South Korea: Korean Tax Brief - November 2016

Last Updated: 30 January 2017
Article by Jeong Wook Choi, Byung Choon Ihn, D. Kim and Ji Young Eom

1. Korea-India tax treaty is amended in 30 years

Korean companies that have expanded its business to India is now able to resolve the difficulties faced due to double taxation by the local tax authorities. According to the National Tax Service ("NTS") on October 16, the bill for the ratification of the revised Korea-India tax treaty has recently been passed through the National Assembly. The Korea-India tax treaty had not been revised for the past thirty years since its first enactment in 1986. The NTS had been negotiating with India for nine years since May 2005, and the revision of the agreement was concluded in 2014 and signed in April last year. The key amendment of the tax treaty that came into force this time is that mutual agreement between the tax authorities of both sides has become available for transfer pricing taxation. Transfer pricing taxation is usually accompanied by a high amount of tax, so it gives companies a lot of financial pressure and often causes double taxation with their home tax authorities. India's strong transfer pricing taxation policy has proven to be a major challenge for local companies. However, Korean companies that have entered India have had no other remedy, except to file lawsuits through local courts, even if transfer pricing issues arise. The NTS has tried to resolve the issue by agreeing to start mutual agreement immediately after the enforcement of the Korea-India tax treaty at the end of last year and concluding a memorandum of understanding (MOU) to postpone the collection of tax levied for up to five years if the mutual agreement is started. In the future, if double taxation issue is raised due to tax investigation on the transfer price, the procedure to resolve the double taxation through the consultation between the taxation authorities is specified, so that the problem can be solved promptly at the time of the transfer price taxation. The NTS said, "We will make various efforts to create an environment in which the trade and investment between the two countries can be more actively carried out with the entry into effect of the Korea-India tax treaty."

2. It is possible to file a claim for foreign tax credit including overseas source income increased due to the correction of tax base by the tax authority (Statutory Interpretation Division-3383)

A company applied 0.2% to 0.5% of the payment guarantee fee rate as an arm's length price to the service fee with respect to the payment guarantee service provided to overseas subsidiaries and included it in its taxable income according to Article 4 and 5 of the "International Tax Adjustment Act" when filing a corporate income tax return. However, the tax authority conducted a comprehensive corporate tax audit, and applied 0.54% to 2.74% of the payment guarantee fee rate for the payment guarantee service for the relevant business year and corrected the tax base by increasing the gross income by the amount corresponding to the difference between the payment guarantee fees filed by A company. A company submitted an inquiry whether it is possible to file a claim for foreign tax credit including the amount of overseas source income increased due to the correction of tax base by the tax authority in calculating the limit of foreign tax credit and received a reply that if the foreign source income amount of the domestic corporation is increased due to the correction of tax base by the tax authority, it is possible to file a claim for foreign tax credit including the increased amount of overseas source income in calculating the limit of foreign tax credit in accordance with Article 45-2 of the "Framework Act on National Taxes".

3. 'Gold Banking' tax war ends...S Bank breaks the NTS's taxation logic

The tax litigation on the "Gold Banking" which has been filed by S Bank against the NTS over several years has ended. The Supreme Court Special Division 1 ruled in favor of plaintiffs (S Bank, etc.) in the same way as the first and second trials on October 27, rejecting the appeals filed by Namdaemoon tax office. The court ruled at the first and second trial that "it is hard to see the income from the gold banking, a type of financial instrument that trades gold through a bank account, as dividend income subject to taxation under the Income Tax Act". 'Gold Banking' is a financial instrument that trades gold through a bank account. When customers deposit cash into a gold bank account, the bank converts the amount of the deposit into gold denominated in grams (g) and record in the bankbook. Later, when customers reclaim cash, they can receive gold or cash corresponding to the market price of the gold. In 2003, when the instrument was released, the government, which suffered from the extravagant tax evasion due to underground gold transactions, permitted the development and sale of financial instruments such as an accumulated gold account as one of the side businesses of banks and banks competitively started to release relevant instruments. Since investment was made through banks as agents, they were essentially the same as gold transaction (involving physical transaction of the actual commodity) at the stage of instrument launch. Therefore, sales companies (banks) promoted and sold products with no tax (dividend income tax and comprehensive income tax) on investment income, and did not withhold taxes. However, in 2010, the Financial Services Commission issued the interpretation that "Gold Banking is subject to taxation as a derivative product under the Capital Markets Law." In addition, the Ministry of Strategy and Finance has issued an interpretation that "the dividend income tax should be levied on the profit from the gold banking transactions, a derivative product".

The NTS, the tax authority, has examined all income earners from gold banking on the income earned after January 1, 2009, and notified them to pay taxes through the bank. As the situation got worse, commercial banks such as S Bank filed administrative lawsuits after filing a tax appeal against the Tax Tribunal. In the first and second trials held in 2012 and 2013, the court ruled that "the income from the gold banking did not meet the requirements to be dividend income subject to taxation and there is no income distribution based on the equity stake, therefore it is difficult to see such income as a dividend income."

4. "Pay tax if you want to emigrate"...'Exit Tax' will be established

An exit (or departure) tax will be created to charge tax to domestic residents on the capital gains which would have arisen if the emigrants had sold their domestic stocks when they move out of the country. On November 14, the subcommittee of the Strategy and Finance Committee of the National Assembly ("Tax Subcommittee") agreed to pass the amendment of the Income Tax Law. According to the amendment, the exit tax will be assessed on the deemed transfer of shares held in Korea based on the day the residents move out of the country due to emigration (on the date of departure). Taxable object and taxpayers shall be limited to domestic stocks and major shareholders (1% or more of the listed corporations) who are subject to the share transfer profits tax under the Income Tax Act among those who have had a domicile or place of residence in Korea for 5 years or more in the past 10 years. The tax rate is 20% (22 or 23%, including local income tax), which is the capital income tax rate for major shareholders in Korea. However, in order to prevent double taxation, foreign tax credits will be applied, and the tax credits will be provided later in case the prices drop lower than those at the time of taxation when the actual transfer of shares takes place. In addition, if requirements, such as pledging collateral security for tax payment and appointing a tax agent, are met, the tax payment can be postponed for 5 years, so stocks do not need to be sold immediately and all the taxes paid will be refunded in case of re-entering Korea within 5 years after the exit of the country. If the law is passed at the National Assembly plenary session, the exit tax provision will be enacted on January 1, 2018.

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.

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