2020 Korean Tax Law Revision
Inbound Tax Service
▲ The National Assembly Approves Tax Reform Bill
On 2nd December 2020, the National Assembly approved the government’s bill to amend sixteen tax laws including the Individual Income Tax Law (IITL), the Corporate Income Tax Law (CITL), the VAT Law (VATL) and other laws. Most of the changes will be effective from the fiscal year starting on or after 1st January 2021. Provided below are the selected major items on the approved tax laws.
* Whilst there are some changes to the approved law, there are no direct impact to the selected items below in comparison to the proposed bill. As such, the contents of information outlined is identical to the proposed tax revision bill newsletter dated on 31st July 2020.
1. Expansion of investment tax incentives
- Currently, there are 10 investment tax incentives are in operation under the Special Tax Treatment & Control Law (“STTCL”) which is comprised of 9 targeted facilities investment tax incentives and an investment tax incentive for small and medium enterprises. However, the amendment will consolidate the tax incentives and expand the targeted assets to all business related tangible assets (excluding land, buildings, motor vehicles and select assets). This revision is intended to allow corporations to have more freedom in their investment decision making, where the current law prescribes specific eligible facilities categories and limited scope to particular corporations. The amended rule will be effective from the fiscal year starting on or after January 1, 2021.
- In addition to the basic deduction, the revision will strengthen the incentives by providing additional deduction rates on the increased investments over the past three years’ investment average.
- The revision provides a preferential treatment of support to new industry investments such as commercialized facilities in new growth technologies and the Korean “new deal”. There will be increase in the basic deduction rates and significant mitigation in applicable requirements for new growth technologies related facilities (only one of current four criteria will remain as a result of the approval of tax law revision).
2. Extension of investment tax credit carry forward
- Under the prior STTCL, if a corporation does not have tax payable due to the corporation being in a loss position or application of minimum tax (where unable to claim tax credit), then such unused investment tax credits were able to be carried over for the next five years but this will be extended to 10 years. The purpose of this amendment is to support the large-scale initial investments and to assist corporations that have had poor performance due to pandemic and other reasons. The newly passed tax law will apply with respect to tax credits that have not elapsed as of the end of 2020.
3. Extension of foreign tax credit carry forward and expense of unused credits
- Korea’s foreign tax credit system was introduced to minimize the double taxation. Previously, there were two methods of claiming relief for foreign taxes paid. A taxpayer could utilize foreign taxes paid either as a tax credit (credit against calculated tax assessment subject to limits) or alternatively deduct these foreign taxes as an expense. Under the amendment, the alternative to deduct foreign taxes paid for corporations is eliminated but the foreign tax credit carry forward period will be extended to 10 years (previously 5 years) and any unused tax credits can be expensed in the year following the 10 year period (e.g. in the 11th year). These revisions will apply with respect to foreign tax credits that have not lapsed as of the end of 2020.
4. Extension of tax loss carry forward to 15 years
- Under the amendment, the tax loss carry forward period will be extended to 15 years from the current period of 10 years. The extension will be applicable for tax losses accumulated from FY2020 as the government expects an increase in the number of loss corporations as well as accumulated tax loss amounts due to the continuing COVID-19 crisis.
5. Reform the system of income tax exemption for foreign engineers
- The revised rules for the income tax exemption for foreign engineers working in Korea which will now allow a 50% tax exemption for five years (70% for the first 3 years and 50% for the remaining 2 years if working for materials, parts or equipment companies). Furthermore, the foreign workers must i) hold a bachelor’s degree in science or engineering and have 5 years or more R&D work experience or ii) hold a doctoral degree in science or engineering and have 2 years or more R&D work experience.
6. Expansion of the scope of passive income subject to the deemed dividends treatment under the CFC regime
- Under the prior Controlled Foreign Corporation (“CFC”) rules, the undistributed earnings of a Korean resident company’s foreign subsidiary located in a low tax jurisdiction are taxed as deemed dividends to the resident company where such earnings are from passive investment income.
- The revision will expand the scope of passive income not only income from shares and bonds such as interest and dividends but also gains from disposal of such equity and debt instruments. The revision will apply to tax years starting on or after January 1, 2021.
7. Changes to the hybrid mismatch prevention regime
- The Law for Coordination of International Tax Affairs (“LCITA”) limits the tax deduction of interest expenses paid by a Korean company to its foreign related party for hybrid financial instruments which have both debt and equity characteristics. Specifically for financial instruments that are classified as debt in Korea while being classified as equity in a counterpart jurisdiction. The tax deduction for interest expense is denied for the amount that would taxed in the jurisdiction of the foreign related party during a reasonable period (i.e. 12 months from the end date of the fiscal year when the Korean entity pays the interest expense).
- Under the recent revision, interest paid by the Korean corporation will now first be recognized as a deductible expense in the tax year in which the interest is paid but would be included back as taxable income in a subsequent tax year in which the last day of the reasonable period falls, if the foreign related party is not taxed in its jurisdiction. The amendment will apply to interest paid in tax years starting on or after January 1, 2021.
8. Streamlining of documentation submission requirements for international transactions and extending deadlines for data submission
- Under the revision, a Korean entity which is obligated to submit the local and master files will be exempted from the submission of the statement of international transactions filed with its annual tax return even if the entity does not submit a written confirmation of exemption thereof.
- Furthermore, the statement of international transactions, the summary income statement and documents related to foreign real estate properties and foreign direct investments will be due within 6 months from the end of each tax year. Also, the annual report on APAs and the Country-by-Country Report (“CbCR”) will now need to be submitted within 12 months from the end of each tax year.
9. Change the base date for calculation of interest accrued on national tax refunds in relation to the amended tax return
- Under the amendment, a taxpayer will be eligible to receive interest on national tax refunds pursuant to an amended tax return from the date of initial tax payment rather than the date of the filing of the amended tax return.
10. Extension of APA rollback period
- The revision has amended the LCITA’s regulations as it relates in to the rollback period of an advance pricing agreement (“APA”). Under the prior LCITA rules, Unilateral and Bilateral APAs may be retrospectively applied to a maximum of three and five years, respectively, immediately preceding the APA covered period. The amended tax law, effective for APA requests on or after January 1, 2021, will now allow a maximum rollback period of five years for a Unilateral APA and seven years for a Bilateral APA.
11. Improvement of Mutual Agreement Procedure (“MAP”)
- The previous transfer pricing regulations stipulated that once a final court decision (i.e. Supreme Court) was rendered, taxpayers could not apply for the commencement of a MAP and any open MAP cases would automatically be terminated. Under the revised rules, in certain circumstances taxpayers will be allowed to initiate a MAP and ongoing MAP cases will not be closed even if the final court has issued a final judgement. This exception will apply where “in response to a primary adjustment made by the tax authority of one contracting country, the tax authority of the other country makes corresponding adjustment with respect to the tax liability of the entity located in that other country.” This amendment will strengthen taxpayers’ rights through MAP by alleviating conditions for commencement and termination of MAP. The relevant provisions will be effective for MAP cases that are (i) in-progress and the court issues final judgement on or after January 1, 2021 or (ii) submitted to the tax authority on or after January 1, 2021.
- Also, according to the prior provisions of the LCITA, a taxpayer was allowed to implement MAP and to proceed with judicial tax appeal simultaneously, even if Korea’s competent authority of Korea reaches an agreement with the competent authority of the other contracting state through a MAP. Under the amendment, taxpayers are required to accept the MAP agreement and to withdraw from any judicial appeal proceeding regarding the concerned MAP case as a condition to implement the agreement reached with the other Contracting State under a MAP. This relevant provision will be applicable to cases that reached mutual agreement on or after January 1, 2021.
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