Korea’s 2022 tax reform proposals include new global minimum tax rules to align with OECD BEPS 2.0 Pillar Two

  • As part of the 2022 tax reform proposals, Korea has proposed minimum tax rules to align with the OECD BEPS 2.0 Pillar Two.

  • These rules, outlined in this Alert, will be effective for fiscal years beginning on or after 1 January 2024.

  • Taxpayers should review the rules to determine their impact on their Korean operations.

Executive summary

Model Rules for the Global Minimum Tax (GloBE or OECD BEPS 2.0 Pillar Two) were released by the Organisation for Economic Co-operation and Development (OCED) on 20 December 2021, as approved by the Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The GloBE Rules apply to Constituent Entities that are members of a Multinational Enterprise (MNE) Group that has annual revenue of €750 million or more in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) in at least two of the four Fiscal Years immediately preceding the tested Fiscal Year.

In this regard, the 2022 tax reform proposals (the 2022 Proposals)1 introduce new global minimum tax rules to align with the OECD BEPS 2.0 Pillar Two. The regulation will be included in the Adjustment of International Taxes Act (AITA) and will be effective for fiscal years beginning on or after 1 January 2024.

Detailed discussion

Details regarding the GloBE rules in the 2022 Proposals are outlined below.

Provisions AITA

Article 60 (Definitions)

  • MNE Group: Group with companies or permanent establishments in multiple countries.
  • Constituent Entities: Entities belonging to an MNE group (corporation, partnership, trust, etc.)
  • UPE: A company that ultimately owns a controlling interest in any other entity.
  • Ownership interest: Equity shares accompanying the right to the company's profits/capital/reserve.
Article 61, Article 62, and Article 63 (Defining in-scope)
  • Consolidated revenue test: Constituent Entities of an MNE Group are in scope of the GloBE rules if their annual revenue is €750 million or more in the consolidated financial statement of the UPE in at least two of the four fiscal years immediately preceding the tested fiscal years.
  • Excluded Entities: i) government entities, international organizations, non-profit organizations, and pension funds, ii) investment funds and real estate investment vehicles but only when they are the UPE of an MNE Group, and iii) entities directly or indirectly owned by i) or ii).
  • Taxpayer: Domestic Constituent Entities pay a top-up tax in accordance with the Income Inclusion Rule (IIR) and Supplementary rules for income inclusion (known as Under Taxed Payment Rule (UTPR)).
  • Identify the location of each constituent entity: Entity located where it is tax resident. A flow-through entity is treated as a stateless entity or located in the jurisdiction where it was created. The location of the permanent establishment is determined in consideration of tax treaties, etc.
  • Location of tax payment: Place of tax payment under the Corporate Income Tax Law.
Article 64(1) and Article 64(3) (Computation of GloBE Income or loss)
  • The amount of GloBE income or loss of a Constituent Entity is determined by taking the financial accounting net income or loss for the Constituent Entity for the fiscal year with the reflection of certain adjustment items (e.g., net tax expense, dividends)
  • International shipping income and related qualifying international shipping incidental income are excluded from the GloBE income and loss calculation.
Article 64(2) (Definition of net profit or loss in the accounting of Constituent Entity)
  • Constituent Entity's GloBE income or loss is the net income or loss that is used for preparing consolidated financial statements of the UPE before any consolidation adjustments eliminating intra-group transactions.
Article 64(4) and Article 64(5) (Allocation of net profit and loss in the accounting of permanent establishments and Flow-through entities
  • Financial accounting net income or loss of Constituent Entities that are permanent establishments are not included in the calculation of GloBE income or loss of the Main Entity.
  • Financial accounting net income or loss of flow-through entities is allocated to the permanent establishment in which the business is carried out or to shareholder constituent entities.
Article 65 (Computation of Adjusted Covered Taxes)
  • The starting point for the computation of covered taxes is the current tax expense accrued for financial accounting net income or loss. Adjustments are made to covered taxes by way of the total deferred tax adjustment amount to take temporary differences and prior year losses into account for GloBE purposes.
Article 66 (Post-filing adjustments)
  • Special rules apply when there is an adjustment to a tax liability for a prior year.
  • To the extent an increase in tax liability results from the adjustment, it is added to the covered tax when calculating the effective tax rate (ETR) for the current fiscal year.
  • To the extent a decrease in tax liability results from the adjustment, ETR is recalculated by deducting it from the covered tax for the previous fiscal year.
  • If an additional Top-Up Tax amount is assessed as a result of the recalculation of ETR, it is treated as an additional Top-Up Tax liability for the current period.
Article 67 (Computation of ETR)
  • ETR is calculated by dividing the total adjusted covered taxes of Constituent Entities located in the relevant country by the net GloBE income.
  • Among Constituent Entities, the adjusted covered taxes and GloBE income or loss of investment companies such as funds are excluded from the calculation of ETR.
Article 68 (Computation of Top-Up Tax)
  • Jurisdictional Top-Up Tax = (minimum rate-jurisdictional ETR) x (net GloBE income – substance-based income exclusion) + additional Top-Up Taxes for the current period - qualified domestic minimum top-up tax.
  • Top-Up Tax for each constituent entity = Top-Up Tax in relevant country x (GloBE income of Constituent Entities/sum of GloBE income of Constituent Entities located in the relevant country (GloBE loss is not included)
Article 69 (Charging provisions: The IIR)
  • Top-down approach: The UPE of the MNE Group is primarily liable for the Top-Up Tax of all low-taxed Constituent Entities. If the UPE is not required to apply an IIR, the Top-Up Tax is imposed on the next intermediate parent entity in the ownership chain that is subject to the IIR.
  • A Partially-owned Parent Entity is a Constituent Entity that has more than 20% of the ownership interests held directly or indirectly by non-group members. In this case, the Top-Up Tax is imposed on the Partially-owned Parent Entities that are subject to the IIR.
  • The allocable share of Top-Up Tax is determined based on a Parent Entity’s inclusion ratio.
Article 70 (Charging provisions: The UTPR)
  • If the low-taxed income of the UPE or Parent Entity in the MNE group is not subject to Top-Up Tax under an IIR, then the Top-Up Tax will be charged under the application of the UTPR at the level of Constituent Entities across all qualifying UTPR jurisdictions.
  • The 2022 Proposals provide the following formula to calculate how the IIR Top-Up Tax is divided among those countries that have adopted a UTPR:
    • 50% x (number of employees in a country applying the UTPR/number of employees in all UTPR countries), plus 50% x (total net book value of tangible assets in a country applying the UTPR/total net book value of tangible assets in all UTPR countries).
Article 71 (De minimis exclusion)
  • When the jurisdiction meets the de minimis threshold (which will be the case when the average GloBE revenue and GloBE income or loss in the jurisdiction are below €10 million and €1 million, respectively), the ETR will not need to be calculated for that jurisdiction.
Article 72 and Article 74 (Special rules for Minority-owned constituent entities and Joint Ventures
  • Minority-owned constituent entities (UPE holds less than 30% of the ownership rights) require calculating ETR and top-up tax.
  • Joint Ventures (JV) which are at least 50% owned by the MNE group are considered Constituent Entities. However, the ETR and Top-Up Tax of the JV Group (JV and its subsidiaries) is calculated separately from the rest of the MNE Group.
Article 73 (Special rules for restructuring)
  • The disposing entity includes the gain or loss on disposition in the computation of its GloBE income or loss, and the acquiring entity determines its GloBE income or loss based on the carrying value of assets and liabilities.
  • However, if the transfer is part of a qualified global reorganization, the transfer is effectively disregarded, with the disposing entity disregarding any gain or loss, and the acquiring entity adopting the carrying values from the disposing entity.
Article 80 (The GloBE Information Return)
  • A Domestic Constituent Entity must file a GloBE Information Return with the Korean tax authorities no later than 15 months after the last day of the reporting fiscal year. This obligation, however, will be exempt when Overseas Constituent Entities file the GloBE Information Return with another jurisdiction.
  • In the above cases, a Domestic Constituent Entity shall notify the Korean tax authorities of the identity of the entity that is filing the GloBE Information Return.
Article 81 (Report and payment of allocated additional top-up taxes)
  • Reporting and payment of allocated additional Top-Up Taxes by the month in which the deadline for filing a GloBE Information Return falls.
  • One-month installment is possible if the top-up tax exceeds KRW20 million.
Article 78 and Article 79 (Transitional rules)
  • Following transitional rules that apply where an MNE Group enters within the scope of the GloBE rules for the first time.
    • All deferred tax assets and liabilities are reflected in the financial statements when calculating the total deferred tax adjustment amount.
    • The deadline to submit a GloBE Information Return will be extended to 18 months (i.e., instead of the standard deadline of 15 months)
  • Exemption from the IIR application for the first five years of rule application for an MNE group in the initial stage of overseas activities.
Article 84 (Penalty)
  • Penalty may be imposed up to KRW100 million for the failure of reporting by Constituent Entities with reporting obligations.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Han Young, Seoul
  • Kyung Tae Ko

  • Jeong Hun You

  • Hoonseok W Chung

  • Ilyoung Chung

Ernst & Young LLP (United States), Korean Tax Desk, New York
  • Young Ju Song
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
  • Gagan Malik

  • Dhara Sampat

Ernst & Young LLP (United States), Asia Pacific Business Group, New York
  • Pongpat Kitsanayothin

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.