The Ministry of Strategy and Finance ("MOSF") announced its proposed tax law amendments for 2016 (the "2016 Tax Amendments") on July 28, 2016. According to the MOSF, the purposes of the 2016 Tax Amendments are to strengthen economic vitality, stabilize people's livelihoods, promote fair taxation and rationalize the tax system. Unless otherwise noted below, upon approval by the National Assembly, the 2016 Tax Amendments will be effective as of January 1, 2017.
We provide below a summary of the key proposed amendments.
1. Extension of the reduced income tax benefit period for foreign workers and adjustment of the flat tax rate (Article 18(2) of the Special Tax Treatment Control Law ("STTCL"))
Under the current STTCL, a foreign worker can choose to have her income taxed at a 17 percent flat rate for a period of five years from the date on which she first began providing services in Korea. This benefit was set to expire on December 31, 2016.
The proposed 2016 Tax Amendments, extends the expiration of this benefit to December 31, 2019 for those who began to provide services in Korea from January 1, 2014. Those who began providing services prior to January 1, 2014are eligible for this benefit only until December 31, 2018. The proposed amendment also increases the flat rate from the current 17 percent to 19 percent. The amended rate will be applicable to income earned after January 1, 2017.
The government expects that by extending the expiration of this benefit, Korea will continue to be able to attract talented foreign workers and extend the stay of such foreign workers in Korea.
2. Setting a deduction limit with respect to losses carried forward for foreign companies (Article 91(1) of the Corporate Income Tax Law ("CITL"))
This amendment will limit the amount of loss carried forward that a foreign company can deduct to 80 percent of the income earned in the relevant business year. . The purpose of the proposed amendment is to provide equal footing between foreign and domestic companies as domestic companies began to be subject to this rule from January 1, 2015. This rule will be effective from the beginning of the 2017 business year.
3. Introduction of an "exit tax"(i.e., the imposition of tax on capital gains at the time of departure from Korea) (newly added Article 118(9) of the Personal Income Tax Law ("PITL"))
According to the proposed 2016 Tax Amendments, where a person departs from Korea for the purpose of emigration and (i) that person has lived in Korea for more than 5 years in the last 10 years before departure and (ii) is a majority shareholder who is subject to capital gains tax under Article 157(4) of the Enforcement Decree of the PITL, such person will be deemed to have transferred his Korean shares as of the departure date and will be taxed at 20 percent on the gains arising from such transfer(the tax rate applicable on the transfer of Korean shares by a majority shareholder).
A person who is subject to the exit tax will be required to report and pay the exit tax within three months from the last day of the month to which the departure date belongs. The penalty for non-compliance will be 20 percent of the tax amount payable. Tax credits will be allowed against foreign taxes paid on the same shares and if the shares are subsequently transferred at a lower value then the value of the deemed transfer, a tax credit will be allowed reflecting this difference. Further, if a person who was subject to the exit tax returns to Korea within 5 years from his departure, the exit tax paid will be refunded to that person.
Under this amendment, majority shareholders will bear the duty to report in advance their capital gains on the deemed share transfer. There are indications from the government that in the future the scope of assets subject to the exit tax will be expanded to include personal property in addition to Korean shares. There is a high possibility that exit tax will be triggered not only on emigration but also on a long-term departure which lasts more than one year.
This amendment will be effective for departures from Korea that occur after January 1, 2018.
4. Change of the method of imposing gift tax on overseas property including overseas deposits donated by a Korean resident to a non-resident (Article 4(2) of the Inheritance Tax and Gift Tax Law ("ITGTL") and Article 21 of the Law for Coordination of International Tax Affairs ("LCITA"))
Under the current ITGTL, where a Korean resident donates overseas property including overseas deposits to a non-resident, the non-resident (the donee) has the obligation to pay gift tax to the Korean tax authorities.
The proposed 2016 Tax Amendments adopts the above ITGTL provision to the LCITA and changes the tax payment obligation from the donee (the non-resident) to the donor (the Korean resident). This amendment will be applicable to donations made after January 1, 2017.
The government expects that this amendment will heighten the effectiveness of taxation.
5. Expansion of the scope of income occurring from the provision of personal services among Korean source income of non-residents/foreign companies (Article 93(6) of the CITL and Article 119(6) of the PITL)
Under the current CITL and PITL, income arising from services provided in Korea by entertainers, professional athletes and freelancers and services provided in Korea by persons with special scientific, technical or business management knowledge("technical services, etc.") (See, Article 179(6)(2) of the Enforcement Decree of the PITL and Article 132(6)(4) of the Enforcement Decree of the CITL) is regarded as Korean source personal service income and withheld at 22 percent (including local taxes).
The proposed 2016 Tax Amendments will cause that income occurring from the provision of "technical services, etc.", if prescribed by an applicable treaty, will be subject to a 3 percent withholding tax where the consideration for such services is paid in Korea even though the services are provided outside of Korea
This amendment is particularly relevant to companies planning to conclude a technical services agreement with an Indian company in the future. Such companies should bear in mind that they are obligated to withhold tax even where the consideration is paid in return for technical services provided outside of Korea.
The amendment will be applicable to applicable services provided after January 1, 2017.
6. Extension of the refund request period for non-resident taxpayers (Articles 98-4(4), 98-5(2) and 98-6(4) of the CITL, Articles 156-2(4), 156-4(2) and 156-6(4) of the PITL)
Under the current CITL and PITL non-resident taxpayers that were subject to Korean withholding tax on income for which they were entitled to apply a treaty-reduced withholding tax rate must file a request for refund within 3 years from the last day of the month in which the tax was withheld.
The amendment will extend there fund request period from 3 years to 5 years. This rule will provide equal footing between foreign and domestic taxpayers because the same rule was introduced to domestic taxpayers from January 1, 2015. This amendment will be applicable to requests for refund made after January 1, 2017.
7. Regime relating to documentation requirements for multinational enterprises
(1) Imposition of duty to submit a Country-by-Country ("CbC") Report on multinational enterprises (Article 11 of the LCITA and Article 21(2) of the Enforcement Decree of the LCITA)
The proposed 2016 Tax Amendments will require a Korean company which is the ultimate parent company of a multinational enterprise with a consolidated turnover of at least KRW 1 trillion (approximately USD 870million) in the preceding year to submit a CbC Report that includes information on the business activities (revenue, profits, number of employees, assets, etc.)and the taxes paid, of the Korean company.
As the amount of taxes paid by multinational enterprises and other tax information will be disclosed through CbC Reports, tax compliance costs of multinational enterprises which carry out a lot of international transactions will increase.
Under this amendment, a Korean ultimate parent company is required to submit a CbC Report for the taxable year of 2016 by the end of 2017.
(2) Extension of the period for submitting the Combined Report of International Transactions ("CRIT") (Article 11 of the LCITA)
This amendment extends the period for submitting the CRIT (i.e., the local file and master file) from the corporate tax return filing due date to within 12 months from the end of the relevant business year. This amendment is expected to reduce the burden on companies subject to CRIT by lessening documentation-related compliance costs.
The amendment will apply to the submissions made after January 1, 2017.
(3) Exemption from duty to submit local file for Advance Pricing Agreement("APA")-approved transactions (Article 21(2) of the Enforcement Decree of the LCITA)
In light of the similarity between APA documents and the local file, Article 21(2) of the Enforcement Decree of the LCITA will be amended so that the duty to submit the local file will be exempted for APA-approved transactions.
This amendment will be applicable to submissions made after January 1, 2017.
8. Addition of a special case for which the statutory period for taxation relating to international transactions of multinational enterprises is applicable (Article 23 of the LCITA)
Where a taxpayer files a request for commencing a mutual agreement procedure ("MAP"), the Korean tax authority suspends enforcement activities with respect to the taxable years subject to the MAP. However, under the current LCITA if the taxpayer later withdraws the MAP, the tax authority does not have the power to assess tax against taxable years for which the statute of limitations has expired during the course of the MAP proceedings.
The proposed amendment will grant the Korean tax authority an additional year from the date on which the taxpayer withdraws a MAP during which it can impose tax, even if the statute of limitations has expired during the MAP process.
This amendment will apply to MAP request withdrawals made after January 1, 2017.
9. Improvement of the MAP regime (Article 22 of the LCITA, Article 39 of the Enforcement Decree of the LCITA)
The amendment will expand the scope of MAP applicants so that even non-residents or foreign companies not having a place of business in Korea can request a MAP. In addition, if the Korean tax authority rejects the taxpayer's MAP request, the amendment imposes on the Korean tax authority the duty to notify the taxpayer and the other Contracting State of the rejection.
This amendment reflects recent OECD recommendations relating to MAP.
This amendment will be applicable to MAP requests and rejections of such requests made after January 1, 2017.
10. Allowing adjustments to the dutiable value of imported goods when the transaction price changes after the filing of an import declaration (Article 16(1) of the Enforcement Decree of the Customs Law)
The amendment, which reflect the World Customs Organization's guidelines, will change the existing position of the Korea Customs Service that prohibited a post-adjustment of the dutiable value of imported goods with respect to post compensation adjustments made by multinational enterprises. According to the amendment, where the transaction price of imported goods is adjusted after an import declaration is filed to reflect the normal value under the national tax methods of calculating such value, the dutiable value of the imported goods can be adjusted under certain conditions (e.g., submission of a post adjustment plan before importing goods, use of the method of calculating the normal value, etc.) by reporting the potential/determined price. This amendment will be applicable to import declarations made after the enforcement date of the Enforcement Decree of the Customs Law expected in early 2017.
Under this amendment, where a remittance is made through a post compensation adjustment, the amount remitted will be included in the dutiable value of imported goods so that additional customs duties will be paid, and if the amount relating to the post compensation adjustment is received, the amount received will be excluded from the dutiable value of the imported goods so that the customs duties already paid can be refunded.
Originally published in Tax Legal Update 2016.08
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.