Korean Tax Newsletter (August, 2020)

▲ News from tax authorities

Inauguration of the 24th commissioner of the National Tax Service

On 21 August 2020, Dae-Ji Kim was inaugurated as the new chief of South Korea’s tax authority, the National Tax Service. He vowed that the tax office would give full support to small and medium-sized businesses suffering from the effects of the COVID-19 pandemic, while strictly enforcing rules against tax evasion. The commissioner pledged to focus on two key strategies with four major goals.

• Two key strategies 
  
  • 1. Redesign the tax service from the public’s perspective; and
  • 2. Set out the future of national tax administration for the next decade.
    
• Four major goals:
  
  • 1. Taxpayer-friendly administration;
  • 2. Inclusive administration to support taxpayers manage the effects of COVID-19 and the economic recovery;
  • 3. Fair administration for tax justice; and
  • 4. Best workplace for all 20,000 national tax officials.

▲ Recent tax rulings and cases 

1. Korea’s tax tribunal issued a decision on 10 July 2020 in which it ruled that foreign-source royalty income should be included as taxable income of the Korean recipient. (Josim2019Seo4334)

Background

• During the tax audit of its corporate income tax returns for the financial years 2013-16, the taxpayer (a Korean company) was assessed on royalty income received from its subsidiary in China for the use of intellectual property. The fair value of the royalty income was calculated as the 3% of the subsidiary’s total revenue.
• The taxpayer later filed an amended tax return with an adjusted foreign tax credit, as the taxpayer included the royalty income as “foreign-source income” for the purpose of claiming the foreign tax credit.
• The tax authorities did not accept the amended return and the taxpayer appealed.
  

Summary of the tribunal’s decision

• Korea’s Corporate Income Tax Law prescribes that the amount of foreign-source income included in total taxable income determines the maximum amount of foreign tax credit that the taxpayer may claim. Since the royalty income from the Chinese subsidiary is included in taxable income, it also should be considered as foreign-source income for the purpose of determining the foreign tax credit limitation.
• The offset of foreign tax credits is restricted to the actual foreign tax paid, therefore claiming a foreign tax credit in respect of the deemed royalty income does not result in an excessive tax credit to the taxpayer. 
  

2. Korea’s tax tribunal issued a decision on 7 July 2020 in which it ruled that the VAT invoice issued by the taxpayer at the time of a credit purchase of goods from the vendor remains authentic and valid on a de facto consignment sales scheme. (Josim2020Seo0220)

Background

• The taxpayer is a Korean retailer who purchases goods from the vendor on credit, and settles the payment upon the sale of the goods after deducting a sales commission fee. The taxpayer receives a VAT invoice from the vendor at the time of the delivery of the goods.
• The tax authorities challenged the authenticity of the VAT invoice, stating that title in the goods is transferred to the taxpayer when the sales occur, not when the goods are delivered to the taxpayer. The tax authorities consequently denied an input tax credit for the associated VAT.
  

Summary of the tribunal’s decision

• A taxpayer may choose any available legal arrangement to conduct its business and pursue its economic goals, and the arrangement chosen by the taxpayer must be respected by the tax authorities.
• Although it is unclear whether the contract in the current case is a consignment agreement or a sales agreement, to the extent that there is no intent to evade tax, and no misstatement of the actual transactions occurs, the VAT invoice is still deemed to be authentic and valid.
• The taxpayer has filed the VAT returns and paid the VAT due based on the actual transactions that occurred, and in accordance with the contract between the taxpayer and the vendor. In view of this, it is considered legitimate VAT reporting in accordance with article 75 of the enforcement decree of the Value Added Tax Law passed by the National Assembly on 12 February 2019.
  

Contacts

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

Partner, Hong Seok Han : +82 (2) 6676-2585 / hseok@deloitte.com
Partner, Scott Oleson : +82 (2) 6676-2012 / scoleson@deloitte.com
Partner, Young Pil Kim : +82 (2) 6676-2432 / youngpkim@deloitte.com