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Korean Tax Newsletter (December, 2006)


Revisions to Tax Laws

Imposition and collection of fines for failure to submit documents (Notice by the National Tax Service No. 2006-31, 2006.11.17)

Under the International Tax Coordination Law (“ITCL”), the tax authorities are empowered to request documents in relation to the transfer pricing methodology adopted by a taxpayer. If the taxpayer does not submit the requested documents by the due date or presents false information, a fine up to KRW 30,000,000 may be imposed. However, no such fine had yet been imposed since there were no clear guidelines/notices issued by the NTS. This NTS notice on the imposition and collection of fines provides the previously lacking details over imposition and collection of fines, and it is expected that the NTS will now actively rely on the NTS notice for the imposition of fines. The notice includes the following:

  • Calculation of the fine:
    Fines may range from KRW 10 million to KRW 30 million.
  • Procedure:
    An “Opinion Request Form” is mailed to the taxpayer who is required to provide reasons for late submission of documents. The submission due date is within 15 days from receipt. It would be up to the Commissioner of the Regional Tax Office concerned to consider the validity of the reasons provided and will impose fines where the reasons are deemed invalid under the Article 21 of the ITCL.
  • Appeal:
    The taxpayer has 30 days from receipt of the notice for imposition of fines for an appeal. The appeal will be heard at the District Court.
  • Collection of fines:
    Fines will be collected in the same manner as for national taxes.

The amendment of the administrative guideline for pre-assessment judgments (Guideline from the National Tax Service No. 1626, 2006.10.20)

Prior to the amendment, all pre-assessment judgments were required to be made in accordance with review and resolution by the Pre-assessment Judgment Committee. The NTS is now entitled to make decisions on pre-assessment judgments without partaking in any review of the committee or based on the resolution of the committee, where the amount under appeal does not exceed the de minimis threshold of KRW 30 million and under the following cases:

  • Where the issue does not require interpretation of the tax law;
  • Where there is a precedent judgment on a similar case reached by the Pre-assessment Judgment Committee or the National Tax Tribunal, when the issue relates to interpretation of the law; or

In addition, the NTS can make decision without the review or resolution of the committee in the following case, where the pre-assessment judgment application is not related to the determination of tax base or calculation of tax liability, and there is a precedent judgment on a similar case reached by the Pre-assessment Judgment Committee or the National Tax Tribunal.

Development at Tax Authorities

Korea-Hong Kong Tax Commissioner Conference

On October 27, 2006, the Commissioner of NTS, Gun-Pyo Jun, and his counterpart in Hong Kong, Alice Lau, opened a conference in which they recognized the exchange of information is essential in order to prevent international tax evasion. Both parties agreed to revitalize the exchange of information and planned to have a regular working level meeting notably to decide the scope and method on the exchange of information.

Recent Rulings and Cases

Income derived by retired employee from exercise of stock options granted by foreign parent company (Seomyun 1 team - 1524, 2006.11.09)

According to the ruling, income derived by retired employees of Korean subsidiary from the exercise of stock options granted by the foreign parent company prior to retirement is classified as the ‘Class B Salary Income’ rather than ‘Other Income’. Furthermore, if the Korean subsidiary makes the payment associated with the exercise of options to the retired employees on behalf of its parent company; the subsidiary is then required to withhold tax on this income.

Eligibility for deduction of bad debts (Seomyun 2 team - 1999, 2006.10.02)

Generally, for a company to claim bad debts as tax deductible expenses, it must substantiate that the debtor has no assets. Historically, the companies have relied on credit investigation reports from the Credit Information Company to verify that the debtor no longer has any assets. However, according to the ruling, it is regarded to be insufficient to meet the bad debt deduction requirement, even if the Credit Information Company confirms that the debtor has no assets.


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