Korean Tax Newsletter (March, 2014)
Korea Tax News
Korea - Peru treaty entered into force
On March 3, 2014, the Korea - Peru treaty entered into force. The main features of the treaty are as follows:
|Withholding Tax||Withholding Tax Rates|
|Royalties||10% for compensation of technical support / 15% for other cases|
The treaty contains provisions on exchange of information. As such, the competent authorities of the countries will be able to exchange such information which might be necessary for the tax administration.
The treaty shall enter into force and be effective as follows;
|a)||With respect to taxes withheld at source, on amounts payable on or after the first day of January of the next year in which the treaty is entered into force;|
With respect to other taxes, for taxation years beginning on or after the first day of January of the next year in which the treaty entered into force.
Korea - US information exchange agreement signed
The Ministry of Strategy and Finance ("MOSF") has made an agreement for information exchange on March 17, 2014. According to the agreement, information on financial accounts reported to the tax authorities (i.e. Korea National Tax Services ("NTS") and US Internal Revenue Service ("IRS")) by financial institutions as of the end of the year would be exchanged by the end of September in the following year between the NTS and IRS on a yearly basis.
The agreement would be effective from FY 2015 and the following table shows the details of the agreement;
|Item||US → Korea||Korea → US|
|Accounts to be reported||Individual||· Bank accounts with over USD 10 of annual interest.
· Other financial accounts related to US sourced income
|· Bank accounts with over USD 50,000 (Existing savings insurance: USD 250,000)|
|Company||· Financial accounts related to US sourced income||· Bank accounts with over USD 250,000 (No limitation for new accounts)|
|Financial information to be reported||· Interest, dividend, other income||· Interest, dividend, other income and account balance|
|Financial institutions obliged to report||· Bank, financial investment company, insurance company, etc.
· Government organization, central bank, international organization and public pensions are excluded
|Timing of information exchange||· Financial information as of the end of the previous year would be mutually exchanged by the end of September (effective from FY2015)|
|Method of information exchange||· To be discussed between NTS and IRS|
The MOSF plans to proceed with the ratification procedures by the National Assembly and make the agreement enter into force as soon as possible.
Multilateral convention on mutual administrative assistance in tax matters entered into force with some countries
The MOSF announced that the multilateral convention on mutual administrative assistance in tax matters has been entered into force with 4 countries (i.e. Canada, South Africa, New Zealand and Slovakia) and 5 UK dependent territories. Under this convention, member countries can exchange information related to tax without a separate tax treaty or information exchange agreement. It is expected that this agreement will help Korean tax authorities secure information related to tax for preventing potential offshore tax evasions.
Updates of Tax Rulings and Cases
VAT on supply of Certified Emission Reduction (“CER”) (Josim 2013 joong 2373, 2014.02.26)
The Tax Tribunal (“TT”) has made a decision that the supply of CER provided by a domestic company to a foreign company is not subject to Korean VAT.
In this case, the domestic company provided CER to a foreign company, which was donated by a French company via a pending account in UNFCCC, and treated it as non-VAT transaction on the basis that the transaction was made outside Korea and as such it was not subject to Korean VAT. However, the tax authorities asserted that the supply of CER to a foreign company should have been a VAT taxable transaction subject to the zero-rated VAT. As a result, the tax authorities imposed the penalty for underreporting of zero-rated VAT base.
The Company filed an appeal with the TT against the assessment made by the tax authorities and the TT decided that the supply of CER to a foreign company is not subject to VAT, based on the following grounds:
- CER is not a right to be registered or recognized in Korea;
- CER cannot be used or consumed in Korea;
- According to the authoritative interpretation of the Ministry of Trade, Industry and Energy, the supply of CER to a foreign company is not classified as overseas direct delivery export under the Foreign Trade Act; and
- Supply of goods are only included in the scope of exportation or importation under the VAT law.
Please be noted that this decision on VAT treatment of supply of CER contradicts the tax ruling previously issued by NTS (Seomyun3team-3448, 2007.12.31).
Arm’s length price of the guarantee fee (Josim 2013 joong387, 2014.03.06)
The TT has made a decision that the tax assessment on a guarantee fee, calculated based on the NTS Transfer Pricing ("TP") model, is appropriate.
In this case, a domestic company provided a guarantee to its overseas subsidiary for the loan borrowed from an overseas bank. In return for providing a guarantee, the domestic company received a guarantee fee and it was determined considering the decreased interest expense that the overseas subsidiary benefited from due to the guarantee from the domestic company.
However, the domestic company did not submit the basis of calculation for the guarantee fee income to the tax office. The NTS assessed the company for the guarantee fee by applying the arm’s length price calculated based on the NTS TP model.
According to the decision of the TT, the company could choose a reasonable TP methodology under the tax laws for a guarantee fee, but it was required to submit the basis for calculation of the guarantee fee to the tax office to support that the guarantee fee is determined at an arm’s length price. However, the company did not submit the necessary information to NTS to support its position nor provide a reasonable basis that the guarantee fee calculated by the company is determined at an arm’s length price. Therefore, the TT made a judgment that the tax assessment made by NTS was appropriate.
If you have any questions concerning the items in this month’s newsletter, please contact your tax advisor at Deloitte Anjin LLC or the following tax professionals on the right top corner.