Samil Commentary. Korean Tax Tax Update

Transcription

1 Samil Commentary Korean Tax Tax Update October 16, 2018 Focused Review of Tax Compliance by Public-benefit Corporations Tax Tribunal to Improve Effectiveness in the Administration of Taxpayer Rights Relief Bill to Tighten Currency Transaction Reporting Rules Revised to Reshuffle of the MOEF and Subordinate Agencies Rulings Update Tax Authorities to Perform a Focused Review of the Tax Compliance by Public-benefit Corporations Affiliated with Corporate Groups When a property is donated to a public-benefit corporation as defined in Article 12 of the Presidential Decree of the Inheritance and Gift Tax Law (IGTL), it is in principle exempt from inheritance or gift tax. Such tax exemption is granted to promote the donation culture and corporate responsibility commitments. However, there is a growing concern that public-benefit corporations might be abused for the purposes of inheritance, business succession or corporate governance control among certain shareholders in large corporations. In order to prevent shareholders from avoiding inheritance or gift tax by using unlawful means, the IGTL provides certain restrictions preventing a public-benefit corporation from appointing its related parties more than one-fifth of the total number of directors and from holding more than 5% ownership in any affiliated company ( 5% ownership rule ). As an exception, the 5% ownership threshold is extended to 10% for certain publicbenefit corporations ( good-compliant corporations) which should meet eight requirements as prescribed in Article 16 (2) 2 of the IGTL, including a mandatory financial review by an external auditor, disclosure of business and financial results, the minimum percentage share of related-party directors, the ban on unfair internal transactions among related parties, etc. Recently, the National Tax Service (NTS) has taken over from the Ministry of Economy and Finance (MOEF) duties of verifying whether good-compliant publicbenefit corporations comply with the foregoing requirements.

2 . In particular, specialized teams within a regional tax office of the NTS dedicated to oversee publicbenefit corporations have undertaken the focused reviews of the tax compliance by all the publicbenefit corporations which belong to corporate groups. This attempts to prevent large corporations and their shareholders from using public-benefit corporations as vehicles to avoid inheritance or gift tax. As a result of the focused reviews, they have found a series of cases that have substantial reasons to suspect abuses of public-benefit corporations. In one of such examples, a corporation which had been established by a large corporation for public interest and obtained exemption from gift tax on high-value donated property violated the 5% ownership rule. It was revealed that the public-benefit corporation was abused by the corporate group owner to reinforce his/her governance in a group company. Another example was that the related parties of a contributor to a public-benefit corporation were hired as highly paid employees or executives in the public-benefit corporation. The NTS plans to keep its focus on public-benefit corporations which are suspected of using donated property in ways to circumvent the law or using them as a tax avoidance vehicle. On the other hand, it will strive to enhance public trust in public-benefit corporations by making the currently Web-based service of providing brief information on public-benefit corporations or organizations also available on mobile platforms to ensure easier and faster information access by the public. Tax Tribunal Announces Measures to Improve Effectiveness in the Administration of Taxpayer Rights Relief On September 26, 2018, the Tax Tribunal announced measures to enhance effectiveness in the administration of taxpayer rights relief. For the purpose of integrating functions for taxpayer rights relief system concerning national taxes and local taxes and enhancing the fairness of taxpayer rights relief system, the Tax Tribunal was separated as an independent body from the MOEF (the National Tax Tribunal) and the Ministry of the Interior and Safety (the Local Tax Review Committee) in February Since it became an independent body under the Office of Prime Minister, the Tax Tribunal has dealt with more than 90% of tax appeals, while the remainder handled by the NTS and the Board of Audit and Inspection. In the recent years, tax laws have become more complicated and also, facts and circumstances of appeal cases have become more technical. Moreover, there has been a significant rise in the number of tax appeal cases filed to approximately 7,000 cases a year. In such an environment, the time the Tax Tribunal spent to resolve a case has been prolonged (which averaged 157 days in 2017, exceeding the statutory period of 90 days). In order to improve efficiency and effectiveness in the administration of taxpayers right relief, the Tax Tribunal aims at: i) setting new standard procedures to accelerate dispute resolution proceedings; ii) introducing new measures to reinforce hearing and examination; and PricewaterhouseCoopers Page 2

3 promoting the taxpayer advocate service for small taxpayers. Most of detailed action plans to achieve those goals will be implemented in October 2018, except those requiring the amendment of laws or government budget before their implementation in the first half of New Standard Procedures to Be Established The Tribunal will have standard resolution procedures in place that require cases involving a small amount of tax assessment at issue or simple facts and circumstances, etc. to be resolved within 90 days from the date of application filed and other cases within 180 days, while providing taxpayers with sufficient opportunities and time to protest against the tax assessment. The cases which have been prolonged for more than one year currently account for 5% of the total number and it will be reduced to 2% over the next three years through reinforced real-time monitoring and management. Increasing Opportunities to Plead in Appeals In the course of the examination of a case, the applicant and tax authority will be given at least three times of opportunities to plead in support of their position with two weeks for each. Also, the current one-week advance notice before the judges meeting will be extended to two weeks to let both parties have more sufficient time to prepare for the meeting. Also, the pre-submission of position paper will be introduced so that the original text of the position paper prepared and pre-submitted by both parties prior to the judges meeting may be attached to the statement of a case examination which will be used as the examination materials in the judges meeting. For significant cases, a hearing date will be introduced to set a date (the first meeting day of judges) when judges would hear both parties opinions without undertaking the examination of a controversial issue, while a full-scale examination will be conducted in the second round of the meeting. In addition, the existing non-standing judge system will be improved, requiring that two out of four non-standing judges attending the judges meeting must be randomly appointed one week before the date of the meeting to ensure fairness and justice in hearing and examination. Promotion of Taxpayer Advocate Service for Small Taxpayers Considering that small taxpayers experience difficulties in preparing assertions and verifications to support their positions, the Tax Tribunal will expand ex-officio investigation in confirming underlying facts for small taxpayer s cases involving small amount of tax assessment. Also, the Tribunal will post on its website more information such as writing instructions and examples to help small taxpayers prepare position paper more easily and effectively. Currently, small taxpayers who do not avail themselves of expert assistance such as tax agent or advisor for the preparation of position paper represent 30% of the cases filed (50% in small-amount-involved PricewaterhouseCoopers Page 3

4 Proposed Bill to Tighten Currency Transaction Reporting Requirement The Financial Supervisory Commission (FSC) announced on September 14, 2108 a bill to amend the Presidential Decree of the Law on Reporting and Use of Certain Financial Transaction Information to invite public comments on the bill for 60 days from September 17 to November 16, If the bill is finalized through the review by the Regulatory Reform Committee in the Ministry of Government Legislation and the cabinet meeting, it will be effective from July 1, The bill requires the improvement of Korea s system to be aligned with the international standards and the levels of other major countries in preparation for the upcoming mutual evaluation (in January 2019) by the Financial Action Task Force on Money Laundering (FATF) of Korea s level of implementation of the FATF s recommendations. One of the most significant changes is proposed to tighten the currency transaction reporting (CTR) requirement. Currently, any currency transaction of KRW20 million or more must be filed by financial institutions to the Financial Intelligence Unit (FIU). The bill proposes to lower the reporting requirement threshold to KRW10 million, given the broader reporting scope of major foreign countries such as USA, Canada, and Australia which have the reporting threshold of 10,000 dollars. The CTR requirement applies to transactions between a customers and a financial institution whereby a customer directly deposits cash in an account with a financial institution or a customer receives cash from a financial institution (e.g. withdrawal). However, the wire transfer between accounts are excluded from the CTR requirement. The FIU provides certain CTR information to eight government agencies as specified in the Law (including the Prosecutor's Office and Police, the NTS, and the Customs Service) through the deliberation by the Information Analysis Council and other strict procedures, only to the extent that it is deemed necessary for an investigation or an examination, e.g. related to a suspicious money laundering. The CTR requirement was introduced in Korea in 2006 with the reporting threshold of KRW50 million. The threshold was lowered to KRW30 million in 2008 and has been retained at KRW20 million since Rules Revised to Reshuffle MOEF and Its Subordinate Agencies The MOEF proclaimed and enforced the revised enforcement rules on its organization including subordinate agencies on September 28, 2018 The latest revision aims at strengthening the function of cooperation and negotiation in the area of international taxation and tax treaties within the MOEF. Certain function formerly carried out by the Deputy Director General for International Tax & Customs Affairs been transferred to the domestic tax divisions. As a result, the organization of the International Tax and Customs Affairs has been reorganized as follows: i) the International Tax Division was realigned to be under the Deputy Director General for Individual and Corporate Income Tax; and ii) the International Tax Cooperation Team (formerly Tax Treaty Team) was put under the Deputy Director General PricewaterhouseCoopers Page 4

5 Tax Policy Coordination; and iii) The title of Deputy Director General of International Tax & Customs Affairs was renamed as Deputy Director General of Customs Affairs. Those duties which were performed by the head of the International Tax Division such as tax treaty and tax information exchange were transferred to the head of the Tax Policy Division, while the assignments tasked by the head of the International Tax Division were transferred from the head of the International Tax & Customs Affairs Division to the head of Individual and Corporate Income Tax Division. In other words, duties involving the international tax cooperation and inter-government tax information exchange agreements were transferred to the head of the Tax Policy Division under the supervision of the Deputy Director General for Tax Policy Coordination, while investigation, planning and negotiations associated with tax treaties with foreign countries are the responsibility of the head of the International Tax Division governed by the Deputy Director General for Individual and Corporate Income Tax. Rulings Update Whether the ex post price reduction according to a property sale and purchase contract would constitute a reason for requesting a refund of acquisition tax In this case, as a condition under an apartment sale and purchase contract (i.e. the decrease in the apartment market price as of the second anniversary of the acquirer s moving into the apartment as compared with the apartment sales price) was fulfilled after the acquirer completed the registration of the transfer of the title to the apartment per property register, a reduction in the apartment sale price was offered to the acquirer in accordance with the apartment sale and purchase contract. The issue of this case is whether the acquirer could claim the refund of the acquisition tax relating to the ex post price reduction, which was already paid at the acquisition of the apartment under the Local Tax Law. The Supreme Court decided that as long as there was a legitimate act of a property acquisition based on the original acquisition price (i.e. apartment sales price), unless special circumstances exist, the ex post price reduction could not affect the acquirer s obligation to pay the acquisition tax which was already established based on the tax base at the time of acquisition. Accordingly, the Court ruled against the taxpayer that the ex post price reduction would not constitute a reason for requesting the refund of the acquisition tax via an ordinary refund process or an extraordinary refund process allowed for any subsequent reasons as described under the Local Tax Law. (Daebeop 2015du57345, ) The Court s decision upholds the existing court decisions ruling that the acquisition tax on property is a transfer tax levied on a certain act to transfer a property (i.e., the act of acquisition) rather than a tax on the profits arising from the use or disposal of a property and, therefore, as long as the tax claim has legitimately arisen due to the existence of the act of acquisition, it would not be affected although a contract is retroactively invalid due to the contract cancellation by mutual agreement, the fulfilment of the conditions for the cancellation or the exercise of the right to cancel the PricewaterhouseCoopers Page 5

6 This Supreme Court judgment is the first case that the ex post price reduction would not constitute a reason to request the refund of acquisition tax since the tax refund application system was introduced alongside the enactment of the Basic Local Tax Law in For your reference, the Supreme Court has taken the position that from the income tax perspectives, the reduction in a sales price as agreed under a sales contract would serve as a reason to request the refund of corporate or individual income tax. (Deabeop 2011du1245, , Daebeop 2015du36003, etc.) Whether the unqualifying spin-off involving the transfer of land would be treated as the sale for which reduced acquisition tax on the land should be recaptured In this case, a company engaging in the distribution business under the Distribution Industry Development Act ( Act ) purchased land in a designated metropolitan area for the purpose of constructing a shopping mall and paid the acquisition tax thereon at the rate of 4% rather than a higher rate of 8% (generally applicable to the acquisition of property in a designated metropolitan area) as the Local Tax Law exceptionally allows certain taxpayers engaging in qualifying business such as the distribution business under the Act to apply the lower acquisition tax rate. Under the Local Tax Law, the reduced acquisition tax on a property due to the exceptional rule would be recaptured if related property is sold, among others. This case deals with the issue as to whether the transfer of land (for which a lower acquisition tax rate was applied due to the exceptional rule) via an unqualified horizontal spin-off would constitute sale of the land triggering the recapture of the reduced acquisition tax on the land. The Tax Tribunal concluded that the term sale for the purpose of recapturing reduced acquisition tax on a certain property would mean the specific transfer of the property and therefore, the spin-off involving the comprehensive transfer of all the relevant assets and liabilities relating to a transferred business would not be regarded as sale subject to the recapture of the reduced acquisition tax. (Joshim 2018jee0364, ) This Tax Tribunal s decision upholds the previous decisions (Joshim 2017jee0438, etc.) that a merger or spin-off would not constitute sale triggering the recapture of exempted or reduced acquisition tax. This decision may be meaningful in that it affirms that even an unqualifying horizontal spin-off for corporate income tax purpose would not fall into the sale subject to the recapture of reduced acquisition PricewaterhouseCoopers Page 6

7 International Tax Services Alex Joong-Hyun Lee Sang-Do Lee Sang-Woon Kim Michael Kim Dong-bok Lee Chong-Man Chung Hyun-Chang Shin Chang-Ho Jo Domestic Tax Services Yeon-Gwan Oh Young-Sin Lee Jin-Ho Kim Chul-Jin Hwang Bok-Suk Jung Hyungsuk Nam Dong-Jin Nam Seungdo Na Transfer Pricing & International Trade Heui-Tae Lee Henry An Won-Yeob Chon Junghwan Cho M&A Tax Min-Soo Jung Hye-Won Choe Global Mobility Services (GMS) Jina Park Nonprofit Corporation Service Center YoungSun Pyun Small and Midsize Enterprise and Startups Service Center Bong-Kyoon Kim Knowledge & Innovation Han-Chul Cho Samil Infomine Sang-Keun Song PwC Customs Service Young-Mo Lee m com Nam-Gyo Oh Il-Gyu Cha Kwang-Soo Kim Young-Ok Kim Robert Browell Youngsuk Noh Sun-Heung Jung Sung-Wook Cho Yoon-Sup Shin Yu-Chul Choi ycchoi@samil.com Inheritance & Gift Tax Services Hyun-Jong Lee Financial Tax Services Taejin Park Hoon Jung Soo-Yeon Park The information contained in this publication is for general guidance on matters of interest only and is not meant. The information contained in this publication is for general guidance on matters of interest only and is not meant to be comprehensive. The application and impact of laws can vary widely based on the particular facts involved. For more information, please contact your usual Samil PwC client service team or professionals listed above. C 2018 Samil PricewaterhouseCoopers. All rights PricewaterhouseCoopers Page 7