In 2016, meaningful changes have been made in the area of international tax in Korea. Tax laws including the Law for Coordination of International Tax Affairs, the Corporate Income Tax Law, the Individual Income Tax Law and the Special Tax Treatment Control Law have been amended in order to enforce BEPS related international taxation guidelines and rationalize the existing international tax system. Further, ratification of Korea-Hong Kong Tax Treaty and Intergovernmental Agreement with the U.S. has been made by the National Assembly last year. Yulchon Tax Group presents below major tax law amendments, Supreme Court precedents and procedural progress in some tax treaties of 2016 and thereafter presents soon-to-be amended Presidential Decrees and Ministerial Decrees of tax laws.
I. Major Changes in 2016
1. Tax Law Amendments
A. Imposition of duty to submit a Country-by-Country ("CbC") Report on multinational enterprises (Article 11 of the Law for Coordination of International Tax Affairs ("LCITA") and Article 21(2) of the Enforcement Decree of the LCITA)
The LCITA has been amended to 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 900 million) 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. Under this amendment, a Korean ultimate parent company is required to submit a CbC Report within 12 months from the end of the relevant tax year. If the ultimate parent company of a multinational enterprise is not obliged to prepare a CbC Report or is located in the jurisdiction which is not required to exchange CbC Reports with other jurisdictions, a Korean subsidiary or branch of the multinational enterprise should directly file the CbC Report. In such a case, for tax years beginning on or after January 1, 2016, the Korean company is obliged to prepare and submit a CbC Report to the relevant tax office.
B. Extension of the deadline for submission of a Combined Report of International Transaction ("CRIT") (Article 11 of the LCITA)
The period for submitting the CRIT (i.e., the local file and master file) has been extended from the corporate tax return filing due date to within 12 months from the end of the relevant business year. The amendment will apply to the submissions made after January 1, 2017.
C. Improvement of the MAP regime (Articles 22 and 23 of the LCITA)
Mutual Agreement Procedure ("MAP") is a procedure which enables the parties to a bilateral treaty to resolve a dispute with respect to the interpretation of treaty provisions or the inappropriate tax assessment or adjustment of taxable income through consultation with the competent authority of the other contracting state. Under the 2016 amendment of the LCITA, the scope of MAP applicants has been expanded so that even non-residents or foreign companies not having a place of business in Korea can request a MAP. This amendment will be applicable to MAP requests made after January 1, 2017.
In addition, in accordance with the 2016 amendment of the LCITA, where a taxpayer files a MAP and later withdraws the MAP, the date on which the taxpayer withdraws the MAP becomes the closing date of the MAP. The amendment grants the Korean tax authority an additional year from the date on which the taxpayer withdraws the MAP to recommence enforcement activities which have been suspended with respect to the taxable years subject to the MAP. This amendment will apply to MAP request withdrawals made after January 1, 2017.
D. 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) to (18) of the Individual Income Tax Law ("IITL") and Article 178(8) to (12) of the Enforcement Decree of the IITL)
According to the 2016 amendment of the IITL, 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 IITL, such person will be deemed to have transferred his Korean shares as of the departure date and will be taxed at 20 percent (22 percent if local taxes are included) on the gains arising from such deemed transfer (the tax rate applicable on the transfer of Korean shares by a majority shareholder). Although the scope of assets subject to the exit tax is currently limited to Korean shares, there is a possibility that the scope of assets will be expanded in the future. This amendment will be effective for departures from Korea that occur after January 1, 2018.
Under this amendment, tax credits will be allowed against foreign taxes paid on the same shares and if the shares are subsequently transferred at a lower value than the value of the deemed transfer, a tax credit will be allowed reflecting this difference. In addition, in order to mitigate the taxpayer's liquidity problem which is caused by the imposition of exit tax on unrealized capital gains, the payment of exit tax may be deferred for 5 years if certain requirements including the pledge of collateral to guarantee the exit tax payment and the designation of a tax agent are satisfied. 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.
The introduction of exit tax in Korea is expected to prevent offshore tax avoidance through emigration and secure Korea's taxing jurisdiction over domestic assets. However, in order to prevent double taxation in the country to which the person departing from Korea emigrates, follow-up measures, such as the conclusion of a tax treaty, are required.
E. Expansion of the scope of income occurring from the provision of personal services among Korean source income of non-residents/foreign companies (Articles 93(6) and 98(1)(2) of the CITL and Articles119(6) and 156(1)(2) of the IITL)
Under the 2016 tax amendment, income occurring from the provision of "technical services, etc." (services provided in Korea by persons with special scientific, technical or business management knowledge), 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. The amendment will be applicable to applicable services provided after January 1, 2017. Accordingly, in applying a tax treaty (e.g., Korea-India Tax Treaty) which prescribes that income occurring from the provision of technical services can be taxed by the country in which such income occurs in a similar way as royalty income, Korea will have taxing jurisdiction over income occurring from technical services provided outside of Korea in the future.
F. 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 IITL)
Prior to the amendment, 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 has extended the refund 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.
G. Setting a deduction limit with respect to losses carried forward for foreign companies (Article 91(1) of the CITL)
The CITL has been amended to 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 this 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. The deduction period is 10 years, which is the same as before. This rule will be effective from business years beginning on or after January 1, 2017.
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