Korea’s Ministry of Strategy and Finance has proposed tax law amendments that will be effective from January 1 2017 once the National Assembly has approved them.
Intended to stimulate the economy and improve people’s livelihoods while pursuing fair taxation, the draft policies include providing tax credits for research and development of new technologies and a number of other amendments, such as the introduction of country-by-country reporting (CBCR), that businesses and their employees should be aware of.
“In Asia, Korea and India are some of the most difficult jurisdictions for businesses. Tax officials are aggressive on tax treaties and laws to raise revenue. With the pressure to increase the welfare state without raising tax rates, the tax authority needs to enforce current tax laws strongly,” says John Dryden, senior foreign counsel at Yulchon.
Foreign workers’ taxable income
The plans extend a popular benefit for foreign workers who started working in Korea from January 1 2014. They will now have their income taxed at a flat rate of 17% for another three years until December 31 2019. The favourable rate was supposed to be withdrawn at the end of this year. Those who began working before January 1 2014 are eligible for the benefit until December 31 2018. The rate will increase to 19% from January 1 2017. For locals, the tax rate is 6% to 38%, depending on the income bracket.
Deduction limit for losses carried forward
A foreign company will now be able to offset up to 80% of their income against losses carried forward for an unlimited period. This will create equality between foreign and domestic companies. The rule started on January 1 2015 for domestic companies and will commence in 2017 for foreign companies.
The amendments introduce an exit tax for the first time for a person who leaves Korea having lived there for more than five years in the last decade, and who is the majority shareholder of a business subject to capital gains tax. They will be taxed at 20% on the gains arising from the sale of the shares. The amendment will apply to departures on or after January 1 2018. If the person returns to Korea within five years, the exit tax will be refunded.
A Korean company which is the ultimate parent company of a multinational enterprise with a consolidated turnover of at least $870 million in the preceding year will be required to submit a country by country report, including information on revenue, profits, number of employees, assets and taxes paid. Companies will be required to submit the report for the taxable year of 2016 by the end of 2017. The requirements are in line with the OECD’s base erosion and profit shifting (BEPS) action plan 13 guidelines. “Korea has been in the vanguard for adopting changes, with the country by country adoption, the rules will make it easier for Korea to tax companies even if it has no entity in Korea,” says Dryden.
Mutual agreement procedure
Under the Law for Coordination of International Tax Affairs, if a taxpayer requests a mutual agreement procedure (MAP), a process in which two national tax authorities hold discussions about unresolved cross-border matters between their jurisdictions in a bid to avoid double taxation, Korea‘s National Tax Service (NTS) suspends enforcement activities for the taxable years subject to the MAP, but if the taxpayer withdraws the MAP request, the NTS cannot assess tax against the taxable years for which the statute of limitations has expired.
The amendments would allow the authority an extra year from the date on which the taxpayer withdraws a MAP request to issue a tax assessment. In line with OECD recommendations, the scope of MAP applicants will be expanded to include non-residents or foreign companies not based in Korea.
“Korea has been difficult to deal with in MAP negotiations, especially when dealing with smaller countries like Hungary for example. It does not provide an answer. But the authority has to give reason to doing so starting next year,” says Dryden.
Practical tips for businesses
Companies should be prepared for tax investigations by ensuring they have a robust system of record-keeping. “Businesses need to make sure that emails are kept and keep a record of passwords used,” says Dryden. “There should be a strong policy in force for tax and regulatory issues so that a company is keeping enough information but not beyond statutory requirements. There was a case of a company that got into trouble with the tax authority because of a copy of a memo that had no reason for it to be in Korea.”
“Tax enforcement criminalisation has emerged in investigations for actions that were not normally criminalised,” says Dryden. “There have been prosecutions on a business for getting outside advisers to help reduce the amount of tax it needs to pay and this was a sign of conspiracy to the tax authority.” It is not uncommon for businesses to be required to participate in investigations that can last between three to six months.
Korea is likely to enforce tax laws even more aggressively in the future, with still more comprehensive changes to the law possible in 2018. Businesses should have tax policies in place to ensure information provided during audits is accurate and complete and that non-essential information does not get traced in the future.