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Korean Tax Newsletter (November, 2010)

Revision to Tax Law

Notice of the Ministry of Strategy and Finance ("MOSF")

Notice on statutory interest rates under the Inheritance and Gift Tax Law (“IGTL”)
The MOSF noticed the statutory interest rates used for valuation of assets under IGTL as below:

Item Gift income amount Current Revised
Statutory interest rate applied to calculation of gains on the borrowing from related parties for free of charge or at a lower interest rate · Borrowing amount x
  statutory interest rate
  (in case of the borrowing
  for free of charge)

· Borrowing amount x
  statutory interest rate -
  actually paid interest amount
  (in case of the borrowing
  at a lower interest rate)
9% 8.5%
Statutory interest rate in valuation of subscription rights of warrant bonds of unlisted companies · [Repayment amount at maturity
  / (1+issuance interest rate)n] -
  [Repayment amount at maturity
  / (1+ statutory interest rate)n]
  (n: period until maturity)
6.5% 8%
The revised interest rates become effective from 5 November 2010.

Revision of the Ministerial Decree of Customs Law

Rearrangement of scope of environmental pollution protection facilities eligible for customs duty exemption
The MOSF announced a proposed revision with respect to rearrangement of scope of environmental pollution protection facilities eligible for customs duty reduction. According to the proposed revision, the number of pollution protecting facilities eligible for the 30% customs duty exemption will be decreased from 113 items to 49 items as (i) existing 83 items have been manufactured or already introduced in domestic will not enjoy the 30% customs duty exemption any more and (ii) the 30% customs duty exemption will be newly granted to 19 items such as car parts used for reducing vehicle exhaust gas (7 items), water quality-improving goods (2 items) and wastes-disposing goods (10 items).

Developments at Tax Authorities

Plan for tax audits

On 5 November 2010, the National Tax Service (the “NTS”) announced the “Plan for Tax Audits,” the main features of which are summarized as follows:

Criteria for selection of a tax audit target company

  Large companies
(Sales revenue of KRW 500 billion or more)
Medium-size companies
(Sales revenue of KRW 5 billion or more)
Small companies
(Sales revenue of less than KRW 5 billion)
Criteria · Every 4 years · Result of analysis of the extent of tax filing compliance · Results of analysis of the extent of tax filing compliance

· Partial selection on a random basis

Tax audits for small and medium sized companies ("SMCs")

According to the plan, tax audits on a SMC of which revenue is less than KRW 50 billion (previously KRW 30 billion) will be undertaken by a district tax office rather than a regional tax service.

In addition, in case where a SMC of which revenue is less than KRW 50 billion (KRW 2 billion for an individual taxpayer) has operated a business more than twenty years (thirty years for a SMC located in metropolitan area) and filed tax returns faithfully, such SMC will be excluded from a tax audit target company.

Recent tax rullings and cases

Conditions for income deduction by Project Financing Vehicle (“PFV”) (Jaebubin-856, 2010.10.07.)

Under Article 51-2 of the Corporate Income Tax Law (“CITL”), in order for PFV to take the benefit of the income deduction, certain conditions should be met such as: (i) certain financial companies or the National Pension Service should be a shareholder of a PFV, (ii) a shareholder company (or a company which is established solely by a shareholder company or jointly by shareholder companies) should act as an asset management company of the PFV, and (iii) a financial company operating a trustee business should act as a fund management company of the PFV, etc. According to the previous ruling (Jaebubin-611, 2010.07.14.) with regard to the conditions above, in case where the fund management company of a PFV is a shareholder of the PFV, the income deduction is not granted to the PFV. According to this ruling, even though the financial company is a shareholder of the PFV and acts as a fund management company, a PFV can be allowed to enjoy the income deduction unless the financial company is an asset management company itself or a shareholder of an asset management company.

Foreign tax credit (“FTC”) on tax paid by US LLC (Jaekookjo-281, 2010.07.01.)

In the case where (i) a Korean investment trust invests in Brazil (i.e. acquisition of bonds issued by Brazil SPV) through US LLC which elects the partnership taxation and does not pay tax in the US and ii) US LLC receives interest income after deducting the Brazil withholding tax as per the Brazil tax law due to no treaty between US and Brazil, the FTC cannot be claimed in Korea for the withholding tax paid in Brazil.

Interest penalty imposed upon the audit result of the Board of Audit and Inspection (Joshim2009seo2689, 2010.09.30.)

In case where the tax authorities denied a tax credit and assessed the corporate income tax together with the interest penalty upon the audit result of the Board of Audit and Inspection after the amended corporate income tax return by the company to claim the tax credit had been previously accepted by the tax authorities, the interest penalty should not be imposed as the company is not responsible for the underpayment of the corporate income tax.

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


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