Korean Tax Newsletter (April, 2020)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
▲ Revisions of Tax Laws
The Korean National Assembly's Planning and Finance Committee passed amendments to the Special Tax Treatment & Control Law on April 29, 2020, to encourage domestic spending by introducing a new corporate income tax credit for certain prepayments of goods and services. The amendments also would allow early provisional tax refunds for small and medium-sized enterprises (SMEs).The major proposed changes are summarized below.
1. Introduction of new income tax credit for corporations making prepayments for goods and services
- The requirements to qualify for the new credit would include the following:
- The goods or services for which the prepayment is made would have to be purchased for business purposes.
- The goods or services would have to be purchased from small business owners.
- The amount of the prepayments would have to exceed KRW 1 million per transaction, and the prepayments would have to be made between 1 April 2020 and 31 July 2020 for goods or services to be provided by 31 December 2020. The prepayments would have to be made at least three months before the date when it is agreed that the goods or services will be supplied.
- The tax credit would equal the prepaid amount X 1%.
- It would be possible to claim the credit at the same time as other tax credits and exemptions, and the credit would not be limited. However, even if the taxpayer has no corporate income tax liability for the year, the minimum tax and the special fishery and agriculture tax still would be levied.
- Taxpayers would be able to apply for the tax credit when filing their income tax returns for the fiscal year (FY) including 31 December 2020, and would be required to submit supplemental documents to prove that they made eligible prepayments.
2. Granting of special refunds for SMEs
- SMEs and sole proprietors that filed individual or corporate income tax returns for FY 2019 would be eligible for early provisional tax refunds.
- Early provisional tax refunds could be made to taxpayers incurring tax losses during the first half (six months) of FY 2020.
- The early provisional tax refunds would be calculated based on the formula ➊ – ➋, where:
- ➊ = 50% of the FY 2019 tax liability
- ➋ = [(FY 2019 taxable income – (tax loss for first half of FY 2020 x 2)) x FY 2019 tax rate] x 50%
- The early provisional tax refund would be limited to 50% of the previous year’s individual or corporate income tax liability.
- The final tax refund settlement would be made by comparing the provisional tax refund with the final tax refund calculated for FY 2020.
- Applications for early provisional tax refunds would have to be submitted within two months after the end of the first half of FY 2020 (i.e., by the end of August 2020 for calendar-year taxpayers).
▲ News from tax authority
Suspension of dispositions for arrears for small business owners affected by COVID-19
- The National Tax Service (NTS) has suspended “dispositions for arrears” (i.e., the appropriation of taxpayers’ assets by the NTS in lieu of payment of tax arrears) for around 393,000 taxpayers that are small business owners with delinquent tax debts of less than KRW 5 million, until 30 June 2020.
- The following taxpayers are eligible for the suspension:
- Qualifying small enterprises, as defined in the Special Tax Treatment & Control Law; and
- Small business owners with limited annual income in fiscal year 2019 (less than KRW 600 million for wholesalers and retailers; less than KRW 300 million for manufacturers and food and hotel business owners; and less than KRW 150 million for other taxpayers in the hospitality industry).
- Taxpayers with income exceeding the thresholds above; entertainment venues; real-estate leasing businesses; and taxpayers with delinquent transfer, inheritance, or gift taxes will not be eligible for the suspension.
Tax administrative support for oil refining industry and alcoholic beverage corporations affected by COVID-19
Late payment of the April installment of the transportation/energy/environment tax, individual consumption tax, and liquor tax (including the education tax) is allowed without penalties until 31 July 2020.
Purchase of products from SMEs through use of tax points
- The NTS has granted taxpayers one “tax point” for every KRW 100,000 of tax paid since January 2004 (tax points have been granted to small and medium-sized business corporations since March 2014).
- The NTS is preparing to launch an online shopping mall by the end of June 2020 where taxpayers can purchase products from SMEs with the tax points granted to them.
▲ Recent tax rulings and decisions
1. Korea’s tax tribunal issued a decision on March 16, 2020 in which it ruled that a bad debt tax credit could be claimed for VAT purposes in a case where receivables were exchanged for stock that was retired in accordance with a court-approved financial restructuring plan for the debtor. The tribunal determined that the amount of the bad debt for purposes of the tax credit was the difference between the book value of the receivables and the fair market value of the stock after the capital reduction.
- Under Korea’s VAT law, where a supplier provides goods or services subject to VAT and all or a part of the accounts receivable that the supplier records become irrecoverable for certain reasons (such as the bankruptcy of the recipient of the supply), a credit amount calculated by multiplying the amount of irrecoverable receivables (bad debt) by 10/110 can be deducted from the output tax amount for the taxable period that includes the date on which the bad debt is confirmed.
- Although the taxpayer in the case was not able to collect the full amount of sales receivables, a portion of the receivables was collected in cash. The remaining portion of the receivables was exchanged for shares of the debtor (purchaser), which were later sold to a third party at par value as a result of a court’s approval of the debtor’s financial restructuring plan.
- The taxpayer argued that the par value of the debtor’s shares after the reduction of capital should be regarded as the fair market value, meaning that the difference between the book value of the receivables and the par value of the stock should be considered as the value of the uncollectible receivables. The taxpayer filed an amended VAT return to claim a tax credit relating to the bad debt.
- The tax authorities did not accept the taxpayer’s request for a VAT refund, and the taxpayer appealed to the tax tribunal.
Summary of tribunal’s decision
- The tax tribunal sided with the taxpayer and explained that if, in accordance with an approved financial restructuring plan, it is determined that existing receivables were written off through the issuance of new shares that were retired without any cash payout, this would mean that it appears certain that the taxpayer was not able to exercise its rights as a shareholder in relation to the newly issued shares and the shares were retired without any consideration. The tribunal found this to be the case.
- Accordingly, the tribunal ruled that it appeared certain that, as a result of a court’s approval of the financial restructuring plan, the receivables at issue were confirmed to be uncollectible, meaning that the taxpayer was entitled to claim the credit.
2. A ruling issued on March 24, 2020confirms that COVID-19-related donations made to certain special disaster areas and to other affected communities qualify as statutory donations for tax purposes.
- In each of the following cases, the donations made were accepted as statutory donations that were deductible for corporate and/or individual income tax purposes:
Case 1): A donation made to residents in special disaster areas before the government’s announcement of the designation of the special disaster areas;
Case 2): A donation made to a COVID-19-related donation fund that was used for the accommodation and labor costs of doctors, nurses, and volunteers, as well as the purchase of various medical supplies; and
Case 3): A donation made to areas that were affected by COVID-19, other than the special designated disaster areas.
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