Improvement regarding calculation of deductible limit for entertainment expenses The current CITL specifies that regarding intercompany transactions, the ceiling of the sales revenue used in calculating the deductible limit for entertainment expenses is 20%. According to the tax reform proposal, the 20% ceiling will be lowered to 10% so as to enhance transparency in corporate management. Also, under the current CITL, as for financial public corporations, the sum of their revenue amount and 6 to 9 times (9 times for Korea Eximbank, Korea Investment Corporation, and Korea Asset Management Corporation and 6 times for other financial public corporations) the amount of their service charges is used as their revenue amount in calculating the deductible limit for entertainment expenses. According to the proposed revisions, the multiplier applied to the amount of service charges will be unified to 6 times.
Rationalization of industry- standard useful lives for depreciation purposes
Currently, five categories of standard useful life (5 years, 8 years, 10 years, 12 years, and 20 years) are used by industry for depreciation purposes. According to the proposed tax law changes, other four categories (4 years, 6 years, 14 years, and 16 years) will be added (9 categories in total) to be applied to industries of Manufacture of Footwear, Telecommunications, Manufacture of Refined Petroleum Products, and Gas Supply respectively in order to bridge the gap between their useful life for accounting purposes and that for tax purposes. This revised provision will apply to assets acquired from 2014 after a one-year grace period.
Lowered ratio of bad debt allowance for financial institutions, etc.
The current CITL stipulates that the ceiling on bad debt allowances for financial institutions, etc. is 2%. Under the proposed revisions, the 2% ceiling will be lowered to 1% in order to ensure taxation equity between financial institutions and non-financial institutions. As the result, financial institutions, such as banks, securities companies, insurance companies, credit-specialized financial companies, etc., will apply the highest rate among 1%, actual write-off ratio, and reserve ratio as specified under the financial supervisory rules (Max〔1%, actual write-off ratio, reserve ratio as specified by the financial supervisory rules〕) as their bad debt allowance ratio.
Taxation on gains on sale of residence or land for non-business purpose
Under the current CITL, a company which sells residence or land for non-business purpose is subject to an additional charge of 30% of the capital gains in addition to corporate income tax. Under the proposed amendments, the 30% additional charge will not be applicable to any such sale transaction conducted in and after 2013 with a view to stimulating real estate transactions. However, in case of the sale of real estate in any real estate speculation area, an additional charge of 10% will continue to be applied with no sunset period applied.
Improvement regarding taxation of offshore joint business (“OJB”)
- Clarification of criteria for taxation of OJB
According to current tax law, an OJB classified as a foreign corporation is subject to taxation under the CITL, while that classified as a foreign organization is subject to taxation under the Individual Income Tax Law (“IITL”). Despite such different taxation treatment, there are no clear-cut criteria provided under Korean tax law regarding determination of an OJB as a foreign corporation. For this reason, the CITL will be revised to include the following criteria for classifying an OJB as a foreign corporation: - The OJB shall have a corporate (juridical) personality;
- The OJB shall be composed of partners with limited liability only; and
- A domestic entity which is the same as or most similar to the OJB shall be classified as a corporation under Korean private law.
If an OJB does not meet the foregoing criteria, it will be classified as a foreign organization which is subject to taxation under the IITL. - Clarification of taxation of foreign organizations which are not corporations (IITL)
Under the current IITL, where a foreign organization which is not a corporation does not distribute profits, it shall be treated as a single nonresident taxpayer, and where such a foreign organization distributes profits, it shall also be treated as a single nonresident taxpayer but be taxed at the level of each partner regarding its distributed share of the organization’s profits. However, the tax law will be revised as described below to clarify taxation of such a foreign organization for the case where there is distribution of profits: Foreign organization with a permanent
establishment (“PE”) in Korea | Foreign organization without a PE in Korea | If information on partners and the profit allocation ratio are submitted through business registration | If no information is submitted on partners or no business registration is made | If information, etc. on partners is submitted | If no information, etc. on partners is submitted | To be taxed at the level of each partner (as each member of the business) | To be taxed as a single non-resident taxpayer | To be taxed at the level of each partner (as each member of the business) | To be taxed as a single non-resident taxpayer |
- Application of special tax treatment for partnership entities to OJB (Tax Incentives Limitation Law)
Under the current Tax Incentives Limitation Law (“TILL”), only domestic entities including associations (“Johap”) under the Civil or Commercial Law are eligible for special partnership taxation. According to the proposed amendments, however, an OJB satisfying the following requirements will also be able to elect special partnership taxation: - The OJB shall be similar to the domestic entities eligible for special partnership taxation;
- The OJB shall conduct business through a PE in Korea; and
- The OJB shall be eligible for a similar special taxation regime in the country of incorporation.
After a one-year grace period, the revised provision will be applicable to fiscal years commencing on or after 1 January, 2014.
Establishment of taxation guidelines regarding internal transactions
The current tax law does not provide clear-cut guidelines for gains/losses recognition under transfer pricing principles and application of arm’s length price, etc. regarding taxation of internal transactions between the permanent establishment (“PE”) of a non-resident/foreign corporation and its overseas head office or branch. In order to address this issue, MOSF has proposed to reflect Article 7 of the OECD Model Tax Convention amended in July 2010 to make the PE of such non-resident/foreign corporation recognize gains/losses expected from the case where it is assumed to engage in a transaction entirely independent from its overseas head office or branch. Detailed rules on gains/losses recognition and calculation of the arm’s length price for such internal transactions will be set forth in the relevant Enforcement Decree (“ED”), etc. | 