Korean Tax Newsletter (February, 2011)
Revisions to Tax Laws
A number of changes were made to the International Tax Coordination Law (ITCL) in December 2010 and, on 1 February 2011, the Ministry of Strategy and Finance (MOSF) announced that the Ministerial Decrees (MD) to the Corporate Income Tax Law (CITL), Value Added Tax Law (VATL), ITCL, etc. also would be amended.
Revisions to ITCL
Clarification of scope of international transactions
The revised ITCL clarifies that transactions between a domestic company and a Korean permanent establishment of a foreign company are not within the scope of international transactions subject to the ITCL. Instead, such transactions would be subject to the general anti-avoidance rules applicable to transactions between domestic companies. The revised law applies to the fiscal year for which a CIT return is filed after 27 December 2010.
Time limit on exemption of previously taxed deemed dividend income abolished
Previously, where dividends were actually distributed by a controlled foreign company (CFC) or where a Korean parent company transferred the shares of a CFC, the dividend income or capital gain was exempt from taxation up to the amount of the total deemed dividend income previously taxed to the Korean parent company within the past 10 years. The 10-year limit has been abolished for actual dividend payments or transfers of shares made after 27 December 2010.
Integrated analysis and use of multiple year data
Where particular transactions are closely related or take place consecutively and it is not reasonable for prices, profits or transactional net margins to be computed on a per transaction basis, the transactions can be analyzed on an integrated basis. In addition, multiple year data may be used to determine an arm’s length price where economic conditions, business strategy, etc. affect multiple years. The new rules apply from the fiscal year for which a CIT return is filed after 30 December 2010.
Revisions to MD to the CITL
Assets qualifying for additional depreciation deduction
To alleviate any significant increase in the tax burden due to the adoption of K-IFRS, a temporary additional depreciation deduction by way of a tax adjustment is allowed. Tangible fixed assets and intangible assets with an indefinite useful life are eligible for the additional depreciation. According to the amendment, the following intangible assets qualify:
- Legal or contractual rights that have an indefinite useful life or that can be renewed;
- Intangible assets with an indefinite useful life under K-IFRS; and
- Assets for which depreciation is not recognized in the accounting books.
The additional depreciation deduction is limited by reference to the depreciation method and useful life used before the adoption of K-IFRS. Companies that used the straight-line method (SLM) before adopting K-IFRS calculate the additional depreciation deduction by multiplying the acquisition price of the asset by the average depreciation ratio over the previous three years. Companies that previously used the declining balance method (DBM) calculate the additional depreciation deduction by multiplying the remaining balance of the asset by the average depreciation ratio over the previous three years. Companies that previously used both the SLM and DBM may choose one of the following:
- The weighted average SLM and DBM depreciation ratio ; or
- The average depreciation ratio under the primary depreciation method based on the amount of related assets.
Useful life tables to be revised
Table VI of the CITL-MD [Useful Life Table] provides the standard useful life and range of available useful lives for the depreciation of tangible fixed assets for all types of businesses. A company can select the useful life within the range specified in the table. The MOSF intends to revise the table, which dates back to 1995, in two steps:
- Step 1 (in 2011): Revision of the classification of business types to reflect the revision to the Standard Industry Classification Chart; and
- Step 2 (after 2012): Complete the revision to the table with respect to depreciation from FY 2014 under K-IFRS.
Proposed revision to MD to the VATL
The MD to the VAT Law will be revised to allow companies in the automobile manufacturing and sales sector to issue receipts instead of statutory VAT invoices. Currently, only retail businesses, personal service businesses, etc. are allowed to issue receipts.
Proposed revision to MD to the ITCL
Transfer pricing analysis procedures
The revised PD to the ITCL introduced procedures used to determine an arm’s length price. Below are specific analyses required under the proposed MD of the ITCL.
- Determination of years to be covered;
- Broad-based analysis of the taxpayer’s circumstances;
- Understanding the controlled transaction(s) under examination, based in particular on a functional analysis in order to select the tested party (where needed) and the most appropriate transfer pricing method;
- Review of existing internal comparables, if any;
- Determination of available sources of information on external comparables, where such comparables are needed, taking into account their relative reliability;
- Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicators;
- Identification of potential comparables based on a comparability analysis;
- Determination of, and comparability adjustments for, factors that cause differences in prices, profits, etc.; and
- Interpretation and use of data collected, and determination of the arm’s length price.
Council of Europe-OECD Convention and Agreement on Exchange of Tax Information
The increased focus worldwide on preventing offshore tax evasion, combined with the global financial crisis in 2008, has led the OECD countries to agree on the need for the exchange of tax information and transparency and to take a more collective approach to addressing the issues with international speculative funds. To this end, Korea joined the CoE-OECD Convention on 27 May 2010, which aims to enhance multi-country information exchange and cooperation, and also entered into the Agreement on the Exchange of Tax Information (AETI) with nine countries (e.g. Bermuda, Cayman Islands).
The AETI allows the signatory countries to exchange and collect the following information:
- Location of individuals and companies, information on business registration, such as incorporation date, etc.;
- Identification of shareholders of a company, beneficiaries of a trust and partners of a partnership;
- Financial statements, financial records related to the specific transactions of a company; and
- Details of bank accounts opened in the name of individuals or companies and the financial transaction details.
Tax treaty update
Korea and Switzerland tax treaty
On 28 December 2010, the MOSF signed a revised tax treaty with Switzerland, which must be ratified by both countries before it enters into force. The main changes to the treaty are as follows:
|Tax rates||Current version||Revised version|
|Dividends||10% (for shareholders holding at least 25%)/15%||5% (for shareholders holding at least 10%)/15%|
|Interest||10%||10% (Interest received by a bank: 5%)|
|Capital gains on the transfer of shares||Taxed only in country of residence||Capital gains on real estate-rich shares (at least 50% of the assets value consists of real estate) may be taxed in source country|
Treaty with Malaysia revised
On 13 and 14 January 2011, the MOSF signed a draft of a revised tax treaty with Malaysia. The tax rates under the treaty will be revised as follows:
|Dividends||10% (for a shareholder holding at least 25%)/15%||5% (for a shareholder holding at least 10%)/15%|
- The existing treaty provides capital gains tax protection to nonresidents, but the revised treaty changes the article to provide that capital gains derived from the transfer of real estate rich shares (at least 50% of assets value consists of real estate) and shares owned by majority shareholders (shareholders holding at least 25% of the shares) will be taxed in the source country.
- Labuan will be excluded from treaty benefits.
- The treaty adds a limitation on benefits provision and an obligation to exchange financial information.
- The revised treaty will enter into force after the official signing and ratification procedures by the National Assembly.
New tax treaty with Brunei signed
The MOSF signed a tax treaty with Brunei in January 2011, the main features of which are as follows:
- A construction site will constitute a permanent establishment if it lasts more than 12 months.
- The withholding tax rate on dividends will be 5% where the dividends are paid to a company that holds at least 25% of the payer company; the rate will be 10% in all other cases. The rates for interest and royalties will be 10%.
- The treaty contains a provision on the exchange of information for the investigation of tax evasion, etc.
The treaty will enter into force after both countries complete their official signing and ratification procedures.
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
|Young Kyung Koh
+82 (2) 6676-2487