Korean Tax Newsletter (September, 2011)
Proposed Revisions to Tax Laws
Korea’s Ministry of Strategy and Finance (MOSF) announced a number of proposed changes to the tax law on 7 September 2011, which generally will become effective in 2012 if approved by the National Assembly. Changes are proposed to the following laws: Corporate Income Tax Law, Individual Income Tax Law, Tax Incentive Limitation Law, Value Added Tax Law, National Tax Basic Law, Inheritance and Gift Tax Law and International Tax Coordination Law.
Please note that the proposals are not yet final and therefore, may be subject to change or may be removed during the legislative processes.
Corporate Income Tax Law
Extension of carryover period of statutory donations
Under current tax law, donation expenses exceeding the statutory limit for deduction may be carried forward for one or five years, depending on the classification of the donations, i.e. “statutory donations” and “designated donations,” respectively. It is proposed to extend the carryover period for statutory donations to five years (for both companies and individuals).
Extent of indirect foreign tax credit
Foreign tax paid by a qualifying foreign subsidiary currently may be claimed as an indirect foreign tax credit when a parent company receives dividend income from the foreign subsidiary. If a tax treaty between Korea and the country in which the foreign subsidiary is a resident allows for an indirect foreign tax credit, 100% of the foreign tax can be claimed as an indirect foreign tax credit; otherwise, only 50% of the foreign tax is available for purposes of the indirect foreign tax credit. The proposed revisions to the Corporate Income Tax Law would abolish the 50% limitation, so that a full indirect tax credit would be granted regardless of the provisions of a tax treaty.
Expansion of scope of statutory payment statements
Statutory payment statements would be required to be submitted to the tax authorities on dividends and interest regardless of whether such income is subject to withholding tax, is nontaxable or is exempt. Currently, the statutory payment statement is not necessary where dividend or interest income is not subject to withholding tax, is nontaxable or is exempt.
Abolition of penalty limitation on statutory payment statement
Currently, an income payer is required to prepare and submit the statutory payment statement to the tax office by the end of February (10 March for salary income) of the year following the tax year. A penalty will be imposed for failure to submit the statutory payment statement or if its contents are unclear. In the latter case, the penalty can be imposed only within one year from the filing due date of the corporate or individual income tax return. The one-year limit is proposed to be abolished.
Obligation to report shareholder information
A penalty would be imposed where a newly established company fails to submit relevant shareholder information to the tax authorities at the time the company is established. The penalty would be equal to 0.5% of the par value of the shares held by shareholders that have not been appropriately disclosed. According to another proposed change, the statement on a change in shareholders, which is submitted with the corporate income tax return, would be required to be based on the actual shareholders, rather than nominal shareholders included in the shareholders’ registry, as is currently the case.
Individual Income Tax Law
Limitation on retirement income of directors
To prevent tax avoidance through the payment of excessive retirement income, which is subject to a lower tax rate than salary income, retirement income paid to directors would be limited to the amount calculated by the three-year average salary income before the retirement x 10% x years of employment. The excess amount would be treated as salary income.
Tax Incentive Limitation Law
Extension of tax incentive periods
Under the proposed revision, certain tax incentives that are scheduled to expire on 31 December 2011 would be extended to 31 December 2012 (including the special taxation of enterprises maintaining employment, etc.), 31 December 2013 (including the tax credit for investment in energy savings facilities, etc.) and 31 December 2014 (including the special tax reduction for Small and Medium-Sized Enterprises (SME), special taxation of companies relocating outside large cities, special taxation where an SME relocates its factory, special taxation of dividend income on shares of overseas resources development investment companies, etc.).
Tax credit for investment for creation of employment
Current tax law provides for two investment credits: one is applied at a rate of 4% to 5% of the investment amount as a temporary investment tax credit (TITC) and the other a 1% tax credit for the creation of employment (TICE), resulting in a total investment tax credit of between 5% and 6%, depending on the investment area and the type of a company (i.e. whether or not the company is an SME). With the expiration of the TITC on 31 December 2011, it is proposed to increase the rate of the TICE. TICE would be calculated at a rate of 3% of the investment amount (2% for investment by large companies in the Seoul metropolitan area) if the number of employees is not decreased from the previous year. If the number of employees is increased from the previous year, an additional tax credit amount of KRW 10 to KRW 20 million would be granted per increased employee, but the additional tax credit amount would be capped at 3% of the total investment amount.
R&D tax credit
- Scope of R&D tax credit
The R&D tax credit would be extended to apply to expenditure incurred on the development of new services and service delivery systems, as well as expenditure incurred in the R&D center of a company in certain knowledge-based service industries (e.g. information service, management consulting, etc.).
- Calculation method for R&D tax credit
Under existing rules, the R&D tax credit may be claimed on either a current year basis spending method or an incremental spending basis method, whichever is higher. The proposals would disallow the use of the incremental spending basis method if no R&D expenditure was incurred in the previous four years.
- Minimum tax fate
It is proposed to apply the minimum tax to R&D tax credits of large companies with respect to qualifying salaries of researchers that have masters or doctorate degrees. Under current law, the minimum tax does not apply in such cases.
Tax credit on social insurance premiums paid by employment generating SMEs
SMEs that increase the number of their employees from the previous year would be eligible for the tax credit on the social insurance premiums paid for newly hired employees. The tax credit amount would be 100% of the social insurance premiums paid for youths aged 15 to 29, and 50% of the premiums paid for other employees. These tax benefits would expire on 31 December 2013.
Value Added Tax Law
Taxation on free rental services of real estate to related parties
Services provided free of charge currently are not subject to VAT, while services provided to related parties at a price lower than fair market value are subject to VAT at the fair market value price. It is proposed to make the provision of free rental services of real estate for business to related parties subject to VAT.
Proxy VAT payment
Under current law, if VAT-able services are provided by a nonresident that does not have a place of business in Korea to a Korean company operating a VAT-exempt business, the Korean company is required to make a “proxy payment” of VAT on the services. The proposals would extend the proxy VAT payment requirement to the supply of intangible assets by a nonresident and services or intangible assets provided to a company operating a VAT-able business which are not eligible for a VAT refund.
Inheritance and Gift Tax Law
Taxation on wealth transfer
Shareholders of certain large companies in Korea have created new companies and then have the large companies purchase goods or services from the new companies. These intra-group transactions enable the affiliate companies and the shareholders of the affiliates to make profits. To prevent tax evasion by structuring such intra-group transactions, a gift tax would be imposed on gains derived from intra-group transactions. If a company’s sales with related parties exceeds 30% of the total sales amount, controlling individual shareholders (i.e. those holding more than 3% of the shares) would be subject to the gift tax. The gift tax base would be calculated as follows: operating income after taxes x intra-group transaction ratio exceeding 30% x share holding ratio exceeding 3%.
International Tax Coordination Law
Mutual adjustment of taxable price for national tax and customs duty purposes
New provisions would be introduced to alleviate the tax burden on importers. Where the National Tax Service (NTS) or Korea Customs Service (KCS) adjusts the taxable price of imported goods in a related party transaction and the taxpayer files an amended tax return with the NTS or KCS, as appropriate, based on the adjusted taxable price, the other authorities would then adjust the taxable price for customs duty or national tax purposes, respectively, if the adjusted taxable price is considered appropriate under the relevant law. The NTS and KCS would be permitted to mutually agree on the taxable price, if necessary.
Exchange of tax information among tax authorities with regard to international transactions
To ensure accurate assessment of national taxes and customs duties, new provisions would be introduced to allow the NTS and KCS to exchange tax information for assessment and collection of national taxes and customs duties and adjustments of the taxable price.
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.