluded in principle
Timing of information exchange
  • Financial information as of the end of the previous year would be mutually exchanged in September (effective from 2015) of the current year
Procedures for information exchange
  • To be determined through a discussion between the NTS and the IRS
News from tax authorities

Revisions to Presidential Decree of Local Tax Law (the "LTL-PD")

Submission of detailed statement for special levy of local income tax

Under the previous LTL-PD, a special collection agent, who is required to make special collection of a 10% local income tax when withholding corporate income tax on interest and dividend paid to a resident company and to remit it to the district office, had to submit a detailed statement for the special collection of local income tax by the 10th day of the following month after the special collection date. With the revision to the LTL-PD, the submission of the detailed statement for the special collection of local income tax can be made only once a year (i.e., by March 31 of the following year after the special collection date). This revision is applied to the special collection of local income tax made on or after January 1, 2015.

Revisions to the Tax Law

Proxy VAT on personal service fees paid to a foreign agent (SeomyunBupryungBuga-659, 2015.05.22)

The NTS has issued a tax ruling on a proxy VAT in relation to a case where a domestic company operating a casino business pays a commission to a foreign agent and the commission is calculated in proportion to revenue amount earned as a result of the agent’s services under an agency contract concluded between the domestic company and the foreign agent. If the foreign agent independently conducts its business without maintaining physical facilities and hiring employees, personal services provided by the agent would fall under VAT-exempt personal services under the VAT Law, in which case the commission would not be subject to the proxy VAT in Korea.


Deemed foreign tax credit on dividend from Chinese subsidiary (Josim2014Seo-3574, 2015.05.22)

Under this Tax Tribunal (“TT”) case, a domestic company, who received dividends from its Chinese subsidiary and claimed a direct foreign tax credit (“FTC”) for a withholding tax imposed on the dividends at 5% under the Korea-China tax treaty, requested a refund of additional deemed FTC of 5% based on i) the treaty provision (effective until 2014) stating that income tax on dividend in China should include tax, which would have been paid in case where there is no tax reduction, exemption or legal incentive, and such tax is deemed to be 10% of the total dividend; and ii) a guidance published by the NTS which provided that the difference between actual 5% withholding tax and 10% deemed income tax on dividends can be claimed as a deemed FTC.

Concerning this case, the TT has interpreted that the deemed FTC should be allowed only for income tax actually exempted, while the reduced withholding tax rate under the tax treaty is not considered as the tax exemption, but an allocation of taxation rights between Korean and Chinese tax authorities. Also, the TT ruled that there is no evidence that the domestic company conducted certain acts by relying on the NTS’s guidance; thereby the principle of good faith under the National Tax Basic Law is not applicable in this case.

Accordingly, the TT has made a decision that the further 5% deemed FTC cannot be claimed by the domestic company under the tax treaty and Korean tax laws.

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.

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