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Korean Tax Newsletter (January 2022)

Creating the future, together

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

▲ Tax law revisions 

Various Korean tax laws were revised in December 2021. The following is a summary of the key changes.
 
  • Corporate Income Tax Law (No. 18590, 21 December 2021)
    • A new penalty tax for negligence in submitting expense statements regarding passenger vehicles for business use applies to tax returns filed after 1 January 2022. The penalty tax will equal 1% of the amount included in deductible expenses or the amount for which the corporation submits a false statement (section 74-2).
  • Individual Income Tax Law (No. 18578, 8 December 2021)
    • A tax credit will be available for the transmission of electronic invoices issued for goods or services supplied after 1 July 2022 (section 56-3(1)).
    • As from 1 January 2022, the de minimis amount for the non-collection of interim tax prepayment is increased from KRW 300,000 to KRW 500,000 (section 86-4).
    • The law now provides a grace period  of 1 year for the taxation of income from virtual assets (Law No. 17757). 
  • Value Added Tax Law (No.18577, 8 December 2021)
    • As from 1 January 2022, a change in the trustor of a trust is treated as a VAT-able transaction (sections 10(8) and 29(4)).
    • As from 1 January 2022, a 0.5% VAT penalty is imposed on the excess of any overstated amount reported on a credit card sales slip summary statement, etc. (section 60(5)).
  • Inheritance and Gift Tax Law (No.18591, 21 December 2021)
    • The following provisions apply to returns filed after 1 January 2022:
      • The annual sales threshold to be eligible for family business deductions is increased from KRW 30 billion to KRW 40 billion and the income deduction limitation for farming businesses is increased from KRW 1.5 billion to KRW 2 billion (section 18(2)).
      • The scope of deductions for houses in which ancestors and heirs have lived together is expanded to include spouses of lineal descendants (section 23-2).
      • The period to make annual installment payments is increased from five years to 10 years (section 71).
  • Tax Incentive Limitation Law (No. 18634, 28 December 2021)
    • For fiscal years beginning on or after 1 January 2022, the special taxation rules for research and human resources development are modified as follows:
      • Higher tax credit rate for research and investment in facilities for national strategy technology; 
      • Extension of sunset period for tax credits for new growth engines and source technologies;
      • Extension of sunset period of special taxation for technology transfer and acquisition;
      • Extension of sunset period of tax credits for acquisition of technological innovation-oriented stocks; and
      • Expansion of the scope of tax credits for management performance bonuses of achievement-sharing small and medium-sized enterprises (SMEs).
    • Changes to the special taxation rules for employment support:
      • Relax the tax credit requirements for enterprises re-hiring career-interrupted women;
      • Increase the amount and extend the effective period of tax credits for enterprises increasing jobs for youths; and
      • Specify the requirements for and extend the effective period of tax credits for social insurance premiums for SMEs.
    • For fiscal years beginning on or after 1 January 2022, the special taxation rules for balanced regional development:
      • Specify the requirements for a corporate tax reduction or exemption for relocating head offices to areas outside of the Seoul metropolitan area; and
      • Improve post management on tax reduction or exemption for enterprises that occupy agro-industrial complexes.

▲ News from the tax authorities 

 

New tax incentives available for R&D spending on carbon neutrality technology 

For R&D spending related to "new growth and original technologies," including carbon neutrality technology, Korea’s government will offer up to a 40% tax credit for small and medium-sized companies and up to a 30% tax credit for large and middle-standing companies.

Preferential deduction rates of 3% for large companies, 5% for middle-standing enterprises, and 12% for small and medium-sized companies will apply to investment in related facilities. Additional tax deductions also will apply to any amount invested above the average investment amount for the three immediately preceding years.

The government plans to enact an enforcement decree specifying the relevant procedures and eligible enterprises within the first half of 2022.

▲Recent tax rulings and cases

 

Mobile telecommunications services and mobile phone terminal supply held to be separate transactions for VAT purposes

In a decision issued on 15 December 2021, Korea’s Tax Tribunal held that, because value-added tax (VAT) is a consumption tax imposed on the "supply of goods or services" and is collected by each transaction unit, mobile telecommunications services and mobile phone terminal supply are separate transactions (Joshim 2020seo8535).

 

Facts and background

The claimant is a corporation engaged in the mobile telecommunications business. It pays Club T points to customers who sign up for the Club T program and offers a special installment payment plan to mobile communication service customers who purchase mobile phone terminals (i.e., mobile phones) from retailers.

A customer treated the base rate discount from Club T points as a discount on the original supply value and did not include it in the tax base on the VAT return, whereas the discounts on terminal installment payments from Club T points were included. 

The claimant filed a request for a refund of pre-paid VAT on the grounds that the discount on terminal installment payments qualifies as an “amount of discount” deducted from the VAT tax base pursuant to article 29(5)(1) of the Value-Added Tax Act.

 

Issue

Whether the discount provided by the claimant, a corporation engaged in the mobile telecommunications business, to customers for terminal installment payments qualifies as a discount deducted from the VAT tax base.

 

Tax Tribunal decision

The Tax Tribunal dismissed the claim for the following reasons:

  • The membership application for the Club T program states that Club T points are paid instead of terminal discounts and the points are automatically deducted from terminal installment payments every month. Also, the discounts from Club T points are used for terminal installment payments based on the actual usage of Club T points.
  • According to the "Mobile Phone Terms of Service,” the claimant can offer customers a contract period of not more than 24 months on the condition that the claimant supports part of the terminal price when a customer signs up for membership or switches terminals, and subsidies are paid only for new terminals that have not yet been activated and supplies from retailers with whom the claimant has signed a consignment contract.
  • The “new service” contract and the terminal installment payment contract define subsidies as "terminal subsidies in return for maintaining the service and rate plan during the contract period."
  • VAT is a consumption tax imposed on the "supply of goods or services" and is collected by each transaction unit. Accordingly, the supply of mobile telecommunications services by the claimant and the supply of mobile phone terminals by the retailer are separate transactions. (High Court 2017.6.16.)

 

Integrated investment tax credit does not apply to solar power generation facilities 

In another decision, the Tax Tribunal held that the integrated investment tax credit under article 24 of the Restriction of Special Taxation Act does not apply to a domestic corporation that invests in solar power generation facilities to save on electricity bills (Sajeon-2021- BeopRyungHaeSeok BeopIn -1785, 29 December 2021). 

 

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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

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