Global Tax Alert | 3 September 2013
Korea announces 2013 tax reform proposals
On 9 August 2013, Korea's Ministry of Strategy and Finance announced 2013 tax reform proposals (2013 Proposals). The 2013 Proposals aim at supporting job creation, boosting domestic economic demands, improving fiscal soundness, and laying the foundation for an advanced taxation system. The 2013 Proposals contain revisions to Korean tax laws including, but are not limited to, the Corporate Income Tax Law (CITL), the Tax Incentives Limitation Law (TILL), the Law for Coordination of International Tax Affairs (LCITA), and other tax related laws.
This Tax Alert summarizes key features of the 2013 Proposals.
Corporate Income Tax Law
Withholding of personal services income classified as business profits under tax treaty
The current CITL stipulates that any person who makes a payment for domestic-source personal services provided by freelancers (e.g., public entertainers, professional athletes, attorneys, etc.) must withhold tax if it is attributed to a domestic place of business but will be exempt from the withholding obligation if the domestic business place is registered as a business entity in Korea. However, if the personal services income is classified as business profits under a relevant tax treaty, the payor of the personal services income may be exempt from the withholding obligation, even though the income is attributed to a domestic business place not registered as a business entity in Korea.
The 2013 Proposals would require the payor to withhold income tax if income is attributed to a domestic business place not registered as a business entity in Korea, even if such income is classified as business profits under a relevant tax treaty.
Change in submission procedure of a foreign corporation's treaty exemption application
According to the current CITL, a foreign company that is a beneficial owner of income should submit an “application for tax exemption on nonresident's Korean source income provided under tax treaty (Application),” if claiming a tax exemption on Korean source income under a tax treaty through its withholding agent. However, if the Korean source payment is made through an Offshore Investment Vehicle (OIV), the beneficial owner of income itself must submit the Application, which has caused some difficulties to the beneficial owner.
Under the 2013 Proposals, the OIV would submit to a district tax office an Application received from the beneficial owner with an OIV report which includes details of the beneficial owner.
Withholding agent's ability to file a refund claim for over-withheld tax
The current CITL requires any refund claim resulting from over-withholding, due to an untimely submission of a treaty claim form, must be made by the beneficial owner within three years from the last day of the month in which the tax was withheld.
The 2013 Proposals will allow either the withholding agent or the beneficial owner of income to file the refund claim.
Expanded disclosure requirements related to overseas subsidiaries
Under the current CITL, a domestic corporation with an overseas subsidiary is required to file information on the overseas subsidiary (Information on Overseas Subsidiaries).1 Failure to file the required information subjects the Korean shareholder to noncompliance penalties of KRW10 million (US$9,000) or less. This penalty is imposed on the Korean shareholder corporation that holds 50% or more ownership in the overseas subsidiary.
The 2013 Proposals expand the scope of required information by adding details of loss transactions made by overseas subsidiaries. Further, the threshold of ownership interest is lowered from the 50% or more to 10% or more ownership in an overseas subsidiary.
Tax Incentives Limitation Law
According to the current TILL, the scope of manpower development expenses2 eligible for an R&D tax credit includes expenses incurred for outsource training offered by external professional research institutions or universities in and outside of Korea and for in-house job skill development training offered to all employees. The 2013 Proposals will limit manpower development expenses eligible for the R&D tax credit to those incurred by R&D institutes or R&D-dedicated departments.
Law for Coordination of International Tax Affairs
The LCITA covers changes to rules related to a controlled foreign corporation (CFC).
Prevention of passive income from being excessively retained overseas
Under the current law, a Korean resident is required to include in its income undistributed CFC's retained earnings if certain conditions exist, one of which is when a ratio of the CFC's passive income (e.g., interest, dividend and royalty income of the CFC) to its gross income exceeds 50%.
Under the 2013 Proposals, the LCITA will lower the 50% threshold; however, a new ratio is yet to be set.
Imposition of non-compliance penalty for failure to submit required documents
The current LCITA imposes no penalty for failure to submit relevant documents such as calculation details of distributable retained earnings, or a statement of surplus (deficit), etc. of the CFC. The 2013 Proposals would impose a penalty of 0.5% of the retained earnings that would have been treated as a deemed dividend capped at KRW100 million (US$90,000) and 50 million (US$45,000) for small- and medium-sized enterprises.
1. These include details of direct investment, financial conditions of the subsidiary, status of overseas business operations, etc.
2. The term “manpower development expenses” means certain expenses including qualified training expenses.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Han Young, Seoul
- • Jeong Hun You
+82 2 3770 0972
- • Jaewon Lee
+82 2 3770 4601
Ernst & Young LLP, Asia Pacific Business Group, New York
- • Chris Finnerty
+1 212 773 7479
- • Jeff Hongo
+1 212 773 6143
- • Kaz Parsch
+1 212 773 7201
- • Bee-Khun Yap
+1 212 773 1816
EYG no. CM3780