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Korean Tax Newsletter (November, 2007)


Revisions to Tax Laws

Proposed National Tax Basic Law

We will additionally cover the proposed revisions to the National Tax Basic Law ("NTBL") announced by the Ministry of Finance and Economy on August 22, 2007 that were not introduced in our September and October newsletters. These proposed revisions will also take effect beginning 2008.

(Please note that proposed revisions have not been passed in the National Assembly yet and therefore, those introduced in this newsletter may be amended or repealed during the legislation process.)

- Amended tax return for those who do not file the personal income tax return

Under the current law, it is not necessary for individuals who have only salary income, retirement income, or pension income to file their personal income tax return. As such, it is not allowed for them to file an amended personal income tax return even if their salary income, retirement income, or pension income is under-reported. The amended tax return to report under-stated income can only be filed by a withholding agent under the current law. Under the proposed revision to the NTBL, however, they can file the amended tax return for under-reported salary income, retirement income, or pension income if the withholding agent does not amend their tax return.

Developments at Tax Authorities

Interest rate applied for national tax refund (Notice by the National Tax Service No. 2007-32, 2007.10.15)

According to the NTBL, if the taxpayer overpaid taxes and thus is entitled to a tax refund, the tax authorities must pay interest, in addition to tax refund, which is calculated using the interest rate announced by the National Tax Service ("NTS"). On October 15, 2007, the NTS announced that the interest rate will change from 11.5/100,000 per day (approximately 4.2% per annum) to 13.7/100,000 per day (approximately 5.0% per annum). This revised interest rate is effective on or after October 15, 2007.

National Tax Tribunal ("NTT") News

NTT newly introduced a 'conference call' system in order to provide taxpayers with opportunities for the participation in the council of national tax judges in order to present their statements in front of the judges via telephone. This new system will help taxpayers to save their time and costs of visiting NTT, and using the 'conference call' system will have the equal effect as presenting statements by attending the council.

Recent Tax Rulings and Cases

Deemed Acquisition Tax ("DAT") ( Daebeobwon 2007du10297, 2007.8.23)

Under the current local tax law, when a party together with its related parties acquires 51% or more interest in an unlisted company ("controlling shareholder"), the controlling shareholder is subject to the deemed acquisition tax on taxable assets held by the unlisted company at 2.2% of the book value of the underlying taxable assets multiplied by its shareholding ratio. If there is a transfer of shares within the same cluster of controlling shareholders without increasing the aggregated shareholding ratio, no deemed acquisition tax arises from the transaction. However, under current tax rulings (e.g. Jibangsejeong team-2810, 2007.7.20, etc), if the entire shares held by the controlling shareholders are transferred to related parties (within the same cluster of controlling shareholders) who previously have not owned any shares in the company, the new shareholders should be subject to the deemed acquisition tax even though the shareholding ratio of the controlling shareholders as a whole remains same. According to this recent Supreme Court case, however, the new shareholder would not be subject to the deemed acquisition tax, since the total shareholding ratio of the controlling shareholders remains unchanged.

Securities Transaction Tax ("STT") ( Seomyun3team-3027, 2007.11.07)

According to the tax ruling, if there is any subsequent increase ("earn out payments") from original sales price of shares due to the satisfaction of conditions after the share transfer date, a taxpayer can file an amended STT return when the earn out payment amounts are fixed. In case of filing such amended STT return, the taxpayer will not be subject to penalties.

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