Korean Tax Newsletter (January, 2011)
Revision to Presidential Decree on Tax Laws
On 30 December 2010, Korea’s Ministry of Strategy and Finance (“MOSF”) announced revisions to the Presidential Decree (“PD”) on the tax laws, including the Corporate Income Tax Law (“CITL”), Individual Income Tax Law (“IITL”), Tax Incentive Limitation Law (“TILL”), Value Added Tax Law (“VATL”), International Tax Coordination Law (“ITCL”), Inheritance and Gift Tax Law (“IGTL”), etc. The revised PD was promulgated on 30 December 2010 and the changes under the promulgated PD generally would be effective as from 2011. The major revisions are summarized as below:
Presidential Decree on CITL
Designation of qualified donees for statutory donations
With the revision, when a company makes a donation to a qualified donee (i.e. a non-profit company established for the purpose of fund collection/allocation to provide social welfare services or to support other social welfare activities, or another institution as specified in the relevant laws) that meets the following requirements, the donation would be deemed to constitute a statutory donation for the subsequent six years, including the year in which the qualified organization is designated:
- For a non-profit company: (i) the annual fund collection/allocation result would have to be disclosed on the company’s website; (ii) an external audit would need to be conducted; (iii) accounting documents that are in accordance with the IGTL would have to be disclosed on the company’s website or the website of the National Tax Service; (iv) the company would be required to open a bank account that would be used solely for public services; (v) the average fund allocation amount for donation for previous five years would have to be more than 80% of total expenditure; (vi) the sum of expenses for fund collection/allocation activities and operating/management expenses would need to be less than 10% of the total fund collection amount; (vii) the average fund allocation amount to each donee would need to be less than 25% of the total fund allocation amount for donation; and (viii) the fund could not be allocated to a contributor or related non-profit company under the IGTL.
- An institution: (i) the purpose of establishment would have to be to carry out public services such as social welfare, charity, culture, arts, education, etc., and (ii) the average amount of government subsidies and donations for previous five years would have to be more than one-third of the annual total revenue.
To be a qualified donee, the donee would need to apply to the relevant authorities and the MOSF will designate by March 31 each year based on the donee’s application and the recommendation of the relevant authorities. This revision would be applicable to donations made after 1 July 2011.
Designation of qualified donees for designated donations
Where a company makes a donation to a qualified donee (i.e. a foreign non-profit company or an international organization) designated by the MOSF that meets certain requirements, the donation would be deemed to constitute a designated donation for subsequent six years, including the year in which the qualified donee is designated. Relevant requirements include the following: (i) the donee would need to be a foreign non-profit company established for the purpose of providing support/aid to overseas Korean residents, providing public relations services for Korea or international exchanges and cooperation arrangements; (ii) the revenue of the donee would have to be used for the public interest and unspecified persons; (iii) the assets of the donee would have to belong to the government, local government or other non-profit company when the qualified donee is dissolved, etc.
Reserve for retirement allowance
To encourage companies to convert to retirement pension systems, the 30% limit on the deductible retirement allowance would be phased out by 2016. Deduction on the basis of the accumulated reserve amount currently is limited to 30% of the total estimated retirement allowance, which is the amount payable to all employees if all employees had retired on the closing date of each year. The deductible limit would be reduced as follows:
Imputed interest rate on loans to domestic related parties
When a company makes a loan to a domestic related party, the imputed interest rate selected currently must be either the (i) the weighted-average interest rate on borrowings from third parties (“WAIR”), or (ii) the statutory interest rate announced by the tax authorities (currently 8.5%) when filing the tax return for 2009. According to the revised PD on the CITL, the WAIR would be used as the imputed interest rate. However, (i) if the WAIR is not available or (ii) where the company selects the statutory interest rate announced by the tax authorities as the imputed interest rate when filing the tax return, the company would be allowed to use the latter rate as the imputed interest rate. In the first case, the statutory interest rate could be used only for the year in which the WAIR is not available, and in the second case, the statutory interest rate would have to be used for at least three years, including the year in which the statutory interest rate is selected as the imputed interest rate.
Foreign exchange translation gain/loss on monetary foreign assets/liabilities
Foreign exchange translation gains/losses on monetary foreign assets/liabilities or derivatives of a non-financial company were not be recognized for tax purposes. With the revision, the non-financial company is allowed to elect to recognize foreign exchange translation gains/losses arising from monetary foreign assets/liabilities and certain derivatives, such as currency swaps/forwards, for purposes of hedging exchange risk for tax purposes.
Consolidated tax return filing in mergers between companies
If a company (“Company A”) merges another company (“Company B”) under another consolidated tax filing regime and the transaction is a qualified merger for purposes of the CITL, a wholly owned subsidiary (“Company C”) of Company B is allowed to file a consolidated tax return as follows:
|Period||Consolidated tax return|
|From the beginning of a fiscal year for consolidated tax return purposes of company B to the registration date of the merger||· A consolidated tax return can be filed between Company C and Company B (as a parent company).|
|From the registration date of the merger to the ending date of Company A’s fiscal year for consolidated tax return purposes||· A consolidated tax return can be filed between Company C and Company A (as a parent company).
· Company A is required to submit a report for change of a subsidiary company for consolidated tax return purposes within one month from the registration date of the merger.
Requirements for deductions taken by project financing vehicles
Article 51-2 of the CITL contains a number of requirements for a project financing vehicle (PFV) to claim dividend deductions for income tax purposes, including the following: (i) certain financial companies or the National Pension Service must be shareholders of the PFV; (ii) a shareholder company (or a company established solely by the shareholder company or jointly by shareholder companies) must act as an asset management company of the PFV; and (iii) a financial company operating a trustee business must act as a fund management company of the PFV, etc. With the revision, the deduction would not be claimed if the asset management company and fund management company are the same company.
Deduction of bad debts for small account receivables
Currently, bad debts on account receivables below KRW 100,000 per debtor are deductible for tax purposes if the debt collection period exceeds six months and the cost of collecting the debt exceeds the account receivable amount. According to the revised PD on the CITL, bad debts on account receivables below KRW 200,000 per debtor are deductible in case the debt collection period exceeds six months regardless of whether the cost of collecting debt exceeds the account receivable amount.
Depreciation for telephones and PCs
Telephones (including cellular phones), personal computers and their peripherals would be included within the scope of assets which are allowed to b be fully depreciated in the fiscal year of acquisition.
Presidential Decree on IITL
Tax on research services provided by professors
If a university manages research expenses according to its own regulation and provides professors research expenses for research activities, the income received by the professors would be taxable as “other income.”
Presidential Decree on TILL
Grace period for small and medium-sized companies ("SMCs")
Currently, where a company is disqualified as a SMC due to an increase in the number of its employees or the amount of its capital, revenue or assets, the company is regarded as an SMC for the grace period, but only on a one-time basis. However, according to the revision, in case where the company is disqualified as a SMC again after returning to a SMC within the grace period, the company still would be regarded as a SMC during that period.
Taxation for foreign employees
With the revision, a foreign employee will be provided an option to choose either (i) the standard tax rate (the 30% deduction of total salary from taxable income is abolished), or (ii) a flat rate of 15% (16.5%, including the 10% resident surtax) at the time tax is withheld. If the foreign employee would like to choose the flat tax rate, the withholding agent should submit an application to the tax office no later than the tenth day of the month following the month the individual provides the employment services. The revision will be applied to income earned from 1 April 2011.
Presidential Decree on VATL
Extension of VAT exemption on research services
The VAT exemption on research services of industry-academic foundations, which was scheduled to expire on 31 December 2010, would be extended to 31 December 2013.
Relief on withdrawal of per-business unit VAT filing
Under the current PD on the VATL, a taxpayer is not permitted to withdraw the per-business unit VAT filing within five years. According to the revision, if a taxpayer applies for withdrawal, the per-business unit VAT filing would apply only until the taxable period to which the withdrawal date belongs, and, therefore, the per-business unit VAT filing would not be applied from the next taxable period.
Presidential Decree on ITCL
Reporting of offshore bank deposit accounts
A resident/a domestic company that holds offshore bank deposit accounts exceeding KRW 1 billion must report information, such as holder’s name and address, bank account information, etc. to the district tax office in June of the year following the tax year. Failure to report or under-reporting on an account would give rise to a penalty of less than 10% of the no-reported/under-reported amount as below:
|Under KRW 2 billion||· Unreported/under-reported amount x 3%|
|KRW 2 billion-KRW 5 billion||· KRW 60 million + unreported/under-reported
amount exceeding KRW 2 billion x 6%
|Over KRW 5 billion||· KRW 240 million + unreported/under-reported
amount exceeding KRW 5 billion x 9%
Presidential Decree on IGTL
Determination of market value of property
According to the prior PD on IGTL, the recent price value among (i) a transaction price between unrelated parties; (ii) a price appraised by two or more appraisal firms prescribed by the Ministerial Decree on the IGTL; (iii) an expropriation/auction/public sale price; or (iv) the above three prices of other property of which size, location, usage and type is same and similar is regarded as a market price for IGTL purposes. With the revision, (iv) category of the above three prices of other property can be used only if the above three price is not available.
Deduction of foreign tax credit
With the revision, foreign tax claimed as the foreign tax credit for corporate income tax purposes would be deductible from the net tax income in the share valuation under the IGTL.
If you have any questions on 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
|Kyong Chin So
+82 (2) 6676-2487