Korean Tax Update BEPS Implementation

Transcription

1 Presentation for KGCCI Korean Tax Update BEPS Implementation May 2018

2 CONTENTS I. BEPS: Backgrounds What is BEPS? Backgrounds for OECD BEPS Project BEPS Action plans II. BEPS Implementation in Korea

3 I. BEPS: Backgrounds

4 What is BEPS?

5 What is BEPS? 5

6 What is BEPS? What is BEPS? Base Erosion Profit Shifting ( BEPS )refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Examples of BEPS Schemes Transfer Mispricing Artificial Avoidance of PE Excessive Interest Deductions Hybrid Mismatch Treaty Shopping Transfer of Intangibles/Risks/Capital 6

7 What is BEPS? 7

8 Backgrounds for OECD BEPS Project

9 Origin of OECD/G20 BEPS Project Growing concern in the wake of financial crisis about base erosion and profit shifting by MNEs Increased attention of civil society and the media to corporate tax affairs Perception that MNEs dodge taxes all around the world and in particular in developing countries Political pressure to take action 9

10 BEPS Timeline History of BEPS Project Initial BEPS Diagnostic Report by OECD Discussion drafts and Public Consultation Interim Reports on 7 Action Items Discussion drafts and Public Consultation Presentation of Final BEPS Reports to G20 Final BEPS Report Approved at G20 Feb 2013 Dec 2013 Sep 2014 Nov ~ Dec 2014 Oct 2015 Nov 2015 Recent Developments Korea Implementing BEPS Action Plans since 2015 September 2017 Additional Guidance on Attribution of Profits to Permanent Establishments March 2018 OECD Reports on Tax Challenges Arising from Digitalisation Interim Report ( Final Report Expected) 10

11 Basic objectives of BEPS Project Three main principles: Preventing double non-taxation due to gaps that exist between countries tax rules Aligning taxation with substance Improving transparency 11

12 Participating BEPS Countries 12

13 BEPS Action plans

14 BEPS Action Plans 2. Hybrid Mismatches 3. CFC Rules 4. Interest Deductions 1. Digital Economy 5. Transparency & Substance 13. TP Doc & CBCR 14. Dispute Resolution 6. Treaty Abuse 12. Disclosure s 15. Multilateral Instrument 7. PE Status 11. BEPS Data 10. High Risk Transactions 9. Risk & Capital 8. Intangible s 14

15 BEPS Action Plans Action 1. Digital Economy ADDRESSING THE TAX CHALLENGES OF THE DIGITAL ECONOMY tax challenges of the digital economy the main difficulties that the digital economy poses for the application of existing international tax rules NEUTRALISING THE EFFECTS OF HYBRID MISMATCH ARRANGEMENTS Action 2. Hybrids develops model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effects of hybrid instruments and entities (e.g. double non-taxation, double deduction, long-term deferral). Action 3. CFC Rules DESIGNING EFFECTIVE CONTROLLED FOREIGN COMPANY (CFC) RULES recommendations to strengthen the rules for the taxation of controlled foreign corporations (CFC). 15

16 BEPS Action Plans Action 4. Interest Deduction LIMITING BASE EROSION INVOLVING INTEREST DEDUCTIONSAND OTHER FINANCIAL PAYMENTS outlines a common approach based on best practices for preventing base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income. Action 5. Harmful Tax Practices COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY, TAKING INTO ACCOUNT TRANSPARENCY AND SUBSTANCE revamps the work on harmful tax practices with a focus on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for preferential regimes, such as IP regimes. 16

17 BEPS Action Plans Action 6. Treaty Abuse Action 7. Permanent Establishment Status Action Transfer Pricing PREVENTING THE GRANTING OF TREATY BENEFITS INAPPROPRIATE CIRCUMSTANCES develops model treaty provisions and recommendations regarding the design of domestic rules to prevent treaty abuse. PREVENTING THE ARTIFICIAL AVOIDANCE OF PERMANENT ESTABLISHMENT STATUS changes to the definition of permanent establishment to prevent its artificial circumvention, e.g. via the use of commissionaire structures and the likes. ALIGNING TRANSFER PRICING OUTCOMES WITH VALUE CREATION transfer pricing guidance to assure that transfer pricing outcomes are in line with value creation in relation to intangibles, including hard-tovalue ones, to risks and capital, and to other high-risk transactions. 17

18 BEPS Action Plans Action 11. BEPS Data Analysis Action 12. Disclosure of Aggressive Tax Planning Action 13. Transfer Pricing Documentation Action 14. Dispute Resolution Action 15. Multilateral Instrument 18

19 II. BEPS Implementation in Korea

20 BEPS Action 13 & TP Compliance

21 BEPS Action Plan 13 in Korea : Overview BEPS Action Plan Timing of Adoption Effective From Action 13 -Transfer Pricing Documentation and Country-by-Country Reporting Master File & Local File Tax law amended in 2015 CbC reporting Tax law amended in 2016 Comprehensive Report of International Transaction, comprising of MF,LF & CbCreporting effective from January 1, 2016 Required Documents Master File (MF) Local File + + (LF) Country-by-Country Report ( CbC Report ) 21

22 New Transfer Pricing Documentation Requirements in Korea Comprehensive Report on International Transactions ( CRIT ) Sharing of information between tax authorities Master File (by HQ) Critical to establish consistency centered around Master File Global organizational structure (legal & by geographical locations) Business structure (key factors of generating profit, key agreements, TP policies, etc.) Intangibles (development, ownership status) Intra-group financing Finance and tax status (consolidated financials, APA, CSA, Contract R&D, IGSA, IP transfer/license, etc.) CbC (Country-by-Country) Report (by HQ) Size of revenue, profits, taxes paid, retained earnings, headcount information, etc., by jurisdiction Functional and risk profile by entity Local File (by Local Affiliates) -Specific Statutory Format Required by Tax Authority Business, agreements entered into, functional analysis, transfer pricing status, arm s length nature of transfer prices applied, etc., for each entity 22

23 BEPS Action Plan 13 in Korea: Master File and Local File Subject taxpayers Annual sales over KRW 100b(approx. U$90m) and Annual cross-border intercompany transactions over KRW 50b (approx. U$45m) Effective years Fiscal year commenced on or after 1/1/2016 in general Form of documents Due date Penalty for failure to file or incorrect filing MF Textual approach is allowed so long as all information is included LF NTS provides certain format/template Within 12months of the fiscal year end Extension up to 1-yearmay be given per approval by tax authority KRW 30 m (approx.u$27k) per File 23

24 BEPS Action Plan 13 in Korea: CbCReport Company with consolidated revenue over KRW 1,000b (approx. U$0.9b) Subject taxpayers Korean subsidiary or branch of foreign co. only where parent company is (1) not required to file CbCreport in its homecountry or (2) a resident of a country having no informationexchange available with Korea Effective years Fiscal years commenced on or after 1/1/2016 in general Due date Penalty forfailure to file or incorrect filing 12months of the fiscal year end (Extension up to 1-year is possible per approval by tax authority) Taxpayer must notify the reporting entity for filing within 6 monthsof fiscal year end KRW 30 m (approx. U$27k) 24

25 Other BEPS Actions in Korea

26 Recent Tax Law Amendments in Korea Hybrid Financial Instruments (OECD BEPS Action 2) Interest paid by a Korean company to its offshore related party will not be tax deductible if such interest received by the foreign related party is not subject to tax in the counterparty jurisdiction (Application) Taxable years on or after January 1, 2018 New Limits on Interest Deductibility (OECD BEPS Action 4) Interest deductibility to be limited to the greater of (1) threshold provided under thin-cap rules (2) interest that exceeds 30% of adjusted taxable income (Application) Taxable years on or after January 1,

27 BEPS Legislation in Korea: Multilateral Convention Korea signs Multilateral Convention in June 2017 On June 7, 2017, Korea and 67 other jurisdictions signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS Article 7 Prevention of Treaty Abuse Treaty benefits denied if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted in that benefit (Korea applies the principal purpose test) 27

28 Status of BEPS Implementation in Korea Action Plan Status Effective From 1. Digital Economy VAT on digital services provided by businessto consumers: Nonresident vendors that supply electronic services to Korean consumers must register with the Korea tax authorities and charge VAT 1 July Hybrid Mismatch Hybrid Financial Instruments 2017 tax law amendments 1 January CFC Rules Korea already has CFC rules N/A 4. Interest Deductions New Limits on Interest Deductibility 2017 tax law amendments 1 January Countering harmful tax practices 6. Treaty abuse Exchange of information of APA claim 1 January 2019 Korea alreadyhas substance-over-form rule, often used to deny treaty benefits in treaty abuse situation. N/A 28

29 Status of BEPS Implementation in Korea Action Plan Status Effective From 7. PE status No indication of adopting the recommendation Not yet known 8~10. Transfer Pricing Not yet known Not yet known 12. Mandatory disclosure rules No indication of adopting the recommendation Not yet known 13. TP documentation Master File, Local File 1 January CbC reporting 2016 amended tax law included CbC reporting 1 January Dispute Resolution No indication of adopting the recommendation Not yet known 15. Multilateral Convention Signed June

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