Korean Tax Newsletter (September, 2010)
Revision to Tax Law
On 10 September 2010, the Ministry of Public Administration and Security ("MOPAS") announced its proposal to revise the Local Tax Law ("LTL"), which generally will be effective as from fiscal year 2011. The MOPAS intends to submit the proposed revisions to the National Assembly for its approval by 31 October 2010 (the proposed changes will be subject to further change until adopted by the National Assembly).
Acquisition tax and registration tax are integrated
Under the current LTL, a taxpayer is required to pay an acquisition tax within 30 days from the date an asset is acquired and a registration tax on the date the asset is registered. The proposed revision to the LTL would consolidate the two taxes as the acquisition tax. The new acquisition tax would have to be paid within 60 days from the acquisition date, unless the taxpayer intends to register assets during that 60-day period, in which case the acquisition tax would need to be paid before the date of registration. However, if an individual taxpayer acquires a house, a car or a machine to be registered, the taxpayer would be permitted to pay the acquisition tax in installments for years 2011-2013 as follows:
Tax credit for e-notice and automatic bank transfer of tax payable
Where a taxpayer applies for both the e-notice system and the automatic online bank transfer of tax payable, the taxpayer is entitled to a deduction of KRW 300-KRW 1,000 for each payment made (KRW 150-KRW 500 if the taxpayer only applies for the automatic online bank transfer) according to an ordinance enacted by a local government.
Developments at Tax Authorities
Joint investigation on offshore tax evasion with U. S.
On 9 September 2010, the National Tax Service (“NTS”) concluded an agreement with its U.S. counterparts to tackle offshore tax evasion. The two countries will work together to investigate illegal transfers of assets abroad and other tax evasion activities by sharing information on suspects and the other parties involved who have an economic base in Korea and the U.S.
Certificate of standard financial statements is also available in English
As from 1 June 2010, the standard financial statement certificate is available in English. Previously, the certificate was only issued in Korean, so if a taxpayer required an English version, the Korean certificate had to be translated and notarized. The English standard financial statement certificate can be issued by a district tax office or it can be found on the National Tax Service website (www.hometax.go.kr or www.nts.go.kr/eng).
New tax treaty with Yemen
On 7 July 2010, the Korean Ministry of Strategy and Finance (“MOSF”) signed a tax treaty with Yemen, which will enter into force after both countries complete their ratification procedures. The main provisions of the tax treaty are as follows:
- A construction site will constitute a permanent establishment if it lasts more than 183 days.
- Withholding tax rates for passive income:
- Dividend: 5% or 10%
(for a shareholder holding less than 20% of shares)
- Interest: 10%
- Royalties: 10%
- The treaty contains a provision on the exchange of information for the investigation of tax evasion, etc.
Recent tax rullings and cases
Tax exemption for foreign investor for deemed dividend income (Kukjesewon-91, 2010.02.17)
Where an upward adjustment is made to the taxable income of a foreign invested company in accordance with the transfer pricing rules in the International Tax Coordination Law and the adjusted taxable income is treated as a deemed dividend to the foreign investor through the secondary adjustment, the foreign investor will be entitled to a tax exemption granted under the Tax Incentive and Limitation Law on the dividend income.
Interest paid to foreign financial institution subject to withholding tax (Jaekukjo-223, 2010.05.27)
Where a domestic company obtains a loan from a financial institution in Hong Kong to acquire property situated in Hong Kong, interest paid to the financial institution should be classified as domestic-source interest income, which is subject to the 22% withholding tax in Korea (i.e. 20% plus the 2% resident surtax).
VAT on supply of smart phone applications (Jaebuga-388, 2010.06.10.)
Where a domestic consumer purchases a smart phone application that is registered in online markets by a Korean developer, the standard 10% VAT will be imposed on the transaction; however, the zero VAT rate is imposed if a foreign consumer purchases the application.
Zero VAT rate on transfer of goodwill to foreign company (Buga-598, 2010.05.11)
Where a taxpayer receives consideration for the transfer of client relationships (e.g. rights and interest with respect to clients, detailed information on clients, prices, contracts, etc.) to a foreign company, the transaction is deemed to constitute an export of goods and the zero VAT rate is applied if the transfer of the client relationships is viewed as a transfer of goodwill.
If you have any questions on the items in this month's newsletter, please contact your tax advisor at Deloitte Anjin LLC or the following tax professionals:
|Seung Chan Park
+82 (2) 6676-2422
|Young Pil Kim
+82 (2) 6676-2432
|Kyong Chin So
+82 (2) 6676-2487