Korean Tax Newsletter (May, 2006)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC.
The contents is as below, please see attached file.
Revisions to Tax Laws
On April 28 and May 24, 2006, the Ministry of Finance and Economy (“MOFE”) announced revisions to the National Tax Basic Law (“NTBL”) and the International Tax Coordination Law (“ITCL”), respectively.
Revision to the NTBL
- Due date for tax related filings or applications
Prior to the revision, when a due date for tax filings, applications or payments fall on a national holiday or Sunday, the next business day would be the due date. Now, with the revision, national holiday or Sunday includes Saturdays and Labor day.
- Request for Pre-assessment review
Taxpayers can request a pre-assessment review within 30 days from the day taxpayers receive a preliminary notice for tax assessment. Before the revision such request had to be filed within 20 days. Also, taxpayers can request a pre-assessment review for all preliminary notices for tax assessment for the amount exceeding 5 million won regardless of how such assessment is made. Prior to the revision, assessment made through a tax audit or inspection was eligible for pre-assessment review.
Revision to the ITCL
- Substance over form rule
The substance over form rule is codified in the ITCL. Such rule already existed in the NTBL and Corporate Income Tax Law. The codification of the rule is intended to clarify that the substance over form rule is applicable to international transactions as well.
- Transfer pricing regulations
– A definition of a related party for Transfer Pricing (“TP”) regulation purposes is clarified as a party which satisfies both substantial controlling condition and common interest condition.
– Income deemed to have been derived by a foreign related party, other than a shareholder, from TP adjustments is regarded as dividends when such deemed income is not returned to a corresponding domestic party.
- Controlled Foreign Corporations
– Domestic shareholders who hold more than 20% interest in a foreign company, directly or indirectly or through family members, are subject to the rules of controlled foreign corporations (“CFC rules”), which can result in deemed dividend income by domestic shareholders under certain circumstances prescribed in the law.
– A foreign holding company can be exempt from the CFC rules if it satisfies certain requirements. Presidential Decree on these requirements is to be announced soon.
– Deemed dividend must lead to actual distribution within 10 years from the time deemed dividend income is recognized by Korean shareholders in order to avoid double taxation. Prior to the revision, it was 5 years.
– Foreign tax credit can be claimed at the time of actual distribution by amending the return filed in the year deemed dividend was recognized.
- Improvement of mutual agreement procedure
Mutual agreement can now be initiated by a foreign corporation which has a business place in Korea. Before the revision, only domestic companies and individual residents were allowed to initiate mutual agreement procedures.
Development at Tax Authorities
New interest rate for interest on tax refund
On May 3, 2006, the NTS announced that an interest rate applicable to calculate interest on tax refund under the Ministerial Decree of NTBL is increased to 11.5/100,000 per day (4.1975% per year) from 10/100,000 per day (3.65% a year). This revision is effective for the interest accruing from May 1, 2006.
Recent Tax Ruling and Cases
Classification of Korean source interest income (Seomyun2team-586, April 05, 2006)
In case where a foreign branch of a domestic company directly pays interest expense to a foreign bank on a loan borrowed by the domestic company, but used for the branch’s business operation, such interest is regarded as non-Korean source interest income derived by the foreign bank.