Korean Tax Newsletter (September, 2015)

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

Conference with the Kazakhstan tax authority

The commissioner of the National Tax Service (“NTS”) and the chairman of the State Revenue Committee (“SRC”) of the Ministry of Finance of the Republic of Kazakhstan had a conference in Seoul on September 9, 2015.

They shared experiences concerning advancement of tax administration and exchanged ideas on enhancement of mutual cooperation.

The NTS presented implementation experience of electronic tax administration system such as Home Tax Service, Cash Receipt System, etc. and explained implementation process and anticipated results of the Next-Generation National Tax Information System. In addition, the NTS introduced details of reorganization which were carried out early this year to build stable revenue structure and execute successful tax administration for public welfare.

The NTS has requested the SRC to support Korean corporations and individuals entering Kazakhstan and agreed to create tax environments which encourage trades and investments between Korea and Kazakhstan.

News from Tax Authorities

Reimbursement of transferred income from transfer pricing adjustment (Josim2014Bu4537, 2015.08.19)

The Tax Tribunal (“TT”) has made a decision on reimbursement of transferred income determined through a Transfer Priding (“TP”) adjustment.

In this case, the Korean tax authority made the TP adjustment on transactions between a Korean company and its foreign related party and issued the Notice of Transferred Income and the Notice of Temporary Adjustment, which required the Korean company to get reimbursed for the transferred income from the foreign related party, to the Korean company.

The Korean company submitted the confirmation for reimbursement of transferred income, via cash reimbursement, payment in substitute, and offset against account payables due to the foreign related party.

The Korean tax authority denied the reimbursement other than cash reimbursement, which resulted in a secondary tax adjustment on the denied reimbursement amount as dividends to the foreign related party subject to withholding taxes in Korea, on the basis that a “remittance statement” is required to be submitted together with the confirmation for reimbursement of transferred income under the Presidential Decree (“PD”) and the Ministerial Decree (“MD”) of the International Tax Coordination Law (“ITCL”), thereby only cash reimbursement substantiated by the “remittance statement” should be allowed as reimbursement eligible for waiver of the secondary tax adjustment.

The TT has ruled that it is reasonable to interpret that the reimbursement of transferred income under the ITCL includes both cash reimbursement and other reimbursement based on the followings:

  • Procedural regulations in the PD and the MD of ITCL cannot prevail over intent of the ITCL which only prescribes that transferred income, which is not confirmed to be reimbursed, would be subject to the secondary tax adjustment and does not specifically regulate the reimbursement method; and
  • There is no reason to treat cash reimbursement and other reimbursement differently, provided that the transferred income is viewed to be actually reimbursed through the reimbursement other than cash reimbursement.

Indirect Foreign Tax Credit on dividend income (Josim2013seo3834, 2015.09.01)

The TT issued its decision on eligibility of Indirect Foreign Tax Credit (“IFTC”) with respect to dividend income for which underlying income taxes of a foreign subsidiary were exempt.

Concerning the case where a taxpayer has filed an amended tax return to claim a refund of IFTC in relation to dividend income received from its foreign subsidiary situated in Saudi Arabia for which underlying income taxes were exempted in Saudi Arabia, the Korean tax authority denied the refund claim by arguing that the IFTC is applicable to income taxes actually paid or to be paid by the foreign subsidiary.

The TT has upheld the taxpayer’s claim that, based on the provision under the Korea-Saudi Arabia tax treaty stating that tax on business profits arising in Saudi Arabia exempted in accordance with the laws and regulations of Saudi Arabia to promote foreign investments for economic development purposes shall be deemed to have been paid, the exempted income tax of the foreign subsidiary should be regarded to be paid by the foreign subsidiary and thus eligible for the IFTC in Korea.

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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