TAX LAW CHANGES FOR YEAR 2011

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1 Tax & Finance January 20, 2011 TAX LAW CHANGES FOR YEAR 2011 On December 27 and December 30, 2010, amendments to tax laws and related presidential decrees have been promulgated, most of which took effect as of January 1, 2011 (with the exception of those provisions for which different effective dates are specified). It is also expected that there will be further amendments to presidential decrees unrelated to the above amendments to tax laws sometime around February or March Among the amendments for this year, we provide you below with some of the major items that may affect your business or may be of interest to you. Please also note that this is only a very brief outline of select items among amendments to tax laws and presidential decrees made for this year. If you wish to discuss any of the above item in more detail or have concerns that other amendments not addressed herein may have a bearing on your business, please feel free to contact us. I. No Change in Corporate Income Tax and Personal Income Tax Rates In late 2010, there were discussions on making changes to the income tax rates such as introducing an additional income bracket at the top end for personal income tax, postponing again the scheduled reduction of tax rates applicable for top income brackets, etc. However, such discussions did not materialize and the recent amendments to tax laws did not result in changes to the current income tax rates and the scheduled reduction in income tax rates in Following are applicable income tax rates for this year and for future years (including surtax). Corporate Income Tax: Income bracket 2010/ and thereafter KRW 200 million or less 11.0% 11.0% Over KRW 200 million 24.2% 22.0% Personal Income Tax: Income bracket 2010/ and thereafter KRW 12 million or less 6.6% 6.6% KRW 12 million KRW 46 million 16.5% 16.5% KRW 46 million KRW 88 million 26.4% 26.4% Over KRW 88 million 38.5% 36.3% II. Changes Common to All Industry 1. Reformation of the Tax Incentive System for Foreign Direct Investment ( FDI ) Prior to the amendment, high tech FDIs, individual type foreign investment zone ( FIZ ) FDIs, and industrial complex type FIZ FDIs, etc., enjoyed tax exemption for a certain specified period (for example, full exemption for the first 5 years and 50% for 2 years thereafter) without any limit on

2 the amount of tax incentives. Under the amended rules, however, the cumulative tax incentive will be limited to an aggregate amount of (i) 70% (or 50%) of the investment amount and (ii) KRW 10 million per each new employee but only up to 20% of the investment amount. The new FDI tax incentive system will take effect starting with FDI tax exemption applications filed on or after January 1, Phase-out of Tax Deduction for Severance Payment Plan without Outside Reserve Prior to the amendment, corporate taxpayers were allowed deduction of severance accrual (internal reserve) in the amount equivalent to the lesser of (i) 30% of the projected severance payment required should all employees resign at the end of the current fiscal year or (ii) 5% of the total salary of all employees for the fiscal year. The amendment to the above provision provides for reduction of the 30% threshold by 5% each year until it reaches zero in 2016, starting with fiscal years beginning on or after January 1, However, even if the severance accrual amount calculated based on the reduced threshold rate decrease below the severance accrual amount calculated allowed for tax deduction purposes before this amendment went into effect, the reduction will not result in recapture of previously deducted expenses. Additional deduction for contribution reserve outside the severance insurance scheme will be granted only in case of pension contributions made on or after January 1, 2011 under a Retirement Pension Plan. This means that current level of deduction for severance accrual will still be allowed, but an employer will not be allowed further deduction unless pension contribution is made to a Retirement Pension Plan after December 31, Introduction of Tax Credit for Investment Leading to Job Creation and Extension of Temporary Tax Credit for Investment Prior to the amendment, the temporary tax credit for investment was set to expire on December 31, Under the amendment, the tax credit will continue on for one more year but at a lower rate of 4% (5% for certain investments) as compared to the previous 7%. Tax credit for investment in industrial equipment and facilities at the rate of 1% will be granted in addition, but with a ceiling of KRW 10 million per each new job created (KRW 15 million for hiring employees between the ages of 15 to 29 years), effective for investments made on or after January 1, Repeal of the Hierarchy of the Transfer Pricing Methods Prior to the amendment, the traditional transfer pricing methods (Comparable Uncontrolled Price method, Resale Price method, and Cost Plus method) were used with priority over other methods such as the Profit Split method, Transactional Net Margin method, etc. Under the amend rules, a taxpayer is allowed to select the most reasonable method among all the methods without regard to previous priority, effective from fiscal years for which tax return is filed on or after December 27, Heavier Sanction Against Noncompliance with Request for Submission of Information on International Transactions The amendment provides for the maximum penalty for noncompliance with the request for submission of information on international transactions of KRW 70 million, a significant increase from the current KRW 30 million, effective starting with information requests made on or after December 27, Obligation to Report Offshore Financial Institution Account The amendment introduced a new provision that requires Korean residents and Korean companies, with the exception of foreign nationals who have domiciled or resided in Korea for 5 years or less during the last 10 years and financial institutions, etc., to report offshore accounts. If the aggregate value of the balance of offshore financial institution accounts held by a Korean resident or Korean company as of the end of any day during a calendar year exceeds KRW 1 billion, the Korean resident or Korean company is required to file an offshore financial institution account information with the tax office between June 1 and June 30 of the year following the subject calendar year. A maximum penalty of 9% (4.5% for accounts held during the 2010

3 calendar year) of the under reported account balance can be imposed. The new rules are effective for accounts held during the calendar years beginning on January 1, 2010 and thereafter. Accordingly, the first report containing 2010 account information should be filed between June 1, 2011 and June 30, Improvement of Withholding System for Foreign Workers According to the amendment, foreign workers entitled to the 16.5% special flat rate (including local surtax) on gross salary can request for application of the special flat rate to apply to their monthly withholding, effective starting from salaries paid on or after April 1, Previously, foreign workers were initially subject to withholding at normal progressive rates, and were allowed to obtain refund by applying the flat rate only at the year-end. 8. Mandatory Issuance of Electronic VAT Invoices Pursuant to the revision of the Value-Added Tax Law on January 1, 2010, corporate taxpayers become subject to mandatory issuance and reporting of electronic VAT invoices, effective starting with goods or services supplied from January 1, Extended Statute of Limitations for Penalties Related to Negligent VAT Invoicing The amendment extends the statute of limitations ( SOL ) on penalties imposed for noncompliance with the issuance of tax invoices to 10 years from the standard 5 year SOL, if the noncompliance is deemed a result of fraud or other unlawful acts. The extended SOL will be effective starting with goods or services supplied on or after January 1, Tax Reforms for Corporations Adopting K-IFRS For corporations adopting K-IFRS, which is mandatory for fiscal years starting on or after January 1, 2011 for listed companies and financial institutions (optional for other companies), the following new rules A, B, C, D, H, I, and J are generally applicable from fiscal years in which December 31, 2010 falls (from fiscal years beginning on or after January 1, 2011 for items E, F and G, from fiscal years in which December 27, 2010 falls for item K, from lease entered into on or after December 30, 2010 for item L below). A. Additional depreciation/amortization expense deduction allowed in excess of the amount recorded on books if within tax limit B. Change of depreciation method and useful life allowed with the adoption of K-IFRS C. Introduction of methods for calculating tax base for corporations adopting a currency other than Korean Won as its functional currency D. Revision of methods for translation of financial statements of overseas business places E. Revision of methods for translation of foreign currency assets or liabilities for banks (mandatory) and non-bank businesses (optional) F. Deduction of contingency reserve for insurance business allowed within tax limit G. Revision of method for calculating tax deduction limit for liability reserve for savings-type insurance premium H. Capitalization of interest expenses incurred on general loans allowed during construction period I. Income recognition on collection basis allowed for long-term installment sales for small & medium sized corporations J. Income recognition on delivery basis allowed for short-term construction contracts K. Deferral for gain from reversal of allowance for bad debts arising as result of change of accounting standards to (amended) K-GAAP or K-IFRS L. Revision of classification of financial lease vs. operating lease in accordance with the accounting principles

4 III. Changes Relating to Financial Industry 1. Requirements for Qualified Merger with SPAC Effective with mergers occurring on or after January 1, 2011, a Special Purpose Acquisition Company ( SPAC ) will no longer be required to satisfy one of the conditions for a qualified merger (for which various favorable tax treatments are available) that it must be engaged in business for a period of one year or more. 2. Gain or Loss from Translation of Foreign Currency Assets or Liabilities Effective starting with the fiscal year that commences on or after January 1, 2011, banks will be required to recognize gain or loss from translation of only the monetary foreign currency assets or liabilities for income tax purposes; this is based on the K-IFRS under which the scope of foreign currency translation will be reduced from all foreign currency assets or liabilities to monetary foreign currency assets or liabilities. While the valuation method for currency forward or currency swap has not changed (i.e., recognition of valuation gain or loss is optional but the election should be applied consistently), banks which previously opted to recognize the foreign exchange translation gain or loss, by reporting the change of the valuation method, has one time option not to recognize the translation gain or loss, and vice versa. Non-bank businesses can elect to recognize gain or loss from translation of the monetary foreign currency assets or liabilities as well as currency forward or currency swap to be used for hedging of monetary foreign currency assets or liabilities. 3. Securities Transaction Tax on Depositary Receipts Depositary Receipt ( DR ) is now included in the scope of securities transfer subject to securities transaction tax ( STT ) effective starting with transfers occurring on or after January 1, Nonetheless, transfer of DRs listed on a foreign securities exchange similar to the Korea Exchange will not be subject to the STT. 4. Extension of VAT Exemption on Collection Service Exemption of VAT on debt collection services provided by a credit information company under the Credit Information Business Act, which was set to expire on December 31, 2010 prior to the amendment, has been extended until December 31, STT on Government Managed Funds, etc. Funds managed by the government such as the National Pension Fund used to be exempt from STT as they are part of the government, but the MOSF revised its tax ruling so that the funds became subject to the STT in late December The amendment codifies the December 2009 ruling effective from January 1, The Korea Post will also be subject to the STT effective from January 1, Tax incentives for Finance and Insurance Institution Established in the Designated Financial Hub Area Effective starting from May 14, 2010, if a finance or insurance business is created or newly established as a business place (except re-location of an existing business place) in a financial hub area designated by the Act on Creation and Development of Financial Hub Area until the end of 2012 satisfying certain requirements (i.e., investment of two billion KRW or more and hiring 10 or more employees), certain tax benefits will be available including exemption of corporate income tax (100% for the first 3 years and 50% for 2 years thereafter) and exemption of acquisition tax and property tax subject to certain total exemption ceiling. Currently, Munhyeondong, Pusan City has been designated as a qualifying financial hub.

5 IV. Local Tax System Reform On March 31, 2010, the Local Tax Law ( Previous LTL ) was amended and reorganized into (i) the Local Tax Basic Law ( LTBL ), (ii) the Local Tax Law ( New LTL ) and (iii) the Local Tax Incentives Limitation Law ( LTILL ). There were additional changes to these laws on December 27, 2010 followed by changes in the related presidential decrees on December 30, Main features of the local tax system reform, most of which took effective on January 1, 2011, are as follows. 1. Integration of Local Taxes Governed by the Previous LTL for Simplified Tax System Changes Previous LTL New LTL Acquisition tax + Registration tax Integration of Acquisition tax (related to acquisition) dual taxation Property tax + City planning tax Property tax Registration tax (unrelated to Registration & license tax acquisition) + License tax Integration of Common facility tax + Regional Regional resource & facility similar taxes development tax tax Automobile tax + Motor fuel tax Automobile tax Abolishment Butchery tax Abolished Resident tax, Local income tax, Maintain Local consumption tax, Tobacco existing consumption tax, Leisure tax, taxes Local education tax No change 2. Combining ex-acquisition Tax and ex-registration Tax into Single Acquisition Tax Under the Previous LTL, acquisition of real property was subject to (i) acquisition tax payable within 30 days of acquisition and (ii) registration tax payable at the time of registering the title transfer. Under the New LTL, old acquisition tax and registration tax have been combined into a single acquisition tax payable within 60 days of the acquisition of real property. However, in case of property to be recorded or registered for title transfer (e.g., real estate, ships, automobiles, construction machinery, etc.), combined acquisition tax should be paid prior to the registration of the title transfer. 3. Revision of Amended Tax Return System Under the Previous LTL, amended tax returns were required to be filed within 60 days of the event triggering the obligation to file the amended tax return in order to avoid penalties. Under the New LTBL, however, amended tax returns may be filed at any time prior to the assessment of underpaid taxes (if ever) by the applicable tax authorities. However, penalty taxes should be paid at the time of filing the amended tax returns under the new LTBL. If you have any questions regarding this issue, please contact Woo Hyun BAIK whbaik@kimchang.com Im Jung CHOI ijchoi@kimchang.com Jae Young LYU jylyu@kimchang.com Pyung Jae LEE pjlee@kimchang.com Yoon Sang SIM yssim@kimchang.com or any of your regular contact at Kim & Chang. Seyang Building, 223 Naeja-dong, Jongno-gu, Seoul , Korea Tel: Fax: ~3 lawkim@kimchang.com This service is provided for general informational purposes only and should not be considered a legal opinion of the firm nor relied upon in lieu of specific advice. If this service should be directed to one or more of your colleagues instead of or in addition to you, please let us know by (return) at tax_new@kimchang.com. [UNSUBSCRIBE] If you would prefer not to receive this service, please click here.

by Manuel E. Tron, President of the International Fiscal Association

THE EUROMONEY CORPORATE TAX HANDBOOK 2012 advertisers index Contents Ernst & Young Sweden inside front cover FOREWORD by Manuel E. Tron, President of the International Fiscal Association KPMG Services