Korean Tax Newsletter (October 2023)

▲ Revisions to tax laws

On September 26th, the Ministry of Economy and Finance announced the tax revisions as follows:

To reduce the medical expenses for pet owners, the scope of VAT exemption for veterinary services is expanded. Additionally, in order to stimulate venture capital investment, the asset management and operation services provided by private indirect venture capital associations are exempt from VAT.

▲ Tax Authorities News

Key highlights from the 3rd quarter of 2023 tax statistics

The National Tax Service (NTS) has released a set of tax statistics for the 3rd quarter in its National Tax Statistics Portal. During this quarter, 76 corporate tax statistics have publicly been announced and here are some of the key highlights.

1. Increased tax filings in 2021
   In 2021, approximately total of 906,000 corporate income tax filings have been made, increase of 8.1% compared to the previous year. When categorized by industry, companies in the service sector such as software development accounted for the majority with 200,000 tax returns filed, followed by manufacturing of 178,000 returns and wholesale trade of 167,000 returns. When categorized by geography, metropolitan areas of Seoul, Gyeonggi, and Incheon comprised of 59.9% or 543,000 of the total corporate income tax filings, and there were 23 districts with more than 10,000 corporate income tax filings. 
   
   
2. Corporate charitable contributions and entertainment expenses in 2021
   According to the filed 2021 corporate income tax returns, corporate charitable contributions amounted to KRW 5.3 trillion KRW, an increase of 1.9% compared to the previous year. Entertainment expenses, on the other hand, decreased by 2.6% to KRW 1.14 trillion.
   
   
3. Increased claims of corporate tax credits and reductions in 2021
   The number of corporations that claimed tax credits and reductions in 2021 increased by 8.3%, amounting to 380,000 corporations. However, the amount of claimed tax credits and reductions were KRW 9.9 trillion, which is a 5.7% decrease from the previous year, influenced by a decrease in foreign tax credits paid.
   
   When examining the statistics of claimed corporate tax credits by entity types, for small and medium sized enterprises (SMEs), the most substantial tax credits was for research and development and labor development expenses, total KRW 1.23 trillion, followed by tax credits for increased employment amounting to KRW 900 billion. For general corporations, the most substantial tax credits claimed was for foreign tax credits of KRW 2.28 trillion, and research and development tax credit of KRW 1.34 trillion.
   
   Regarding the tax reductions applicable to the SMEs, the largest reduction was the special tax reduction for SMEs, amounting to KRW 953.4 billion. This was followed by reductions for start-up SMEs as well as reductions for COVID relief in special disaster areas, which totalled at KRW 257.4 billion and KRW 132.6 billion, respectively. For general corporations, the tax reduction for relocation of their head offices to non-metropolitan areas outside of Seoul accounted for KRW 2.888 trillion, which constituted 73.1% of the total reductions for general corporations.
   
   
4. Status of virtual assets held abroad
   During 2023, 1,432 individuals reported a total of KRW 131 trillion of virtual assets held abroad, which amounts to 70.2% of total assets held under foreign financial accounts.
   
   According to the NTS this year, a total of 5,149 individuals reported overseas financial accounts, amounting to KRW 186.4 trillion. This represents a significant increase in both the number of reporting (38.1% increase) as well as reported amounts (191.3% increase) compared to the previous year. It is believed that such substantial increase is attributable to the newly implemented foreign reporting requirements for the inclusion of virtual assets.
   
   In terms of foreign assets held, 854 corporations reported a total of KRW 162.1 trillion, which is an increase of 107 (increase of 14.3%) reporting entities and an increase of KRW 120.5 trillion won (increase of 289.7%). For individuals, 4,565 individuals reported a total of KRW 24.3 trillion in foreign assets. The number of reporting individuals increased by 1,388 (43.7%) compared to previous year, and the reported amount increased by KRW 190 billion (8.5%). Distinguishing by age group, those in their 30s held the highest average amount of foreign assets at KRW 946 million, followed by those aged 20 and under (KRW 799 million) and those aged 60 and above (KRW 484 million).
   
   In terms of foreign virtual assets, 92% (KRW120.4 trillion) of the virtual assets reported were held by 73 virtual currency or crypto currency developing firms. A total of 1,359 individuals declared KRW 10.42 trillion in overseas virtual assets, resulting an average declaration of KRW 7.66 billion per person. By age group, those in their 30s reported the highest amount of KRW 6.75 trillion (64.9%), with an average declaration of KRW 12.38 billion per person. Those in their 20s and under had the second-highest average declaration at KRW 9.77 billion per person.
   
   Furthermore, NTS announced that it will rigorously examine virtual assets held overseas by utilizing international information data exchange and take strict actions against those who fail to report by imposing fines, issuing notifications, initiating criminal prosecution, disclosing the list of violators, and collecting related taxes in the future. 

▲ Rulings and cases 

A. VAT deduction for bad debts on accounts receivable are applicable to small and medium-sized enterprises with payment terms overdue for more than two years before 2020 (Josim 2022 Seo7020, 2023.08.21).

Under the corporate income law, accounts receivable for small and medium-sized enterprises with payment terms overdue for more than two years before 2020 are recognized as eligible bad debts for the corporate income tax purposes. Hence, it is reasonable that the VAT deduction for such bad debts is allowed as well.

B. The discount cost shared by agreement is accepted as a VAT discount and is therefore excluded from the VAT base (Josim 2022 Seo 1815, 2023.09.12).

In the event that customers of a corporation use an affiliated credit cards as their payment method for purchasing products, as part of pre-established business partnership agreements or promotional arrangements with credit card companies, and when the cost of providing discounts is shared jointly, this cost is considered a direct deduction from the standard selling price in accordance with the supply conditions. As such, it is regarded as a "discount amount" for value-added tax (VAT) purposes and should be excluded from the VAT taxable base.

C. If the initial year for applying the increasing employment tax credit was 2018, and, in the case where the number of full-time workers in 2021 has decreased more compared to 2020, taxpayers can pay the additional tax payment for 2020 as a limit (Seomyun-2022-Bubkyobubin-3938, 2023.09.05).

When the initial year for applying the increasing employment tax credit was in 2018, the taxpayer experienced a decrease in the number of full-time workers compared to 2018 in 2020, requiring an additional tax payment. However, the payment was deferred for one year and was not paid. In 2021, the number of full-time workers decreased even further compared to 2018 and 2020, requiring an additional tax payment higher than that of 2020. Moreover, it was ruled that the additional tax payment in 2021 should be limited to the amount that was deferred for additional tax payment in 2020.

4. The previous year's retirees are included in the count of full-time workers from the prior year when calculating the 'annual wage increase amount for the current year (MOSF Bubinsejekwa-488, 2023.09.05).

5. In the case where only the 'Youth Excluding' employment tax credit was initially applied, and both youth and non-youth personnel have decreased, the term 'Youth' is considered as 'Youth Excluding,' and additional payments are calculated based on the total reduction in personnel (Seomyun-2022-Bubkyobuin-0108, 2023.09.04.)

Contacts

If you have any questions regarding the above information, please contact the provided contact information below, and we will be happy to assist you with a response.

Tax Partner, Scott Oleson | scoleson@deloitte.com
Tax Partner, Young Pil Kim | youngpkim@deloitte.com