Korean Tax Newsletter (February, 2021)

▲ Tax law amendments

Several tax reform proposals will be effective in Korea as from mid-March 2021 following a pre-announcement of the new legislation, an interdepartmental consultation, and an evaluation by the Ministry of Government Legislation.

The major regulatory changes affecting corporations are discussed below.

Basic National Tax Law

• 1. Reduction in interest rate for additional charges on national tax refunds 
  
  • The yearly interest rate applicable to additional charges on national tax refunds will be reduced from 1.8% to 1.2%.
  • The reduction will apply as from the period starting after the effective date of the revised rules in mid-March 2021.  

Corporate Income Tax Law

• 1. R&D expenses related to foreign-source income included in calculation of foreign tax credit limit
  
  • The foreign tax credit limit calculation will be modified as follows:
    -When calculating the revenue basis and gross margin basis from a particular foreign source, expenses (including R&D expenses) related to the foreign-source income per country will be taken into account. 
    -The overseas revenue and gross margin of a business outside of Korea will be excluded from Korea-source income (i.e., they will be treated the same as an overseas subsidiary’s revenue and royalty). 
  • R&D expenses are defined as expenditures incurred for R&D activities (including contract and joint research) and R&D activities are defined as activities to achieve scientific or technological progress and to develop new services and service delivery systems (except for general management and support-related expenses) (Tax Incentive Limitation Law, article 2 subparagraph 11).
  • The change will apply to fiscal years starting on or after 1 January 2021.
• 2. Foreign bad debts deductible under certain conditions
  
  • The amount of foreign receivables that cannot be recovered due to the debtor’s bankruptcy, refusal to pay, etc., and reductions in foreign receivable balances agreed between the parties will be tax deductible if a local bank or public institution can confirm that the amount is not recoverable. 
  • A reduction in a receivable balance will be tax deductible as well if an arbitration agency or a court ordered the reduction. 
    
  • In each case, the applicable foreign receivables will be those that are confirmed to be unrecoverable on or after the relevant tax law goes into effect.
• 3. Calculation of indirect shareholding ratio following vertical spin-offs and in-kind contributions
  • New rules will apply to determine the shareholding ratio of the shareholders of a corporation following a qualified spin-off or in-kind contribution or the shareholding ratio of the shareholders in a newly established company resulting from the spin-off.
    - When there are at least two shareholding companies, the final shareholding ratio will be calculated by combining each company’s ratio.
    - The same calculation will apply if there are companies in the ownership chain between the corporation and the spun-off company or between the corporation and the company making the in-kind contribution.
  • This rule will apply to mergers, spin-offs, vertical spin-offs, and in-kind contribution occurring on or after 1 January 2021.
    
• 4. Years of service for settlement of interim versus actual retirement benefits clarified
  
  • An employee’s years of service used to settle their interim retirement benefit when the employee was not actually retired, as defined in the corporate income tax law, will be excluded from the calculation of years of service for the settlement of the employee’s actual retirement benefits.  
    
• 5. Taxable income may be exempt from adjustments when service transactions occur among entities in a consolidated group
  
  • A consolidated tax group’s tax liability will remain unchanged (i.e., there will be no adjustments to taxable income) after taking into account any transaction service fee for services provided among the group’s entities. 
  • The service should be performed between entities that remain in the tax consolidated group throughout the period from the fiscal year during which the service begins until the fiscal year during which the service is completed.  
  • This rule will apply to transactions that occur on or after the relevant tax law goes into effect. 
    
• 6. Scope of mass trading using closing price on a trading day as fair market value; company’s change of control
  
  • A transaction that meets certain conditions/thresholds (price, volume, etc.) pursuant to the securities business regulations of the Capital Market and Financial Investment Business Law will qualify as mass trading and the closing price will be treated as the fair market value.
  • The control of a company will be treated as having been transferred when the company’s major shareholder, as defined by the Inheritance and Gift Tax Law, changes or when the company’s ownership ratio changes by 1% or more following transactions between its major shareholders. 
  • These rules will apply to transactions that occur on or after the relevant tax law goes into effect.

Value Added Tax Law

• 1. Reduction in interest rate to calculate deemed rental fee for security deposit (VAT Law Enforcement Rules article 47) 
  • The yearly interest rate to calculate deemed rental fees for security deposits will be reduced from 1.8% to 1.2%. 
    

Tax Incentive Limitation Law

• 1. Scope of field training expenses treated as employee development expenses expanded
  
  • The aim of the expansion is to hire college students who participated in field training that complies with the operating standards set by the Minister of Education in accordance with the Industry-Academic Cooperation Law and that meets all of the following requirements:
    1. The field training courses comply with standardized operation standards;
    2. On-site training is conducted for a certain period of time; and 
    3. Employment opportunities are offered to those who have completed the field training.
    
• 2. Increase in number of new growth technology commercialization facilities
  
  • The number of new growth technology commercialization facilities qualifying for a special deductible depreciation expense increased from 141 to 158 for the tax year beginning after 1 January 2021.
  • The additional facilities are focused on the following sectors/industries: semiconductors, carbon reduction, new renewable energy, and biomedical research, among others.
    

Regarding the tax law amendments of 2021, Deloitte
Anjin has prepared an information session for the briefing explanation of major
tax law amendments in following YouTube link.

https://www.youtube.com/watch?v=pcbFAyFoEFE

▲ News from the tax authorities 

According to a news release dated 18 February 2021, Korea’s National Tax Service has created a team within each regional tax office dedicated to providing advice regarding the R&D tax credit due to a rapid increase in the number of companies applying for the R&D tax credit pre-screening service. The team is primarily focused on providing advisory services to small and medium-sized enterprises (SMEs) and individual business owners.According to the National Tax Service, about 1,500 companies applied for R&D tax credit pre-screening in 2020. Under the program, the National Tax Service confirms in advance whether a company is eligible for the R&D tax credit to mitigate the risk of the company incurring penalties as a result of improperly applying for the credit. 

▲Recent tax rulings and cases

In a decision issued on 4 February 2021, Korea’s Tax tribunal held that the cost of golf supplies provided for free by a golf products distributor to professional golf players and celebrities should be treated as a deductible marketing and advertising expense rather than an entertainment expense (Joshim2019seo3444, 2021.02.04.)

Facts and background

• The taxpayer, an importer/distributor or golf-related products, gave golf supplies to the golf association and celebrities in an effort to encourage general consumers to purchase its products. It treated the cost of the supplies as a marketing and advertising expense for book purposes and treated it as a deduction for tax purposes.
• The tax authorities treated the expense as an entertainment expense since the golf supplies were provided to a specific group of people for free to enhance business relationships. 

Tax Tribunal decision

• The Tax Tribunal sided with the taxpayer for the reasons discussed below.
• Article 25(5) of the Corporate Income Tax Law provides that entertainment expenses include entertainment expenses and  expenses of a similar nature incurred by a corporation regardless of the corporation’s expense classification. Entertainment expenses should not be confused with marketing and advertising expenses. Entertainment expenses are costs incurred to improve a relationship with business partners, vendors, customers, etc., with the expectation of obtaining a business benefit. 
• If the costs are aimed at promoting products and services to an unspecified group of people such as the general public, they would be treated as marketing and advertising expenses.
• Therefore, for an expense to be treated as an entertainment expense, the recipient should be a specific person who has a business relationship with the taxpayer and the purpose of the expenditure should be to improve business relations by providing entertainment, companionship, comfort, gifts, and other items/activities.
• The purpose of the expenditure should be determined by examining the motive behind it, its value, form, effectiveness, etc. 
  • The tribunal concluded that the taxpayer incurred the expense not for the purpose of entertaining its clients but for the purpose of promoting and advertising its products to the general public through its campaign with professional golf players and people in the golf industry. The tribunal found it reasonable to treat the expenditure as an advertising expense incurred for the purpose of increasing sales by improving the products’ image. In reaching its conclusion, the tribunal relied on the following reasoning:
    -It is difficult to say that the taxpayer maintained a business relationship with golf players or golf association members.
    -It is not unreasonable to conclude that the taxpayer provided golf products to professional golf players and golf associations for advertising purposes, to encourage purchases by the general public. 
    -It is reasonable to consider that professional golf players were selected as recipients to maximize the advertising impact. It is fair to conclude that the fact that only a small number of people received free products does not necessarily mean that they are a specific group of people for the purpose of determining whether the expense was an entertainment expense.
    -It is difficult to see how another group of recipients, such as a golf association, bloggers, participants in charity events, etc., could be treated as a specific group of people who had a business relationship with the taxpayer.

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Contacts

For further questions or inquiries, please kindly contact representatives listed below.

Inbound Tax Leader, Scott Oleson, +82 (2) 6676-2012 / scoleson@deloitte.com
Indirect Tax Partner, Hong Seok Han : +82 (2) 6676-2585 / hseok@deloitte.com
M&A Tax Partner , Young Pil Kim : +82 (2) 6676-2432 / youngpkim@deloitte.com
BPS Tax Partner, Park Sung Han, +82 (2) 6676-2521 / sunghpark@deloitte.com
TP Partner, Lee Yong Chan, +82 (2) 6676-2828 / yongclee@deloitte.com
GES Partner, Seo Min Soo, +82 (2) 6676-2590 / mseo@deloitte.com