Korean Tax Newsletter (September, 2007)
Proposed Revisions to Tax Laws
On August 22, 2007, the Ministry of Finance and Economy ("MOFE") announced a proposal for "Revisions to Tax Laws in 2007" which in general will become effective from 2008 through a legislation process. The revisions include the Corporate Income Tax Law ("CITL"), the Individual Income Tax Law ("IITL"), the Tax Incentive Limitation Law ("TILL"), the Value Added Tax Law ("VATL"), the National Tax Basic Law ("NTBL"), the International Tax Coordination Law ("ITCL"), etc. The MOFE plans to submit the proposed revisions to the National Assembly for their approval. The major proposed revisions (not all-inclusive) are as follows:
(Note) The proposed revisions are not final and therefore, the contents may be amended or deleted during the legislation process.
Corporate Income Tax Law
- Scope of Entertainment Expenses of Financial Companies
Under the current CITL, if a financial company incurs expenses in relation to the contracting or cash collection of deposits, insurances, etc. such expenses are deemed as entertainment expenses for CITL purposes. Under the proposed CITL, this provision would be abolished.
- Submission of Statement of Changes in Shares and Shareholders
Under the current CITL, companies listed on the Korea Stock Exchange or KOSDAQ are required to file the 'Statement of Changes in Shares and Shareholders', if there are changes in shares and shareholders except for changes in the shares held by minority shareholders. According to the proposed revision, the listed companies would be required to submit the Statement only in case of a change in shares held by a controlling shareholder and its related parties.
- Common Advertisement Expenses
Under the current CITL, in case where two or more companies jointly conduct business; common advertisement expenses incurred in relation to the business can be deductible for tax purposes by each company only within the limit calculated based on the relative investment in the joint business. Under the proposed revision, if the companies operating a joint business are not related parties, the expenses can be deducted in accordance with an agreement concluded between the companies.
- Dividend Received Deduction
Where a company ("AA") which is not a holding company under the Monopoly Regulation and Fair Trade Act ("MRFTA") receives dividends from its subsidiary ("BB") and claims a dividend received deduction ("DRD") under the CITL, a certain amount of the dividends which AA receives from BB would be excluded from the DRD amount if BB owns an affiliate company ("CC"). Under the proposed revision, the rule for the reduction in DRD amount applies to a case where AA, BB and CC all fall under the same affiliate group under the MRFTA.
Individual Income Tax Law
- Submission of Withholding Tax Statement
Under the current IITL, a business taxpayer is required to submit a withholding tax statement for all income including non-taxable salary income paid to their employees. However, the proposed revisions relieved the taxpayer of submitting the withholding tax statement on the employer's portion of social securities (i.e. National Pension, Medical Insurance, and Employment Insurance) and some non-taxable salary income such as allowances for day duty, night watch, business travel, etc.
- Individual Income Tax Bracket
Under the proposed revision, individual income tax bracket would be adjusted as follows:
|(*) Exclusive of 10% resident surtax|
Tax Incentive Limitation Law
- Calculation of R&D Credit for Large Companies
Currently, companies other than the Small and Medium Sized Companies ("Large Companies") can claim R&D tax credit only on an incremental basis as follows:
- Amount of R&D Tax Credit to be claimed under the current TILL = (A) + (B)
(A) R&D expenses paid to universities, Small and Medium Sized Companies ("SMC"), etc for consigning a technological development and those incurred to perform a joint technological development:
50% of the R&D expenses for the current year exceeding the average of the R&D expenses incurred during the previous four years
(B) Other R&D expenses
40% of R&D expenses (other than those described in (A)) for the current year exceeding the average of the R&D expenses incurred during the previous four years
Under the proposed tax law, Large Companies would be allowed to claim the greater of R&D tax credit calculated based on the above current method, or the current year spending basis method as below:
- Current year spending basis method = R&D expenses, spent for the current year x (3% +additional rate(*))
(*)Additional rate = (R&D expenses for current year / Revenue) x 0.5 (capped at 3%)
Please note that, under the proposed revision, the current year spending basis method can be selected only if the ratio (i.e. R&D expenses for current year / Revenue) of current year is not less than that of previous year.
- Scope of R&D expenses
As discussed above, with respect to R&D expense paid to universities, SMC, etc. for consigning a technological development and those incurred for performing a joint technological development, large companies are currently allowed to claim R&D tax credit at 50% of such incremental R&D expenses spent in the current year.
Under the proposed revision, certain expenses such as consigned training expense for manpower development are additionally included in the category of such R&D expenses.
- Tax incentives for Investment in Facilities for Enhancement of Productivity
Currently, if a company makes an investment in facilities for enhancement of productivity, it is eligible for a tax credit at 3% (7% for SMCs) of the investment amount. According to the proposed revision, the facilities such as USN (Ubiquitous Sensor Network) System Facilities, RF DONGLE (Mobile Touch Card Payment Terminal) and Service Robot would be added to the list of 'facilities for the improvement and automation of process' which are eligible for the tax credit.
- Temporary Investment Tax Credit for Investments in Gaesung
Under the current TILL, in case where a company conducts a qualified business including manufacturing, it can claim temporary investment tax credit at 7% of domestic investment amount. According to the proposed revision, investments in the Gaesung Industry Area would be treated as domestic investments and therefore eligible for the temporary investment tax credit.
- Deemed Manufacturer in Gaesung
Under the current TILL, a company ("Company A") who uses another company ("Company B") to manufacture its goods can be regarded as a manufacturer for TILL purposes, if certain conditions are met. In such case, the Company B's business place should be located in South Korea. Under the proposed revision, Company A will also be regarded as a manufacturer when the Company B's business place is located in the Gaesung Industry Area.
Introduction of Partnership Taxation
Partnership taxation is newly introduced. According to the proposed TILL, income taxes will be imposed to partners of a partnership when income is allocated to partners and the partnership would not be subject to corporate income tax. Hapmyung Hoesa, Hapja Hoesa, and Yuhan Hoesa mainly providing personal services to be prescribed by the Presidential Decree of the TILL can elect the partnership taxation or remain the current taxation. This revision is proposed to be effective from January 1, 2009.
Value Added Tax Law
- Penalty tax for VAT invoice
Currently, if a supplier issues a VAT invoice without supplying goods or services, or if a VAT invoice is issued in the name of a disguised supplier, the supplier is subject to penalty tax for incorrect issuance of VAT invoice at 2% of the supply amount. Under the proposed revision, the recipient who receives this incorrect VAT invoice would also be subject to this penalty tax.
- Deemed supply of goods
Under the current VATL, if a taxpayer directly uses or consumes goods produced or purchased for the purpose of its own business, it is deemed as a supply of goods under the VATL. According to the proposed revision, if the taxpayer has not received a refund of input VAT incurred on the goods, it is not deemed as a supply of goods subject to VAT, even if the taxpayer uses or consumes them for its own business' purposes.
National Tax Basic Law
- Substance over Form Rule
New provisions regarding the substance over form rule would be stipulated in addition to current provisions. Under the proposed revision, if a taxpayer is deemed as evading taxes through third-party transactions in between, or a series of transactions, such transactions would be disregarded and it will be considered as a direct or single transaction based on economic substance, which are already stipulated in the ITCL.
International Tax Coordination Law
- Change of Thin Capitalization Ratio for Financial Companies
If a company borrows a loan from a Foreign Controlling Shareholder ("FCS") or a third party with a guarantee from the FCS, and such borrowing exceeds 300% ("thin capitalization ratio") of its equity (or paid-in capital if it is greater than the equity), interest expense on the borrowing exceeding 300% of the FCS' equity in the borrower's company will not be deductible. However, for financial companies, 600% of the thin capitalization ratio applies under the current ITCL.
Under the proposed revision, this special exception for financial companies would be abolished and all companies including financial companies would be subject to the same 300% thin capitalization ratio.