Korean Tax Newsletter (January, 2009)
Proposed Revisions to the Presidential Decree of Tax Laws
On December 26, the Ministry of Strategy and Finance (“MOSF”) announced a proposal for revisions to the Presidential Decree (“PD”) of tax laws, including the Corporate Income Tax Law (“CITL”), Tax Incentive Limitation Law (“TILL”), Value Added Tax Law (“VATL”), International Tax Coordination Law (“ITCL”), etc., which will generally be effective beginning FY2009. The major proposed revisions are as follows:
(Note) The proposed revisions have been passed by the Cabinet Council session and are expected to be promulgated early February.
Presidential Decree of CITL
Mandatory maintenance of the entertainment expense details
Under the current PD of the CITL, if a company spends an entertainment expense of 500 thousand won or more, it is required to maintain expenditure details to substantiate the business purpose of the expenses. The details should include the purpose of entertainment, the name/ position/ registered ID number of recipient, etc. With the proposed revision, the documentation maintenance requirement will be abolished.
This proposed revision will be enforced from the fiscal year beginning on or after January 1, 2009.
Mitigation of requirement for statutory receipt for entertainment expense
Under the current PD of the CITL, if a company has entertainment expenses that are congratulatory or condolatory in nature of not more than 100 thousand won, the expense can be deducted from the taxable income of the company without statutory documentary evidence such as VAT tax invoice, credit card bill, etc. With the proposed revision, the limit of deductible congratulatory/condolatory entertainment expenses for which documentary evidences are not required will increase from 100 thousand won to 200 thousand won.
Imputed interest rate for loan to related parties
Under the PD of the CITL as currently enforced, in case where a company makes a loan to domestic related parties, the interest rate should be determined based on the weighted-average interest rate of borrowings from third parties, and if it is not available, the interest rate announced by the tax authority (currently, 9%) should be used as the imputed interest rate. According to the proposed PD of the CITL, a company will be allowed to select one of the above two rates at its choice. Once a company makes a selection, it should continue to apply the selected imputed interest rate to loans made to domestic related parties.
The proposed revision will be applied to the fiscal year for which a corporate income tax return is filed on or after January 1, 2009.
Charge-back of stock option cost
Under the proposed revision, the charge-back cost of stock options granted to the officers and employees of a domestic company by its parent or affiliates will be deductible as part of the ordinary salary expense associated with its business, if one of the following requirements are met:
- The stock options are granted in accordance with the Securities Transaction Law; or
- The stock options are granted by a listed foreign parent company to officers and employees of an unlisted Korean subsidiary
The proposed revision will be applied to the options exercised on or after the PD promulgation date.
Presidential Decree of TILL
Requirements for Small and Medium Sized Companies ("SMC"s)
Under the current PD of the TILL, one of the requirements for SMCs, among others, is ‘independence in ownership and management requirements’, according to which companies that are owned 30% or more directly or indirectly by a company whose total assets are 500 billion won or more fail to meet this requirement to be eligible for SMC. Under the proposed revision, an exception provision for indirect ownership structure through certain collective investment vehicles (e.g. private equity fund) will be introduced. Details of the exception provision have yet to be announced.
Increase in Indirect Foreign Tax Credit ("IFTC") rate
If a company receives dividend from a foreign subsidiary, it can claim the IFTC on the underlying tax paid by the subsidiary in accordance with relevant tax treaties. If there is no provision for the IFTC under the treaty, 50% of the IFTC is allowed under the TILL. Under the proposed revision of PD of the TILL, 100% of the IFTC would be available for the distribution tax paid by an Indian subsidiary.
This proposed revision will be applied to dividends received on or after the PD promulgation date.
Clarification of scope of R&D activities eligible for R&D tax credit
Under the proposed revision, the scope of R&D activities eligible for the R&D tax credit will be newly provided, according to which the R&D activities will be defined as the activities for scientific and technological advancement. Types of activities such as those related to general administration, business supporting, marketing research/survey, sales promotion, or R&D activities of consignees will be excluded from the scope of R&D activities eligible for the R&D tax credit.
Presidential Decree of VATL
Value Added Tax ("VAT") filling based on a whole business unit
As we introduced in our 2008 September newsletter, the requirements for VAT compliance based on a whole business unit was abolished so that all taxpayers can select the VAT compliance (including VAT invoicing, VAT payment, VAT return filing, etc.) based on either a whole business unit or each business place unit. The proposed PD of the VATL provides more details of VAT compliance based on a whole business unit. According to the proposal, once a taxpayer selects the VAT compliance based on a whole business unit, he/she should register all business places as a whole business unit with the district tax office in which his/her principal business place is located and he/she is not allowed to convert the VAT compliance based on the business place unit for five years after the registration.
This proposed revision will be effective on or after FY 2010.
Presidential Decree of ITCL
Waiver of submission of report for declaration of transfer pricing methodology
Under the current PD of the ITCL, if a company has international transactions with its foreign related parties and the transaction amount with the foreign related parties in total is not more than 5 billion won for goods and not more than 0.5 billion won for services, the company is not required to submit a report for declaration of transfer pricing methodology for all such international transactions with foreign related parties. With the proposed revision, the threshold for waiver of the report per foreign related party is newly introduced. More specifically, a company will not be required to submit the report for international transactions with a foreign related party, if the transaction amount with the foreign related party does not exceed 1 billion won for goods and 0.1 billion won for services.
The proposed revision will be applied to the report for submission due on or after the enforcement date of the PD.
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:
|Seung Chan Park
+82 (2) 6676-2422
|Young Pil Kim
+82 (2) 6676-2432
|Seong Ran Hong
+82 (2) 6676-2442
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