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Korean Tax Newsletter (May, 2007)


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Revisions to Tax Laws

Proposed Revisions to Tax Laws

On April 26, 2007, the Finance and Economy Committee of National Assembly reviewed revisions to tax laws including Individual Income Tax Law, Corporate Income Tax Law ("CITL"), and Tax Incentive Limitation Law ("TILL") proposed by the Ministry of Finance and Economy before submitting them to the Assembly plenary session. Among them, the revision to the TILL has passed by the National Assembly on April 30, 2007 and the others are still pending. The followings are major features of the proposed revisions to the CITL and the TILL.

  • Proposed Revision to the CITL
    • Introduction of simplified tax system
      Simplified tax system ("STS") would be introduced for a company whose annual gross revenue is KRW 500 million or less and transaction details can be verified through ERP or POS system, etc. from a fiscal year beginning on or after January 1, 2008. The STS is summarized as follows:
      1. All fixed assets are depreciated over 5 years on a straight line method;
      2. Tax limits for donation expense and entertainment expense are to be simplified to 0.5% of gross revenue and KRW 19 million, respectively;
      3. A standard tax credit at 15% (25%, in case of outside Seoul Metropolitan Area ("SMA")) is applied, while other tax credits under TILL are not applicable;
      4. If gross revenue exceeds 115% of the prior year's gross revenue, tax credit equal to the exceeding revenue amount is available;
      5. The alternative minimum tax under TILL is not applied; and
      6. Tax audit is exempted except tax evasion being noted distinctively.

  • Proposed Revisions to the TILL
    • Tax exemption on dividend income from local funds derived in relation to overseas listed shares
      Under the current law, dividend income received by a Korean resident from local funds in relation to trading or valuation of shares of Korean Stock Exchange-listed companies, KOSDAQ-registered companies, or venture companies is exempted from income taxes. With the revision, the tax exemption would be extended to the dividend income from local funds derived from trading or valuation of overseas listed shares until December 31, 2009.
    • Deductible cultural entertainment expenses
      Where a company spends "cultural entertainment expenses", to be specified by the Presidential Decree of TILL, the cultural entertainment expenses exceeding certain amount would be additionally allowed as deductible expenses within 10% of tax limit for entertainment expenses. This revision is proposed to be effective from FY2007 and terminate by the end of 2008.
    • Increase in tax credit for improving bill system
      A Small and Medium Sized Enterprise ("SME") which pays its purchase liabilities with a bill of exchange, purchasing card, network loan or etc., is entitled to a tax credit for improving bill system. Rate of such tax credit would be increased to 0.4% from current 0.3% for the payment with term of 30 days or less from the invoice issuance date, while the tax credit rate for payment with term of 31 ~ 60 days would remain unchanged at 0.15%.

Developments at Tax Authorities

Tax Support for Companies Operating over 30 Years outside SMA

On April 24, 2007, the National Tax Service announced a plan to provide special supports for companies who operate over 30 years outside SMA and had gross revenue of less than KRW 50 billion on 2006 tax return. Main contents of the plan are summarized as below:

  • Waive a tax audit until December 31, 2009;
  • Finalize a tax audit early without any extension when the tax audit is under progress without delay in submission of necessary documents, etc.;
  • Approve postponement of a tax audit depending on the companies' opinion when a prior notice for the tax audit was made; and
  • Give extension of tax payment due date, grace period for tax collection, advanced tax refund, etc. when the companies have difficulties in business operation such as operating fund shortage.

Recent Tax Rulings and Cases

Capital gain from sales of shares of domestic company by a non- resident ( Seomyun2team-544, 2007. 03. 30)

Where a non-resident sells shares of a Korean company, which was acquired through exercise of stock options granted when he or she was a Korean resident, income from sale of the shares is treated as Korean source capital gains received by the non-resident and eligible for tax exemption in Korea if the relevant tax treaty provides the tax exemption on the capital gains.

Commissions and expenses related to purchase activities for head office ( Seomyun2team-433, 2007. 03. 15)

When a Korean branch of a Japanese company is deemed as a permanent establishment ("PE") of the Japanese company in Korea, commissions received from the head office and expenses spent with respect to mere purchase activities performed by the branch on behalf of the Japanese company are not attributed to the PE under the Article 7 of Korea-Japan tax treaty.

Foreign tax credit on foreign source income earned through business transfer ( Seomyun2team-417, 2007. 03. 14)

A domestic company ("AA") had received foreign source royalty income, subject to withholding taxes in Japan, and accounted for the foreign source royalty income as unearned revenue, since the revenue recognition was deferred. In case where the unrecognized foreign source income was taken over by another domestic company ("BB") through a business transfer, BB is qualified for a foreign tax credit on the withholding taxes paid by AA, if BB includes the deferred revenue in its taxable income in the fiscal year, in which the revenue should be recognized, when filing an income tax return for the fiscal year.

 

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