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Korean Tax Newsletter (January, 2007)


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Revisions to Tax Laws

Proposed Revisions to Presidential Decrees

The Ministry of Finance and Economy ("MOFE") announced proposed revisions to Presidential Decrees of tax laws on January 17, 2007. Most of the material revisions were covered in our previous newsletters. The followings are proposed revisions to the Presidential Decrees of Corporate Income Tax Law ("CITL") and Value Added Tax Law ("VATL") that were not covered in our previous Newsletters.

  • Proposed Revision to the Presidential Decree of CITL
    • Scope of financial derivatives to be allowed for valuation
      Under the current law, only gain/loss on valuation of currency swap for foreign exchange risk hedging purposes of underlying foreign currency denominated assets or liabilities is recognized for tax purposes. With the revision, mark to market on all the financial derivatives (such as forward, futures, options, and etc.) for hedging purposes would be recognized for tax purposes. In addition, financial institutions would be also allowed to value the derivatives for the purpose other than foreign exchange risk hedging for tax purposes.
  • Proposed Revisions to the Presidential Decree of VATL
    • Extension of scope of VAT-exempted financial services
      VATL specifically lists types of Finance & Insurance businesses that qualify for VAT exemption. With the revision, the scope would be extended to include the investment advisory business, which was de-listed from 2005, and Korea Investment Corporation's services for management and operation of trust assets.
    • Introduction of VAT regulations for e-commerce business
      VAT regulations for e-commerce merchants, effective from July 2007, would be introduced including the following:
      i) Business place of the e-commerce merchants would be considered to be located in the tax jurisdiction where main business place of Internet Service Provider ("ISP", such as Auction, G-Market, and etc.) is located, unless e-commerce merchants have a separate business place for e-commerce business;
      ii) ISP would apply for business registration of e-commerce merchants which have no specific business place and have less than 2.4 million won of annual revenue. Business registration of such e-commerce merchants will be collectively made within 10 days from the end of every half year; and
      iii) ISP should issue VAT invoices to the e-commerce merchants for commission income for internet services. Under the current law, ISP can simply issue a receipt for the internet services rather than the VAT invoice.
    • Advance issuance of VAT invoice
      Under the current law, advance issuance of VAT invoice before actual provision of goods or service can be made only at the time when all or part of supply proceeds are paid.

      With the revision, the advance VAT invoice would be allowed to be issued if the payment is made within 7 days after the issuance of advance VAT invoice. Furthermore, if difference between advance invoice issuance date and payment date under a contract concluded between transacting parties is 30 days or less and the advance VAT invoice is maintained in ERP system of the purchaser, such advance invoice would be allowed as well.

New Tax Treaty with the Republic of Albania

The tax treaty between Korea and the Republic of Albania, signed on May 17, 2006, became effective as of January 13, 2007. The main contents of the convention are summarized below:

  • Withholding tax rate for passive income are:
    • Dividend : 5% or 10%
    • Interest : 10%
    • Royalty : 10%
  • Capital gains:
    • Capital gains are generally taxable in the resident country of the person who derived the capital gains.
    • However, gains derived by a resident of Albania from alienation of immovable property situated in Korea may be taxed in Korea, or vice versa.
  • Other income: Income derived by a resident of Korea not dealt with separately in the treaty is taxable only in Korea, or vice versa.

Revised Tax Treaty with Canada

The revised tax treaty between Korea and Canada, signed on September 5, 2006, became effective as of December 18, 2006. The main contents of the revisions are summarized below:

  • Korean taxes covered under the treaty extend to include the resident surtax and the agriculture and fishery tax
  • Withholding tax rate for passive income are:
    • Dividend : 5% or 15% from previous 15%
    • Interest : 10% from previous 15%
    • Royalty : 10% from previous 15%
  • Capital gains: Capital gains from sale of real estate shares (i.e. a company where 50% or more of its assets are comprised of real estates) would be also taxed in the source country. The old treaty stipulates that capital gains from sale of immovable property or sale of shareholding of 25% or more are taxed in the source country.
  • Other income: Income sourced in Korea not dealt with separately in the treaty is taxable in Korea, or vice versa.

Developments at Tax Authorities

Tax audits on Small and Medium Sized Enterprises ("SMEs") to be postponed

On January 4, 2007, the National Tax Service ("NTS") announced a plan to postpone tax audit on SMEs as follows:

  • Until December 31, 2007 for Productive SMEs which operate manufacturing, mining, agricultural, fishery and forestry industries;
  • Until December 31, 2008 for Employment Creation SMEs (December 31, 2009 for Local SMEs and New SMEs) of which average number of employees in 2007 increases by 5% or more compared with 2006;
  • Until December 31, 2007 for Export SMEs of which export amount during 2005 is 20% of total revenue or more;
  • Until December 31, 2008 for Next Generation Growth Engine SMEs participating a syndicate for '10 Next-Generation Growth Engine Industries'

Recent Rulings and Cases

Business classification of a manufacturer of the semi-finished goods (Seomyun2team-17, 2007. 01. 04)

Where a domestic SME transfers semi-finished goods, manufactured and assembled in Korea, to overseas manufacturing facilities to simply assemble the semi-finished goods into the finished goods and sells the goods, the domestic company would be classified as a manufacturer entitled to special tax exemption for SMEs under the Tax Incentive Limitation Law.

Income classification of interest on royalty payments in arrears (Seomyun2team-2645, 2006. 12. 22)

In case a domestic company pays royalty for each quarter including additional interest accrued until payment date to a US company, the interest is regarded as part of royalty income, not as interest income to the US company.

Timing of supply of the export goods (Seomyun3team-3230, 2006. 12. 22)

Where a domestic company maintains its goods in a warehouse located in an overseas bonded area and sells the goods, the goods are deemed to be exported at the time of shipment under the VATL.

However, in case of export for consignment sales, the time when the goods are provided refers to the supply price determination date, and in case of export for consignment processing, the goods are considered to be supplied at the time of delivery overseas.

 

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