Korean Tax Newsletter (September, 2008)
Proposed Revisions to Laws
On September 1, 2008, the Ministry of Strategy and Finance (“MOSF”) announced a proposal for “Revisions to Tax Laws in 2008” which in general will become effective from 2009 through a legislation process. The revisions include the Corporate Income Tax Law (“CITL”), the Individual Income Tax Law (“IITL”), the Tax Incentive Limitation Law (“TILL”), the Value Added Tax Law (“VATL”), the National Tax Basic Law (“NTBL”), the International Tax Coordination Law (“ITCL”), etc. The MOSF plans to submit the proposed revisions to the National Assembly for their approval. The major proposed revisions include the followings:
(Note) The proposed revisions are not final and therefore, the contents may be amended or deleted during the legislation process.
Corporate Income Tax Law
Reduction of corporate income tax rate
In our June tax newsletter, we introduced the MOSF’s plan for the reduction of corporate income tax rate. The MOSF announced the revised proposal as below, according to which the reduction of the corporate income tax rate from 25% to 22% for tax base over KRW 200 million will be enforced from FY2009, rather than FY2008:
|Tax Base||Tax Rate|
won or below
won or below
Decrease in withholding tax rate for non-resident
In case where a non resident earns Korean source income and has no permanent establishment in Korea which is effectively connected with the earned Korean source income, the payer of the income should file and pay the withholding tax calculated according to the CITL in the case where Korea has no tax treaty with the country in which the non resident is a tax resident. With the proposed revision, the withholding tax rate applied to interest income (except for interest income on bonds), dividend income, royalty income and other income under the CITL will be lowered from 25%(27.5% including 10% resident surtax) to 20%(22% including 10% resident surtax).
Introduction of consolidated tax return filing regime
The proposed revision to the CITL provides more details of the consolidated tax return filing system which was introduced in our March Newsletter. The major contents in the proposed revision are as follows:
- Scope of companies eligible for a consolidated tax return filing
In general, a parent company and its 100% owned subsidiaries are eligible for the consolidated tax return filing. Once the consolidated tax return filing is elected, it will not be allowed to make a change for 5 years.
- Additional tax adjustments
After summing up the total amount of taxable income of each company for the fiscal year, additional adjustments (e.g. elimination of the gain/loss from inter-company transactions, recalculation of the tax limit for donation/entertainment expenses, etc.) should be made to calculate the consolidated taxable income.
- Deduction of tax Net Operating Loss (“NOL”)
Tax NOL from a company under the consolidation tax filing regime would be allowed to be deducted from consolidated taxable income. However, tax NOL incurred before the application of the consolidation tax filing regime can be deducted only from the taxable income of the company having occurred the tax NOL. Further, in case where a parent company has newly acquired 100% interest in the subsidiary, the tax NOL of the subsidiary can be deducted only from the subsidiary’s taxable income for 5 years after the acquisition.
- Tax incentives
Tax incentive amounts should be calculated on a standalone basis and then credited from consolidated tax payable amount.
- Classification of small and medium sized company (“SMC”)
The conditions to be a SMC should be determined on a consolidated tax group basis. However, a company which had met the SMC conditions for tax purposes before the tax consolidation would maintain the SMC status for 4 years from the tax consolidation under the grand father rules.
- Filing and payment obligations
Only the parent company is liable to file the consolidated tax return. However, both the parent company and the consolidated tax group subsidiaries are jointly liable for the payment of consolidated tax liabilities.
The consolidated tax return filing regime will be enforced from FY2010.
Extension of carryover period of tax NOL
Currently, tax NOL of companies can be carried forward for 5 years. With the proposed revision, the tax NOL carryover period will be extended to 10 years. Furthermore, mandatory period for maintenance of books, supporting documents and statutory receipts, and the statute of limitation for tax assessment will be prolonged from current 5 years to 10 years for companies which claim to use the ten year tax loss carryover.
Dividend received deduction (“DRD”)
Currently, where a company (“AA”, including a holding company) receives dividends from its subsidiary (“BB”) and claims a DRD under the CITL, a certain amount of the dividends which AA receives from BB would be excluded from the DRD amount if BB owns an affiliate (“CC”) which fall under the same affiliate group with AA and BB under the Monopoly Regulation and Fair Trade Act (“MRFTA”). With the proposed revision, AA’s DRD amount will not be reduced even if BB owns interrelated companies.
Scope of entertainment expense
According to the current tax law, expense for samples given to unspecified many customers or sample expense of 30,000 won or less per specified customer per year is treated as a deductible sales expense. With the proposed revision, purchasing expenses of not more than 5,000 won (per item) for identifiable items such as gifts and office supplies on which a company’s name is printed and which can be distributed to the general public may be deducted as advertisement expenses for tax purposes without any constraints.
Value Added Tax ("VAT") Law
VAT compliance based on a whole business unit
With the proposed revision, the requirements for VAT compliance based on a whole business unit (e.g. set up of ERP system, prior approval by the relevant tax office, etc.) will be abolished so that all taxpayers can select the VAT compliance (including VAT invoicing, VAT payment, VAT return filing, etc.) based on either a whole business unit or each business place unit. This proposed revision will be effective from January 1, 2010.
Tax Incentive Limitation Law
With the proposed revision, the R&D reserve will be restored. In case where a company accounts for a certain amount within 3% of the total sales amount as a R&D reserve for the future R&D spending, it will be treated as a deductible expense in the fiscal year in which the company accounts for it for tax purposes. If the company uses the reserve amount for R&D spending within 3 years, a portion equal to each one third of the used reserve amount will be added to taxable income over 3 years after 3 years from the fiscal year when the R&D reserve is accounted for tax purposes. If the company does not use the reserve for R&D spending within 3 years, the entire unused reserve amount together with interest will be added to taxable income in the fiscal year after 3 years from the fiscal year when the R&D reserve is accounted for tax purposes. The proposed revision will be effective from FY 2009 and is planned to expire on December 31, 2013.
R&D tax credit
Under the current tax law, companies can select either the “current year spending basis method” or the “incremental basis method” for the calculation of R&D tax credit amount. However, large companies (other than SMCs) are allowed to select the “current year spending basis method” only when the R&D spending ratio (i.e. R&D expenses/Revenue) of the current year is not less than that of previous year. With the proposed revision, large companies are also allowed to select the “current year spending basis method” in case where R&D expense amount spent in the current year is at least that of the previous year.
Also, the R&D tax credit rate applied under the current year spending basis method for SMCs will increase from the current 15% to 25%. This proposed revision will be effective from FY 2009. Furthermore, the sunset clause of this credit will be abolished, and thus, it will continue to be applied.
Flat tax rate for foreign employees
Under the current tax law, foreign employees in Korea are eligible for one of the following two benefits at their choice: i) income exemption equal to 30% of total salary amount, or ii) application of flat tax rate of 17%(18.7% including 10% resident surtax).
With the proposed revision, the special flat tax rate for foreign employees will be further lowered from the current 17%(18.7% including 10% resident surtax) to 15%(16.5% including 10% resident surtax).
Individual Income Tax Law
Reduction of individual income tax rates
Under the proposed revision, individual income tax rates would be lowered as follows:
|Tax base||Current||2009||On or
|Up to 12 million won||8%||7%||6%|
|12 million won - 46 million won||17%||16%||15%|
|46 million won - 88 million won||26%||25%||24%|
|Over 88 million won||35%||34%||33%|
10% resident surtax will be added to the above individual income tax rates.
Reduction of scope of taxable income for short-term residing foreigners
Currently, if a foreigner becomes a Korean tax resident by having an address in Korea or a residence for 1 year or more in Korea under the IITL, his/her worldwide income (both Korean source income and foreign source income) prescribed in the IITL are subject to Korean individual income tax irrespective of his/her nationality. With the proposed revision, the foreign source income to be taxed to a foreigner whose total residing period in Korea does not exceed 5 years out of past 10 years will be limited to only the foreign source income which is paid in Korea or remitted to Korea.
National Tax Basic Law
Penalty tax for amended tax return filing
Under the current tax law, when a taxpayer who has timely filed a tax return within the statutory filing due date files an amended tax return within 6 months after the original filing due date, 50% of the penalty tax for underreporting or over-refund claim can be exempted. With the proposed revision, the partial exemption of penalty tax will be extended as follows:
|Perion (from original filing due date)||Current||Proposed|
|Within 6 months||50%||50%|
|After 6 months, but within 1 year||-||20%|
|After 1 year, but within 2 years||-||10%|
In addition, the penalty tax for underreporting of zero-rated VAT base will be additionally included in the scope of the penalty tax eligible for the above partial exemption.
International Tax Coordination Law
Waiver of penalty tax through contemporaneous documentation
Under the current ITCL, when the tax authority makes a Transfer Pricing (“TP”) adjustment to a taxpayer, 10% penalty tax for underreporting can be waived only if the taxpayer is confirmed in the Mutual Agreement Process (“MAP”) that it had no fault on the TP adjustment. With the proposed revision, in case where a taxpayer with foreign related party transactions prepares and maintains contemporaneous TP documentation, to the extent the taxpayer reasonably selects and applies TP methods to produce arm’s length results for tax purposes, the penalty tax for underreporting can also be waived.
Controlled Foreign Corporation(“CFC”) rules for a wholesale business subsidiary and a foreign holding company subsidiary
Under the current ITCL, if certain CFCs conducting wholesale business meet both the “purchase condition” and the “sales condition”, the CFC rules (according to which reserved income of the CFCs is deemed distributed as a dividend income to the domestic parent company) are not applied as an exception. To satisfy the conditions, the foreign wholesale CFC should purchase goods of more than 50% of the total purchase amount from related parties conducting manufacturing business in the same country or region (referring to EU) (i.e., the purchase condition) and should have more than 50% of total sales to be made to non-related parties in the same country or region (i.e., the sales condition). With the proposed revision, the purchase condition will be eliminated so that the foreign wholesale CFC can be entitled to an exception as long as it can meet the sales condition.
For a foreign holding company subsidiary, if 90% or more of passive income (i.e., interest, dividend, royalty, and capital gains from sale of shares) derived by the foreign holding company is comprised of dividend received from CFCs held by the foreign holding company subsidiary and located in the same country or region, it is not subject to the CFC rules under the current ITCL assuming other conditions for this exception are also satisfied. It is proposed that the 90% CFC income test will be based on the sum of dividend income and interest income (i.e., the sum amount should be 90% or more of total passive income of the foreign holding company subsidiary).
Securities Transaction Tax Law
Due date of filing and payment of Securities Transaction Tax (“STT”)
Under the current STT law, in case of the transfer of an unlisted company’s stock, the seller should file and pay STT within the 10th day of the month following the share transfer date. With the proposed revision, however, the seller can file and pay the STT within 2 months from the last day of the quarter to which the transfer date belongs in line with the current preliminary filing due date for capital gains tax on transfer of stock.