On July 28, 2016, the Ministry of Strategy and Finance announced its proposed tax law amendments for 2016. According to the proposal, the revisions are aimed at increasing the engines for growth and promoting fairness in taxation in accordance with the mid- to long-term tax policy initiatives of the government. The proposed amendments are expected to come into effect on January 1, 2017 pending approval by the National Assembly.
Provided below is a highlight of some key proposed amendments.
I. Transfer Pricing Documentation Requirements
In general, for fiscal years beginning on January 1, 2016, multinational enterprises (“MNE”) with operations in Korea are required to submit both local and master file documentation as part of the measures aimed at gathering and exchanging information on international transactions pursuant to the OECD/G20 BEPS project. The 2016 proposals introduce provisions aimed at providing taxpayers additional flexibility in meeting the newly implemented laws. Further, additional reporting requirements are introduced to require certain MNEs to report company information in a global scope.
a. Country-by-Country Reporting Requirement for Multinational Enterprise Groups
In addition to the local file and master file documentation requirements implemented in 2015 as part of the OECD/G20 BEPS project, the proposed amendments to the Law for the Coordination of International Tax Affairs (“LCITA”) introduce the requirement for submission of a Country-by-Country Report (“CbC Report”) containing information on the global allocation of the MNE group’s income and tax payments together with certain indicators of the economic activity within the MNE group, including sales revenue, profit, number of employees and assets. The CbC Report is required to be filed by the ultimate parent company of a MNE group with annual consolidated group revenue in the immediately preceding fiscal year of more than KRW 1 trillion.
The CbC Report should be filed within twelve months from the end of each fiscal year beginning on January 1, 2017. The proposal indicates that the CbC Report should be prepared for the fiscal year 2016 and submitted prior to the end of 2017 – this report will be subject to automatic government-to-government exchange with other jurisdictions from 2018 onwards in accordance with the requirements set forth under a multilateral agreement.
b. Local File Exemption for Taxpayers with APA Approval
Having recognized that taxpayers under APA arrangement with the National Tax Service (“NTS”) have already submitted an APA package containing similar types of information, the proposed amendments grant an exemption on the requirement to submit local files with respect to those taxpayers that have already received approval of their APA application from the NTS.
This exemption applies to those APA applications submitted on or after January 1, 2017.
c. Extension on the Deadline for Submission of Transfer Pricing Documentation
Currently, the master file and local file documentation are required to be filed by the annual corporate income tax returns filing due date. The revisions to the law provide an extension on this deadline for submission to within twelve months from the end of each fiscal year.
This extension applies to submissions made after January 1, 2017.
II. Extension of Statute of Limitations on International Transactions by Multinational Corporations Upon Termination of APA
In general, MNEs that have terminated an advance pricing arrangement (“APA”) with the NTS may remain subject to assessment on international transactions, with respect to which the statute of limitations has expired, for a one-year period after the termination of the APA.
There are several types of statutory periods for which an APA is deemed terminated, following which tax impositions are possible, including: (i) the date determined, in writing, by the two competent authorities involved in a bilateral APA; (ii) five years following the initiation of the APA, if no agreement has been made between the competent authorities; and (iii) the date on which a final and conclusive determination is made by the court during the course of the APA. In addition to the above, the proposed amendments stipulate that an APA may be deemed terminated on the date a taxpayer withdraws its application for an APA. This new provision seeks to prevent instances whereby taxpayers apply for APA and withdraw the application once the statute of limitations has passed, using this measure as a loophole to prevent the tax authorities from exercising its taxing authority.
III. Procedural Amendments to Mutual Agreement Procedures
Under the current law, a request for mutual agreement procedure (“MAP”) may be filed by the following taxpayers: (i) Korean citizens, residents or domestic corporations; and (ii) nonresidents or foreign corporations with a domestic business place. Under the proposed revisions, any non-resident or foreign corporation may file a request for MAP procedure, allowing nonresidents or foreign corporations without any place of business in Korea to also file for MAP.
In addition, where an application for MAP has been rejected, the proposed amendments impose an obligation on the NTS to send a rejection notice to the taxpayer and the tax authorities of the jurisdiction with which MAP is sought.
IV. Expansion in Scope of Korean-Source Personal Services Income
Under the current tax law, non-residents providing certain personal services are subject to withholding at the rate of 20%, to the extent that such provision of such services are actually performed in Korea.
The proposed amendments introduce a new withholding requirement of 3% with respect to any consideration paid in Korea for technical services that are performed offshore as domestic source personal services income, if so determined by relevant tax treaty. For example, this requirement would apply with respect to technical services performed in India for which payment is made in Korea pursuant to the Korea-India tax treaty.
V. New Ceiling on Deductibility of Net Operating Losses Carried Forward for Foreign Corporations
Under the current corporate income tax law, foreign corporations may carry forward net operating losses (“NOL”) for 10 years without any limitation on the amount of deductions claimed. The proposed amendments impose an annual limit on NOL deductions in excess of 80% of income for each fiscal year. This measure is aimed at eliminating the discrepancy in tax treatment of NOLs between foreign corporations and Korean corporations, as Korean corporations were already subject to the NOL limit.
This new requirement applies to fiscal years beginning on January 1, 2017.
VI. Increase in Flat Tax Rate Applicable to Foreign Employees
The current 17% flat tax rate on foreign employees working in Korea is applicable for a period of five years from the date of first employment in Korea. Although an exception to the five-year limit was granted to foreign workers who had started to work in Korea prior to January 1, 2014, the sunset provision provides that the law will cease to have effect after December 31, 2016.
The proposed amendments to the law grant a 19% flat tax rate for a five year period to foreigners who start working in Korea prior to December 31, 2019. With respect to those foreigners that have started to work in Korea prior to January 1, 2014, the new 19% flat tax rate will apply until December 31, 2018.
VII. Extension of Deadline for Filing a Claim of Rectification for Reduced Rates or Exemptions under Tax Treaty
Under the current law, non-residents or foreign corporations may file a claim for rectification for claiming reduced tax rates or exemptions under relevant tax treaty within three years from the end of the month in which the withholding date falls. In order to protect the rights of foreign corporations and non-residents to file such requests, the proposed amendments extend the deadline for filing such claim of rectification to five years.
This extension applies for filings made after January 1, 2017.
VIII. Adjustments to Customs Declared Values in correspondence with Transfer Pricing Adjustments
Under the current customs law, any post-clearance adjustments to the transfer price of goods are not recognized as acceptable adjustments to the customs value of the goods. The proposed amendments allow for post-clearance adjustments to be made to the customs value of goods if the adjustments are made in accordance with the arm’s length standard and provisional and final value declarations have been filed with the customs office. In order for the customs value adjustments to apply, certain conditions are required to be met: (i) a post-clearance adjustment plan must be drafted and submitted prior to the initial importation of the goods; (ii) arm’s length transfer pricing methodology must apply; and (iii) actual payments must be made in cash.
This new rule is expected to provide importers with some relief in reducing the mismatch in customs values and transfer prices as a result of price adjustments.
IX. Additional Guidance on Customs Valuation Methodology for Related-Party Transactions
Under the current customs law, adjustment factors involved in the calculation of the transaction value require clear allocations to be made between items requiring addition to the price and items that are not required to be added. Nonetheless, there is no clear guidance with respect to items that combine elements requiring additions to the transaction value with those elements that should not be included.
The proposed amendments seek to provide guidance on this issue by specifying that where items for addition and non-addition are combined within the price, the customs office may request the importer (or its related party) to break down the price to distinguish between the addition items and non-addition items. Where the taxpayer is unable to provide a reasonable breakdown, the law stipulates that the customs office may deem the combined amount in full as additions to the transaction value. At the request of the taxpayer, the customs office may decide, in the alternative, to apply alternative methods of valuation in hierarchical order.
This bulletin is intended as a summary news report only, for general information. This bulletin does not represent, and should not be construed as, legal opinions or advice of Bae, Kim & Lee LLC. Information contained in this bulletin is not represented to be accurate or up-to-date. For legal advice, please inquire with Bae, Kim & Lee LLC or other qualified counsel.
Tae Kyoon KIM
+82 2 3404 0574
Pil Yong KIM
+82 2 3404 0489
Seung Wan CHAE
+82 2 3404 0577
+82 2 3404 7589