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Korean Tax Newsletter (December, 2015)

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

Amended tax laws passed by the National Assembly and proposed revisions to the Presidential Decrees

The Korean National Assembly passed the 12 revised tax laws on December 2 and the Ministry of Strategy and Finance (“MOSF”) announced the proposed revisions to the Presidential Decree of the 18 tax laws on December 24 including Corporate Income Tax Law (“CITL”), Personal Income Tax Law (“PITL”), Tax Incentive Limitation Law (“TILL”), International Tax Coordination Law (“ITCL”), Value Added Tax Law (“VATL”), Inheritance and Gift Tax Law (“IGTL”), National Tax Basic Law (“NTBL”) and etc. The proposed revisions to the Presidential Decree of the tax laws are supposed to be promulgated in late January after the cabinet meeting planned on January 26, 2016.
Most significant proposed revisions to the tax laws and the Presidential Decree were covered in our last August newsletter. In this newsletter, we will cover the major changes in the proposed revisions to the tax laws during the legislative process and the changes in proposed revisions to the Presidential Decree and some revisions which were newly introduced. Unless specified otherwise, the revisions would generally be effective from January 1, 2016.


<NTBL>
Extended filing due date for amended tax returns with subsequent event

The revised NTBL passed by the National Assembly newly includes a revision in the filing due date of amended tax returns in the event of occurance of subsequent event. Generally, amended tax returns should be filed within 5 years from the statutory tax filing due date. However, in the case where a subsequent event occurs (e.g. when a transaction or act which constituted a base for computation of original tax base or tax payable is confirmed/adjusted differently by a court judgment, etc.), an amended tax return could be filed within two months from the date when a taxpayer becomes aware of occurrence of such event. According to the revised NTBL, the filing due date for amended tax returns in case of a subsequent event has been extended to three months in order to strengthen taxpayer’s rights. The revision will be effective from the amended tax returns to be filed on or after January 1, 2016. The extended filing due date does not apply if the previous two months filing due date has already passed before January 1, 2016.


<CITL>
Limitation on deductible company vehicle-related expenses

During the legislative process, certain contents with respect to the limitation on deductible company vehicle-related expenses (including depreciation, rental fee, fuel expense, insurance, maintenance expense, car tax, toll fee, interest on capital lease, etc.) have been revised as summarized in the below table. The three conditions described below should be all satisfied to claim a deduction for company vehicle-related expenses.

Description Proposed Revision Final Revision Tax Implications
1st condition - A vehicle insurance for exclusive use by directors/employees of a company needs to be subscribed (for 2016, such insurance can be subscribed when an existing insurance needs to be renewed after April 1, 2016).
Subscription of vehicle insurance for exclusive use by directors/employees     If this condition is not met, all vehicle-related expenses are denied for tax deduction and treated as a deemed taxable income to relevant persons in the company.
2nd condition - Vehicle need to be used for business purpose. When a driving log is prepared and maintained, the ratio of actual usage for business purpose is calculated by business purpose driving mileage divided by total driving mileage per vehicle. A driving log should be recorded for entire fiscal year, but for 2016, it shall be recorded from April 1, 2016 (the ratio of actual usage for business purpose from April 1, 2016 shall apply for 2016).
If a driving log is prepared/maintained. Vehicle-related expenses can be deductible up to the ratio of actual usage for business purpose Same as left Vehicle-related expenses in excess of a deduction limit under the 2nd condition would be denied for tax deduction and treated as a deemed taxable income to relevant persons in the company.
If a driving log is not prepared/maintained. A certain ratio (i.e. 50%) of the expenses are allowed to be tax deductible Vehicle-related expenses can be deductible up to KRW 10 million per vehicle.
If a company's logo is attached to vehicle 100% of the expenses are allowed to be tax deductible Deleted
3rd condition - Among tax deductible vehicle-related expenses under the 1st and 2nd conditions, depreciation expense and disposal loss on the company vehicle is further subject to an annual deduction limit.
Annual deduction limit on depreciation expense and disposal loss on the company vehicles   Depreciation expense for the portion of actual business use (*1) and disposal loss on the company vehicles are tax deductible up to KRW 8 million per year. In case of vehicle lease, a depreciation equivalent amount included in lease fee is also subject to annual deduction limit of KRW 8 million. Depreciation expense/disposal loss in excess of the annual deduction limit will be carried forward and can be deducted within the annual deduction limit in the following tears. For remaining carry-forward balance, if any, in the 10th year from date of lease termination or disposal, it shall be deducted in the 10th year.

 

(*1) In case where a driving log is prepared/ maintained, the ratio of actual usage for business purpose is used. However, in case where a driving log is not prepared/ maintained, the ratio would be 100% if the vehicle-related expenses would be KRW 10 million or less; otherwise, the portion of actual business use would be calculated as KRW 10 million divided by vehicle-related expenses.
Further, under the proposed revision to the Presidential Decree of the CITL, a straight line method and 5 years of useful life should be used as a depreciation method and useful life for business purpose vehicles acquired from the fiscal year starting on or after January 1, 2016. Currently, a taxpayer can choose either a straight line method or a declining balance method as a depreciation method and a useful life within a range from 4 to 6 years for business purpose vehicles.
The revision will be effective from a merger to take place after the revised Presidential Decree is promulgated.


Tax deduction for combined pension plan

Under the proposed revision to the CITL Presidential Decree, when a company has both Defined Contribution (DC) plan and Defined Benefit (DB) plan, the DC plan for employees shall be included in the total estimated severance liabilities (together with DB plan) and the estimated amount for the period of no particpation to the pension plan, when calculating a tax deductible amount for pension contribution amount. However, the contributed amount in the DC plan, which has been already deducted, will be subtracted in calculating the tax deduction limit. The revision will apply from tax returns to be filed after the revised Presidential Decree is promulgated.


<VATL>
Deferment of import VAT payment for export small and medium sized company (“SME”)

Under the current VATL, a taxpayer is required to pay import VAT to the customs office upon declaration for import of goods. Under the proposed VATL Presidential Decree, to be eligible for deferment of import VAT payment on business related goods (e.g. raw materials), a SME should run a manufacturing business as its primary business for at least three years and the portion of its export amount (eligible for zero-rated VAT) should exceed 30% of total supply amount in the previous fiscal year. The deferred payment shall be settled through offsetting against input VAT credit when filing the VAT returns. A qualifying export SME needs to apply for the deferment of import VAT payment to the customs office and upon the approval, the deferment of import VAT payment shall be granted for 1 year. The proposed VATL Presidential Decree shall apply from import of goods to be made on or after July 1, 2016.


<TILL>
Tax credit for increase of employment of young regular workers

A company hiring young regular workers will be newly entitled to tax credit for increase of employment of young regular workers aged from 15 years old to 29 years old under the revised TILL. The tax credit amount would be computed by multiplying KRW 5 million for non-large companies or KRW 2 million (under the proposed revision, it was KRW 2.5 million) for large companies by increased number of young regular workers (capped at the lesser of increased number of total full-time workers or increased number of total regular workers) compared to the prior fiscal year. This new tax credit shall apply from the fiscal year to which the date of December 31, 2015 belongs.


Tax credit on win-win payment

The revised TILL passed by the National Assembly newly includes a tax credit on win-win payment. The win-win payment refers to payment for goods from the 1st-tier SME supplier of a large company to the 2nd or 3rd-tier SME supplier with the credit of the large company (i.e. account receivables due from a large company). The tax credit amount (which is capped at 10% of corporate income tax payable) is 0.2% of win-win payment amount with payment terms of within 15 days and 0.1% of win-win payment amount with payment terms of within 60 days. This tax credit can be granted on the conditions that the ratio of cash payment does not decrease and the payment amount in note does not increase compared to the previous fiscal year. To be regarded as cash payment, purchase price should be settled within 60 days in cash or using a bill of exchange without right of recourse from financial institutions, an exclusive-use card for corporate purchase, an account receivable collateral loan system or purchase loan system. This tax credit shall apply from the win-win payment made in the fiscal year beginning on or after January 1, 2016.


Tax credit for investment in productivity improving facility

Under the previously proposed revision, the tax credit rate for investment in productivity improving facility was supposed to decrease from the current 3% (5% for medium-sized company and 7% for SME) to 1% (3% for medium-sized company and 6% for SME). However, according to the revised TILL, the tax credit rate shall remain unchanged in order to continuously encourage investment in productivity improving facility.


Unification of criteria for a small-sized company

A small-sized company can be entitled to a special tax exemption for SME with more favorable tax credit rate (10%~30%) than that of a medium-sized company (5%~15%). Before the proposed revision to the TILL Presidential Decree, in order to be regarded as a small-sized company, it needs to meet both i) the number of employee based criteria and ii) sales revenue based criteria. For example, in case of a manufacturing company, the number of employees should not exceed 100 and the sales revenue amount should not exceed KRW 10 billion to be classified as a small-sized company. Under the proposed revision to the TILL Presidential Decree, the sales revenue based criteria as below would only apply to determine a small-sized company:

Business category Threshold sales revenue amount
Manufacturing, Electricity, Gas, Water business KRW 12 billion
Agriculture, Mining, Construction business KRW 8 billion
Wholesale, Publishing business KRW 5 billion
Expertise, Science, Technology Services business KRW 3 billion
Accommodation, Restaurant business KRW 1 billion


This revision would apply from the fiscal year beginning on or after January 1, 2016, but in case of a small-sized company under the previous laws, the status of a small-sized company would continue to be maintained until the fiscal year to which January 1, 2019 belongs.


<PITL>
Withholding tax obligation for dispatched employees from a foreign company

Under the revised PITL, a Korean company which meets the following conditions is newly obliged to withhold 17% tax on service fees (or employment income if confirmed) paid to a foreign company dispatching its employees to the Korean company:

  • Payment amount condition: total service fees paid to foreign companies which dispatch employees exceed KRW 3 billion per annum;
  • Business volume condition: sales revenue amount of the Korean company in the previous fiscal year is KRW 150 billion or greater, or total asset amount of the Korean company in the previous fiscal year is KRW 500 billion or greater; and
  • Business type condition: business category of the Korean company falls under air transportation, construction, expertise, science and technology service business.

It was originally scheduled to become effective from January 1, 2016, however, the effective date has been postponed to July 1, 2016 under the revised PITL. A foreign company assigning its emoloyees to a Korean company should perform a year-end payroll tax settlement for dispatched employees and file it to the relevant tax office along with additional tax payment or tax refund claim. Under the revised PITL, a Korean company using dispatched employees can also perform and file a year-end payroll tax settlement for dispatched employees on behalf of the foreign company.


Expansion of scope of major shareholders

Under the proposed revision, a scope of major shareholders subject to capital gains tax on transfer of listed shares or higher capital gains tax on transfer of unlisted shares will be expanded as below:

Description Current Proposed
KOSPI/ Unlisted company i) ownership ratio of 2% or more; or
ii) total share value of KRW 5 billion or more
i) ownership ratio of 1% or more; or
ii) total share value of KRW 2.5 billion or more
KOSDAQ i) ownership ratio of 4% or more; or
ii) total share value of KRW 4 billion or more
i) ownership ratio of 2% or more; or
ii) total share value of KRW 2 billion or more


This revision will apply from a transfer of shares made by a major shareholder on or after April 1, 2016 (in case of a major shareholder of an unlisted company, it will apply from a transfer of shares made on or after January 1, 2017).


Decrease in capital gains tax rate from trading financial derivatives

Under the revision, capital gains tax would apply to the income from trading financial derivatives such as KOSPI 200 futures and options on or after January 1, 2016 and it requires tax filing and payment once a year. Under the proposed revision to the PITL Presidential Decree, the tax rate shall decrease from 10% to 5%.


<IGTL>
Gift tax on deemed gains from business opportunities offered by related party companies

Under the revised IGTL, if there are deemed gains derived by a major shareholder in a company which gets benefits from business opportunities offered by a related party company through lease ageement, agent agreement, franchise agreement, etc., gift tax shall be imposed on deemed gains to the major shareholder of the beneficiary company. The beneficiary company is defined as a company whose major shareholder together with relatives directly or indirectly own 30% (under the proposed revision, the ratio was 50%) or more of its total shares.


<ITCL>
Requirements for submission of new Transfer Pricing (“TP”) documentation

In order to comply with recommendations of BEPS (Base Erosion and Profit Shifting) Project, the revised ITCL requires a Korean company or a permanent establisment of a foreign company whose annual sales revenue amount exceeds KRW 100 billion and whose transaction volume with foreign related parties exceeds KRW 50 billion per year should submit a local file to the tax authority by the CIT filing due date. The local file includes an explanation on each company, transfer pricing information of major foreign related party transactions, etc. Also, an ultimate parent company, among affiliate companies in the same buiness field which submit the local file, needs to additionally submit a master file to the tax authority, which includes information on group structure, business details, intangible assets, financial transactions, status of accounting and tax of group companies, etc. In case where an ultimate parent company is a foreign company, a Korean subsidiay or a permanent establishment of a foreign company, needs to receive a master file from the foreign parent company and then submit the file to the Korean tax authority. The local file needs to be submitted in Korean. The master file can be submitted in English, but in such case, a translated document in Korean needs to be submitted additionally within 1 month. In principle, the local file and master file need to be updated annually, but certain informatoin to be specified in the Enforcement Regulation can be updated in 3 years timeframe. In case where a full or part of local and master file is not submitted or falsely submitted, a penalty of KRW 30 million can be imposed. This revised ITCL shall apply from a fiscal year beginning on or after January 1, 2016.

Revisions to the laws

Action Plans to BEPS Project

As the BEPS measures were agreed in the G20 Leaders' Summit, the MOSF has announced its action plans for the BEPS Project as in the below categories.

BEPS Project (1): Minimum standards
BEPS Project (2): Ensuring coherence of corporate income taxation
BEPS Project (3): Preventing abuse of international standards
BEPS Project (4): Ensuring transparency

The action plans of MOSF for BEPS Project (3) and (4) were announced on November 27 and December 4, respectively, and major action plans are summarized as below:

Project Action BEPS Issue Action Plan of the MOSF
Preventing abuse of international standards Prevent the artificial avoidance of PE status Avoidance of PE status in a source country using a narrow definition of PE under the tax treaty, even though substantial business activities are conducted
  • OECD recommendations to the PE (ex. Tightening the agency PE rules to include not only contracts in the name of the non-resident but also contracts for the transfer of property owned by the non-resident, narrowing the requirements for an agent to be considered as being independent, which excludes a case where the agent acts exclusively for one or more companies to which it is closely related, limiting exceptions from creating a PE for specific activities in which exceptions apply only where the activity is preparatory or auxiliary in relation to the business as a whole) are new standards which have not been reflected in the current Korean tax treaties.
  • A revision in the domestic law and treaty will be carefully reviewed.
Aligining transfer pricing outcomes with value creation Tax avoidance from the transfer of income associated with intangibles (patents) by transferring risk and allocating excessive capital to tax heavens/low-tax jurisdictions
  • Revisions to OECD transfer guidelines (New guidance to ensure that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with value creation, a detailed guidance on analyzing the actual function of each related party and attributing income based on economic substance, new guidance on low-value adding intragroup services) will be in-depth reviewed before adoption along with an impact analysis and a research on international legislation cases.
Ensuring transparency Spontaneous exchange on tulings to counter harmful tax practices Harmful tax practices with rulings to provide preferential regimes
  • It details five types of rulings (including rulings related to preferential regimes, unilateral advance pricing agreements or other unilateral cross-border rulings in respect of transfer pricing, cross-border rulings providing for a downward adjustment of taxable profits and etc.) which is subject to the compulsory spontaneous exchange between tax authorities of taxpayer and its parent company.
  • The detailed guidelines for exchange of rulings under five types of rulings will be discussed at Forum on Harmful Tax Practices.
News from tax authorities

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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