Korean Tax Newsletter (May, 2014)
Korea Tax News
Development of integrated analysis system for linkage analysis on FIU information and NTS taxation data
National Tax Service (“NTS”) announced that they will develop an integrated analysis system for linkage analysis on FIU (Financial Intelligence Unit) information and NTS taxation data. Such system referred to as FOCAS, is to bolster information security and to make efficient use of increasing financial information based on NTS’s expanded range of FIU information. Through FOCAS, per the NTS, linkage analysis of FIU information and NTS taxation data will help track and identify the filing status of taxpayers, examine suspicious tax-evading activities, and pursue hidden assets of highly indebted delinquent taxpayers.
The development of the system is expected to be completed by the end of this year, and the NTS will be afforded with the opportunity to maximize the utilization of FIU information, not only with the speed of information transmission, but also with facilitation of various FOCAS analysis applications.
Escalating corporate tax burden with amendment of local tax law
According to a survey conducted by the Federation of Korean Industries (“FKI”) on domestic companies with annual sales revenues exceeding KRW 100 billion, 58.6% of the companies responded that they will be affected by the local tax law amendment and believe that there would be an increase in local income tax burden. At the end of 2013, it was announced that tax credits available for qualifying taxpayers would be regulated by provisions of the Local Tax Incentive Limitation Law. However, based on the 2014 amendment, all provisions concerning local income tax credit are now limited to qualifying individual taxpayers and thus cannot be claimed by companies. This situation as a result leaves corporate taxpayers with heavier tax burden.
With the corporate tax burden on the rise, the FKI made a proposition to the Ministry of Security and Public Administration that local income tax credit should also be made available to companies, underscoring that the escalation of local income tax burden on companies would yield an effect contrary to the government’s policy on revitalization of the local economy.
VAT imposed on clinical testing services provided by medical institutions
The Ministry of Strategy and Finance (“MOSF”) hosted a meeting with the Screening Committee of National Tax Rulings and reached a resolution to impose VAT on clinical testing services for contracts signed on or after the authoritative interpretation date, March 17, 2014. And the tax authorities decided to set March 17, 2014 as the effective date on which to start imposing VAT on clinical testing services considering that hospitals and other medical institutions up until now have reported such services as VAT-exempt and that there was never a tax audit or an investigation of a previous filing that resulted in additional VAT assessment.
The MOSF regards clinical testing service as a service provided to a pharmaceutical company, which is not the same as VAT-exempt medical treatment service to patients. The decision takes into consideration of the fact that VAT is imposed on clinical testing services in a number of countries such as UK.
Updates of Tax Rulings and Cases
STT on transfer of shares through merger (Seoul Administrative Court 2012 Guhap 22782, 2014.04.11)
Seoul administrative court upheld that a share transfer through a merger between foreign companies should be subject to Security Transaction Tax (“STT”).
Based on facts of the case, Hungarian company (A) merged with Hungarian company (B) which owns Korean company (C). Both Hungarian companies (A) and (B) are owned by UK company (D). When Hungarian company (A) acquired shares of Korean company (C) through its merger with company (B), Hungarian company (A) did not file STT return to the tax office. In 2010, the Korean tax authorities determined that the transfer of Korean company’s shares through a merger between foreign companies should receive the same tax treatment as those of domestic shares when they are transferred through a merger between domestic companies. As a result, Hungarian company (A) was assessed STT which in 2011 filed an appeal with the Tax Tribunal (“TT”), but the case was dismissed by the TT in 2012.
Hungarian company (A) filed an appeal with the Seoul administrative court later in the year with the argument that the share transfer through a merger should not be interpreted as a transfer with consideration, as the rights and obligations of the merged company are comprehensively transferred to the surviving company. In this regard, Hungarian company (A) claimed that STT should not be levied on the transaction on the basis that no payment of consideration was made.
However, the court ruled that the share transfer through a merger should be taxable under STT law based on the followings:
- Under the Corporate Income Tax Law (“CITL”), capital gains derived from transfer of domestic shares are taxed in Korea, however, the CITL is silent with respect to the treatment of capital gain derived from transfer of domestic shares through a merger between foreign companies (e.g., deferral of tax). As such, there is no rationale by which to treat the transfer of assets in Korea through a merger between foreign companies as a non-taxable transaction.
- Under the Tax Incentive Limitation Law, the transfer in this case does not meet the requirements for STT exemption, and thus should be subject to STT.
- As there was an increase in capital resulting from the shares transfer, it is reasonable to treat the transaction as the transfer of shares with consideration.
The decision of this case is in the same line with the similar case (Court2010du7208, 2013.10.30), which was introduced in December 2013 Korean Tax Newsletter.
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.