Korean Tax Newsletter (March, 2007)
Revisions to Tax Laws
Proposed Ministerial Decree of Corporate Income Tax Law
The Ministry of Finance and Economy ("MOFE") announced proposed revisions to the Ministerial Decree of Corporate Income Tax Law ("CITL") on February 6, 2007 including the followings:
- Calculation methods for percentage of completion ("POC")
Under the current law, where a construction, manufacturing, or other service project term is one year or longer, all revenue and expense should be recognized on a progress basis and the rate of progress should be calculated based on the accumulated costs incurred (up until the end of the tax year) over the total estimated project costs.
The proposed revision, however, would newly allow 'input quantity basis' or 'output quantity basis' as well as the current 'cost basis' in calculating the POC.
- Scope of interest expense
With the revision, D/A (Document Acceptance) interest and Shipper's Usance interest would be included in interest expense for deferred payment, which therefore should now be excluded from acquisition cost of underlying assets. Under the current law, such interest for deferred payment is limited to Banker's Usance interest.
Developments at Tax Authorities
Introduction of Prior Access System to Review Documents of National Tax Service
The National Tax Service ("NTS") has introduced the prior access system to review documents of NTS, which is effective from February 12, 2007.
Through the system, taxpayers who appeal to the NTS would be able to obtain an access to documents prepared by the NTS (such as notice of tax assessment, claim for appeal, the tax authorities' opinion, relevant regulations/cases, facts and circumstances, review details, etc.) via e-mail or direct visit before such documents are presented to the Review Committee in the NTS.
In addition, taxpayers are allowed to have an opportunity to reflect their claim by submitting supplementary opinion or data via e-mail or fax within 3 days from the date taxpayers obtained an access to the documents.
Recent Rulings and Cases
Payment Guarantees for foreign related parties (Seomyun2team-255, 2007.02.06)
Where a Korean company provides payment guarantees through stand-by LC to its Chinese subsidiary, which is a foreign related party for tax purposes and tries to borrow money in China, such payment guarantee transactions would be classified as cross-border transactions with a foreign related party subject to transfer pricing adjustments at arms length price under the Article 4 of the International Tax Coordination Law. An arm's length price can be determined according to the methods specified in the Article 5 of the International Tax Coordination Law.
Tax Exemption for Foreign Invested Company (Seomyun 2 Team - 225, 2007.01.31)
In case where a foreign investor, which owns 100% interest in a domestic company entitled to a tax exemption as a foreign invested company, transfers its total interest in the domestic company to another foreign investor, the domestic company would be eligible for the tax exemption as a foreign invested company continuously as long as businesses operation and foreign investment ratio of the domestic company remain unchanged.
Application of Treaty Benefit based on Certificate of Tax Residency (Seomyun 2 Team - 144, 2007.01.18)
When a treaty is silent on the use of a certificate of tax residency, under the Notice 1985-18 issued by the NTS, a foreign income recipient can still claim benefits of favorable withholding tax rates provided by the relevant tax treaty between Korea and the resident country of the foreign income recipient by submitting a certificate of tax residency issued by the tax authorities of the resident country proving that the foreign income recipient is a resident of the corresponding country.