South Korea: 2016 Tax Law Amendments Proposal

Last Updated: 23 January 2017
Article by Yulchon LLC

The Ministry of Strategy and Finance ("MOSF") announced its proposed tax law amendments for 2016 (the "2016 Tax Amendments") on July 28, 2016. According to the MOSF, the purposes of the 2016 Tax Amendments are to strengthen economic vitality, stabilize people's livelihoods, promote fair taxation and rationalize the tax system.  Unless otherwise noted below, upon approval by the National Assembly, the 2016 Tax Amendments will be effective as of January 1, 2017.

We provide below a summary of the key proposed amendments.

1. Extension of the reduced income tax benefit period for foreign workers and adjustment of the flat tax rate (Article 18(2) of the Special Tax Treatment Control Law ("STTCL"))

Under the current STTCL, a foreign worker can choose to have her income taxed at a 17 percent flat rate for a period of five years from the date on which she first began providing services in Korea.  This benefit was set to expire on December 31, 2016.

The proposed 2016 Tax Amendments, extends the expiration of this benefit to December 31, 2019 for those who began to provide services in Korea from January 1, 2014. Those who began providing services prior to January 1, 2014are eligible for this benefit only until December 31, 2018. The proposed amendment also increases the flat rate from the current 17 percent to 19 percent.  The amended rate will be applicable to income earned after January 1, 2017.

The government expects that by extending the expiration of this benefit, Korea will continue to be able to attract talented foreign workers and extend the stay of such foreign workers in Korea. 

2. Setting a deduction limit with respect to losses carried forward for foreign companies (Article 91(1) of the Corporate Income Tax Law ("CITL"))

This amendment will 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 the proposed 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. This rule will be effective from the beginning of the 2017 business year.

3. 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) of the Personal Income Tax Law ("PITL"))

According to the proposed 2016 Tax Amendments, 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 PITL, such person will be deemed to have transferred his Korean shares as of the departure date and will be taxed at 20 percent on the gains arising from such transfer(the tax rate applicable on the transfer of Korean shares by a majority shareholder).

A person who is subject to the exit tax will be required to report and pay the exit tax within three months from the last day of the month to which the departure date belongs. The penalty for non-compliance will be 20 percent of the tax amount payable. Tax credits will be allowed against foreign taxes paid on the same shares and if the shares are subsequently transferred at a lower value then the value of the deemed transfer, a tax credit will be allowed reflecting this difference. 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.

Under this amendment, majority shareholders will bear the duty to report in advance their capital gains on the deemed share transfer. There are indications from the government that in the future the scope of assets subject to the exit tax will be expanded to include personal property in addition to Korean shares.  There is a high possibility that exit tax will be triggered not only on emigration but also on a long-term departure which lasts more than one year.

This amendment will be effective for departures from Korea that occur after January 1, 2018.

4. Change of the method of imposing gift tax on overseas property including overseas deposits donated by a Korean resident to a non-resident (Article 4(2) of the Inheritance Tax and Gift Tax Law ("ITGTL") and Article 21 of the Law for Coordination of International Tax Affairs ("LCITA"))

Under the current ITGTL, where a Korean resident donates overseas property including overseas deposits to a non-resident, the non-resident (the donee) has the obligation to pay gift tax to the Korean tax authorities.

The proposed 2016 Tax Amendments adopts the above ITGTL provision to the LCITA and changes the tax payment obligation from the donee (the non-resident) to the donor (the Korean resident). This amendment will be applicable to donations made after January 1, 2017.

The government expects that this amendment will heighten the effectiveness of taxation. 

5. Expansion of the scope of income occurring from the provision of personal services among Korean source income of non-residents/foreign companies (Article 93(6) of the CITL and Article 119(6) of the PITL)

Under the current CITL and PITL, income arising from services provided in Korea by entertainers, professional athletes and freelancers and services provided in Korea by persons with special scientific, technical or business management knowledge("technical services, etc.") (See, Article 179(6)(2) of the Enforcement Decree of the PITL and Article 132(6)(4) of the Enforcement Decree of the CITL) is regarded as Korean source personal service income and withheld at 22 percent (including local taxes).

The proposed 2016 Tax Amendments will cause that income occurring from the provision of "technical services, etc.", 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

This amendment is particularly relevant to companies planning to conclude a technical services agreement with an Indian company in the future.  Such companies should bear in mind that they are obligated to withhold tax even where the consideration is paid in return for technical services provided outside of Korea.

The amendment will be applicable to applicable services provided after January 1, 2017.

6. 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 PITL)

Under the current CITL and PITL 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 will extend there fund 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.

7. Regime relating to documentation requirements for multinational enterprises

(1) Imposition of duty to submit a Country-by-Country ("CbC") Report on multinational enterprises (Article 11 of the LCITA and Article 21(2) of the Enforcement Decree of the LCITA)

The proposed 2016 Tax Amendments will 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 870million) 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.

As the amount of taxes paid by multinational enterprises and other tax information will be disclosed through CbC Reports, tax compliance costs of multinational enterprises which carry out a lot of international transactions will increase.

Under this amendment, a Korean ultimate parent company is required to submit a CbC Report for the taxable year of 2016 by the end of 2017.

(2) Extension of the period for submitting the Combined Report of International Transactions ("CRIT") (Article 11 of the LCITA)

This amendment extends the period for submitting the CRIT (i.e., the local file and master file) from the corporate tax return filing due date to within 12 months from the end of the relevant business year. This amendment is expected to reduce the burden on companies subject to CRIT by lessening documentation-related compliance costs.

The amendment will apply to the submissions made after January 1, 2017.

(3) Exemption from duty to submit local file for Advance Pricing Agreement("APA")-approved transactions (Article 21(2) of the Enforcement Decree of the LCITA)

In light of the similarity between APA documents and the local file, Article 21(2) of the Enforcement Decree of the LCITA will be amended so that the duty to submit the local file will be exempted for APA-approved transactions.

This amendment will be applicable to submissions made after January 1, 2017.

8. Addition of a special case for which the statutory period for taxation relating to international transactions of multinational enterprises is applicable (Article 23 of the LCITA)

Where a taxpayer files a request for commencing a mutual agreement procedure ("MAP"), the Korean tax authority suspends enforcement activities with respect to the taxable years subject to the MAP. However, under the current LCITA if the taxpayer later withdraws the MAP, the tax authority does not have the power to assess tax against taxable years for which the statute of limitations has expired during the course of the MAP proceedings.

The proposed amendment will grant the Korean tax authority an additional year from the date on which the taxpayer withdraws a MAP during which it can impose tax, even if the statute of limitations has expired during the MAP process.

This amendment will apply to MAP request withdrawals made after January 1, 2017.

9. Improvement of the MAP regime (Article 22 of the LCITA, Article 39 of the Enforcement Decree of the LCITA)

The amendment will expand the scope of MAP applicants so that even non-residents or foreign companies not having a place of business in Korea can request a MAP. In addition, if the Korean tax authority rejects the taxpayer's MAP request, the amendment imposes on the Korean tax authority the duty to notify the taxpayer and the other Contracting State of the rejection.

This amendment reflects recent OECD recommendations relating to MAP.

This amendment will be applicable to MAP requests and rejections of such requests made after January 1, 2017.

10. Allowing adjustments to the dutiable value of imported goods when the transaction price changes after the filing of an import declaration (Article 16(1) of the Enforcement Decree of the Customs Law)

The amendment, which reflect the World Customs Organization's guidelines, will change the existing position of the Korea Customs Service that prohibited a post-adjustment of the dutiable value of imported goods with respect to post compensation adjustments made by multinational enterprises.  According to the amendment, where the transaction price of imported goods is adjusted after an import declaration is filed to reflect the normal value under the national tax methods of calculating such value, the dutiable value of the imported goods can be adjusted under certain conditions (e.g., submission of a post adjustment plan before importing goods, use of the method of calculating the normal value, etc.) by reporting the potential/determined price. This amendment will be applicable to import declarations made after the enforcement date of the Enforcement Decree of the Customs Law expected in early 2017.

Under this amendment, where a remittance is made through a post compensation adjustment, the amount remitted will be included in the dutiable value of imported goods so that additional customs duties will be paid, and if the amount relating to the post compensation adjustment is received, the amount received will be excluded from the dutiable value of the imported goods so that the customs duties already paid can be refunded.

Originally published in Tax Legal Update 2016.08

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions