Korean Tax Newsletter (August, 2007)
Revisions to Tax Legislations
Proposed Revisions to Local Tax Law("LTL")
On july 26, 2007, the Ministry of Government Administration and Home Affairs ("MOGAHA") Announced a proposed revision to the LTL to become effective on January 1, 2008, subject to legislative process. The proposed revision includes, as a major feature, modification of the scope of controlling shareholders under the LTL who are subject to deemed acquisition tax ("DAT").
Under the LTL as it currently stands, when parties acquire 51% or more interest in another Korean company's shares, they are subject to the DAT on certain assets held by the Korean company. Under the proposed revision, the controlling shareholders would be defined as parties who own more than 50% interest in another Korean company's shares.
Revision to Presidential Decree of Individual Income Tax Law("IITL")
On August 6, 2007, the Ministry of Finance and Economy ("MOFE") Promulgated a revision to the Simplified Monthly Withholding Table ("SMWT") utilized to determine monthly withholding tax amount for salary income paid to employees. Prior to the revision, monthly withholding tax on salary income was excessively levied and as such it has caused substantial amount of tax refunds on salary income at the year-end payroll tax settlement. This revision is applied to salary payments made on or after the promulgation date.
Revised Tax Treaty with the federative Republic of Brazil
Under Article 3 of the Protocol of the tax treaty between Korea and the Federative Republic of Brazil signed on March 7, 1989, the MOFE made an announcement of August 8, 2007 of the reduction in withholding tax rates stipulated in the treaty between the countries as follows.
- Reduction of withholding tax rates (including resident surtax) for passive income:
- Dividend: from 15% to 10%
- Royalty: from 15% to 10%, but withholding tax rate for royalty arising from the use of or the right to use trademarks remains at 25% without amendment.
- The lowered withholding tax rates on dividend and royalty arising from the use of or the right to use copyrights is applied retroactively to payments made on or after January 1, 1998 and the lowered tax rates on other royalties is applied retroactively to payments made on or after January 1, 2006.
Revised Tax Treaty with the Republic of Kazakhstan
Under Article 3 of the Protocol of the tax treaty between Korea and the Republic of Kazakhstan signed on October 18, 1997, the MOFE made an announcement on August 8, 2007 of the reduction in withholding tax rates stipulated in the treaty between the countries as follows.
- Withholding tax rates (including resident surtax) for royalty arising from the use of or the right to use industrial, commercial, or scientific equipment is lowered from 10% to 2%.
- This lowered withholding tax rate is applied retroactively to payments for royalty on or after January 1, 2003.
Developments at Tax Authorities
Disclosure of plan for tax audit
The National Tax Service ("NTS") disclosed the "Plan for Tax Audit" to the public on July 23, 2007. Main Contents of the Plan are summarized below:
- The number of companies targeted for tax audit would decrease by 0.1% to 0.8% of total number of companies and the number of tax audits on Small and Medium Sized Companies ("SMC") whose revenue is less than KRW 30 billion shall be decreased to alleviate the tax audit related burden faced by SMCs. In contrast, tax audits on large companies shall continue to be performed at the same level as in 2006.
- Target companies for 2007 regular tax audits will be selected through the application of objective criteria and the computerized database based on the review of tax fillings made for FY2005. The following companies in particular are highly likely to be subject to regular tax audits in 2007.
- Companies suspicious of filling incorrect tax return;
- Companies not audited during the most recent four years; and
- Companies suspicious of tax evasion.
Recent Tax Rulings and Cases
Imputed Interest Rate on Loan to Related Party (Seomyun2team-1178, 2007.6.18)
As we covered in the previous newsletter, where a company makes a loan to a related party, the weighted-average borrowing interest rate ("WABIR") should be used as the imputed interest rate to calculate the deemed interest income under the revised CITL effective on February 28, 2007. According to the tax ruling, if related parties of a company repay loans borrowed from the company before February 28, 2007 and the company extends new loans for the same amount as the repaid loans after a certain period of time from the repayment date, WABIR would be applied to calculate deemed interest income for the new loans in accordance with the amended legislation.
Securities Transaction Tax ("STT") Base for share transfer between foreign related parties (Jesobi-69, 2007.02.20)
Under Article 7 of the STT Law, the actual transfer price is the STT base; however, if Article 52 of the CITL (anti-avoidance rules for transactions between domestic related parties) applies for capital gains tax purposes, the value determined under Article 52 of the CITL (i.e. the tax value under the Inheritance and Gift Tax Law) would be the STT base.
The anti-avoidance rules in Article 52 of the CITL do not apply to transactions between foreign related companies. As such, technically there is no rule which may adjust the STT base for share transfers between foreign related companies, even if actual sales price is lower than the tax value under the Inheritance and Gift Tax Law ("IGTL value"). However, the tax ruling states that the IGTL value should be the STT tax base if the share transfer occurs at a value lower than the IGTL value between foreign related parties.