Samil Commentary Korean Tax Update

Transcription

1 Samil Commentary February 28, 2017 Korea Records Second Consecutive Budget Surplus in 2016 Proposed Amendments to Enforcement Rules of Tax Laws Amended Presidential Decrees of Tax Laws Enacted with a Few Changes NTS Audit Policy Directive for 2017 Rulings Update Korea Records Second Consecutive Budget Surplus in 2016 The Ministry of Strategy and Finance published details of the finalized 2016 state budget accomplishment on February 10, During 2016, the national tax revenue recorded KRW242.6 trillion, exceeding the revised 2016 budget of KRW232.7 trillion by KRW9.9 trillion or 4.2%. The figure was an 11.3% increase from KW217.9 trillion in national tax revenue in 2015, recording the second consecutive budget surplus in According to the Ministry, the latest increase in national tax revenue was due to the improvement in economic indicators aided by improved business results of corporations and the recovery in consumer expenditure and real estate market. The government s initiatives to expand tax revenue source with a focus on reducing tax exemptions or reductions available for large corporations and wealthy individual taxpayers were also cited as factors behind the tax revenue growth. Provided below is a brief summary of tax revenue by category. At KRW61.8 trillion, valued added tax (VAT) was the single largest source of national tax revenues in The VAT collections in 2016 marked a 14.2% increase (or KRW7.7 trillion) from KRW54.1 trillion due to growing consumption in the private sector. In the wake of slow exports and facility investment, VAT refunds offered to exporters and investors declined, contributing to an increase in VAT revenue.

2 Corporate income tax collections increased by KRW7.1 trillion to KRW52.1 trillion in 2016 due to stronger business results and streamlined tax exemptions or reductions for large corporations. It is noted that the effective corporate tax rate applied to companies belonging to large enterprise groups subject to the restriction on cross shareholding under the Anti-Monopoly and Fair Trade Act continued to rise from 18.0% in 2013, 18.7% in 2014 to 19.2% in It is projected to be 19.6% in Individual income tax collections increased by KRW7.8 trillion to KRW68.5 trillion in Specifically, there were increases in the following types of individual income taxes: Wage and salary income tax collections increased by KRW3.9 trillion to KRW31.0 trillion mainly due to nominal wage hikes and rises in the number of employed persons. Capital gains tax collections totaled KRW 13.7 trillion, up KRW1.8 trillion, boosted by the robust real estate market. Collections of individual income tax on worldwide income totaled KRW14.3 trillion, up KRW1.6 trillion due to increased income of sole proprietorship owners. Interest income tax collections declined by KRW400 billion to KRW2.1 trillion due to interest rate cuts. Transportation, energy and environment tax collections increased by KRW1.2 trillion to KRW15.3 trillion due to rising consumption of oil products in response to declining oil prices. Customs duties collections totalled KRW8.0 trillion, down KRW500 billion reflecting a slowdown in imports. Proposed Amendments to Enforcement Rules of Tax Laws The government has announced bills to amend the underlying enforcement rules to set forth details as required in the recently amended tax laws and presidential decrees of corresponding tax laws. Selected changes contained in the government s bills include: Under the recently amended Special Tax Treatment Control Law (STTCL), a tax credit is introduced to encourage investment in facilities designed to promote the commercialization of new growth-engine or core technology. In order to claim a tax credit for such investment, those facilities must be used directly by a company carrying on R&D of an eligible technology for the purposes of commercializing the eligible technology, as stipulated in the Enforcement Rule of the STTCL. A few examples of such facilities include facilities to manufacture censors to be built in self-driving cars, facilities to manufacture innovative new drugs, etc. Samil PricewaterhouseCoopers Page 2

3 The amended STTCL introduces a new tax credit to promote the production or development of cultural contents including video and digital contents. The tax credit is granted in respect of qualified production costs which include original content acquisition costs, payment for actors/actresses, set production costs, editing costs, etc. as set out in the Detailed Rules of the STTCL. However, the tax credit will be not eligible for offshore production costs, entertainment expenses, public relations and advertising expenses and payments for actors or actresses in excess of 30% of the total production costs. A new minimum investment requirement is proposed at USD2 million under the bill in order for a foreign investor to qualify for tax incentives for foreign direct investment in new growth-engine and core technologies. The interest rate used to compute penalties on national tax refunds, deemed rent for rental deposits subject to corporate income tax, VAT, individual income tax, etc., is proposed to be 1.6%, down from the current 1.8%, reflecting a downturn in market interest rates. Currently, where a company transfers a business division consisting of shares through a spin off or in-kind contribution, such transfer is not considered the separation of an independent business division that can be separately operated, and therefore, it would not qualify for tax deferral offered in a qualified spin off or in-kind contribution. However, according to the proposed bill, even if a transaction is not considered the separation of an independent business division, the tax deferral for a qualified spin-off or in-kind contribution will be granted in special cases. One special case is as follows: the transfer of shares to a spun-off entity with the aim of forming a Korean holding company controlling foreign subsidiaries or a foreign-controlled holding company in Korea in order to raise funds through public offerings of foreign subsidiaries in the Korean capital markets (such as Korea Stock Exchange, KOSDAQ). In connection with this, the government s bill will allow the tax deferral for the transfer of shares if the sales to and purchases from the spun-off entity account for at least 30% (down from the current 50%) of the total transactions of the company or they are engaged in the same business line. The write-off expense of receivables arising from payment guarantees are generally not allowed as deductible expenses. As an exception, the government s bill provides that the write-off expense of receivables arising from payment guarantees by a construction company to its related parties will be deductible if the company carries on a social infrastructure project under the Act on Private Investment in Social Infrastructure or is a project financing vehicle incorporated for a construction project or the asset securitization of unsold apartments. According to the government s bill, the following interest rates are deemed as arm s length rates for cash transactions with overseas related parties: In case of loans to overseas related parties, the interest rate of overdrafts as Samil PricewaterhouseCoopers Page 3

4 noted in Article 43(2) of the Enforcement Rule of the CITL (4.6%); and In case of borrowings from overseas related parties, the 12-month LIBOR plus spread (1.5%) by transaction currency as at the end of the year immediately preceding the fiscal year which includes the date of borrowings. Amended Presidential Decrees of Tax Laws Enacted with a Few Changes Subsequent to the amendment of tax laws which passed the National Assembly last December, the government s bills to amend the Presidential Decrees of the corresponding tax laws were announced at the end of December 2016 (please refer to Samil PwC Tax News Flash December 28, 2016). The bills to amend the Presidential Decrees were finalized with a few changes at the end of January These changes were proclaimed and became effective on February 7, Two selected changes to the initially proposed amendments to the Presidential Decrees of the tax laws are as follows. Expanded Scope of New Growth Engine and Core Technologies Eligible for R&D Tax Credit Under the amended tax laws, R&D tax credits are available for investment in new growth engine businesses and core technologies in 11 emerging industries such as future-generation motor vehicles, intelligent information, next-generation software & security, etc. The finalized bill adds three more categories of technology to the list of 11 areas eligible for R&D tax credits. They include: i) small screen AMOLED parts, materials and equipment manufacturing technology; ii) next-generation memory semiconductor materials and equipment, equipment parts design and manufacturing technology; and iii) bio-cosmetics raw materials development and manufacturing technology. Gradual Implementation of New Threshold for Valuation of Unlisted Shares Under the recently amended Inheritance and Gift Tax Law (IGTL), the value of unlisted shares shall be the greater of (i) the value calculated based on the existing method as prescribed in Article 54 of the IGTL (i.e. based on the weighted average of adjusted net income value per share and the adjusted net asset value per share in the proportion of 3 to 2) or (ii) 80% of the adjusted net asset value (i.e. 80% threshold). The government s bill will apply this change to transactions taking place on or after April 1, 2017, a few months later than its proclamation date of February 7, In addition, it will be implemented gradually, ensuring that the 80% threshold shall apply after March 31, 2018, while a 70% threshold shall apply until March 31, Samil PricewaterhouseCoopers Page 4

5 NTS Audit Policy Directive for 2017 The National Tax Service (NTS) has recently announced its tax administration policy for Highlighted below is a brief summary of tax audit-related directives contained in the 2017 NTS policy. Reduction in Tax Audits and Post Verifications for Good Compliant Taxpayers The NTS will maintain the number of target audits at less than 17,000, and for small and midsize taxpayers having records of good compliance, it will conduct simplified audits combined with consultations. In addition, the NTS will continue to reduce the number of post verification for items shown on tax returns filed. The number of tax returns subject to such verification will continue to remain at the similar level of 2016 (i.e. 22,000 tax returns). Furthermore, small taxpayers and good compliant taxpayers will in principle not be selected for such post verification. Expansion of Scope Subject To Five-Year Periodic Tax Audit The number of corporate taxpayers subject to a five-year periodic tax audit will be expanded. The NTS has amended its administrative regulations on the corporate tax laws to raise the predictability of audit target selection. Under the amended regulations, corporate taxpayers having KRW100 billion or more in annual turnover (down from the current threshold of KRW200 billion) will be selected for a full scope tax audit at least every five years. The number of corporations having KRW100 billion or more in annual turnover totalled 3,287 during Previously, the full scope tax audits were conducted by the NTS for corporations having less than KRW200 billion in annual turnover at every four to eight years. The NTS expects its amended regulations to help corporate taxpayers enhance the predictability of the audit target selection. As an exception, the following companies will be selected for a five-year periodic tax audit even if their annual turnover amounts to less than KRW100 billion: companies belonging to large enterprise groups subject to the restrictions on cross shareholdings under the Monopoly Regulation and Fair Trade Act, corporations having total assets of KRW200 billion or more and professional services companies having total assets of KRW50 billion or more. Reinforcement of Forensic Audit to Defend Sophisticated Tax Avoidance The NTS will increasingly apply forensic audit schemes to examine potential tax avoidance by sophisticated means. A new team has been formed to reinforce forensic audit capabilities of the NTS by mobilizing experts as well as high technology and equipment. The team has been engaged in analyzing tax avoidance patterns and predicting suspicious activities through big data analysis. The NTS will expand the number of target audits subject to electronic tax audits. Samil PricewaterhouseCoopers Page 5

6 Rulings Update Application of substance over form principle to multiple transactions for gift tax purposes There is a case involving the cross-gifting of shares by shareholders where instead of directly gifting the shares to their immediate dependents, the shareholders donated their shares to the dependents of other shareholders by making several complex step transactions in order to reduce gift tax liabilities by avoiding the progressive taxation. According to Article 2, Paragraph 4 of the IGTL (effective prior to an amendment on January 1, 2013), where it is considered that certain transactions through a third party or via two or more activities or steps are executed to receive unjust benefit pursuant to the Law, this Law shall apply as if the relevant parties had made a single direct transaction, according to the economic substance of such transactions (i.e. application of substance over form principle for gift tax purposes). In order to determine whether gift tax should be imposed on the transaction consisting of multiple steps under Article 2, Paragraph 4 of the Law, the Supreme Court decided that for the application of the substance over from principle, legal structures or procedures of a transaction taken by a taxpayer should be used as a mere vehicle to achieve the purpose of tax avoidance, and the transfer of property through the transaction consisting of multiple steps should be equivalent of a direct gifting in substance under all surrounding facts and circumstances such as the reason for which the transaction is structured in such a complex manner, the background of transaction, any justifiable reasons other than the intent to reduce tax burden, an interval between each of transactions, and potential losses or risks incurred from the structure of transaction. (Daebeop 2015du46963, ) How to calculate the value of unlisted shares in a domestic company taking over the assets of a wholly-owned subsidiary being liquidated According to Article 54 of the Presidential Decree of the IGTL (effective prior to an amendment on December 30, 2003), if the market prices are not available for the valuation of unlisted shares, it should be calculated based on the weighted average of the adjusted net earning value per share. However, if the adjusted net earning value per share is less than the adjusted net asset value per share, this Article requires the share value calculation to be based on the adjusted net asset value per share. On the other hand, Article 56, Paragraph 1 of the Presidential Decree of the IGTL provides that the weighted average of the estimated earnings per share may be used as the calculation basis in special cases where it is deemed unreasonable to use the weighted average of net earnings for justifiable reasons as specified by the Ministry Samil PricewaterhouseCoopers Page 6

7 of Economy and Finance (currently, the Ministry of Strategy and Finance). One of these special cases includes that a merger, a spin-off, a capital increase or capital reduction takes place during the period from the first day of three fiscal years beginning prior to the valuation date until the valuation date or a main line of business changes during this period, according to Article 17-3, Paragraph 1 (3) of the Enforcement Rules of the old IGTL. In case where an unlisted parent company succeeds the entire assets and liabilities of its wholly-owned subsidiary as part of the subsidiary s liquidation, a recent decision of the Supreme Court provides that the transaction in question should result in similar consequences with the merger of the subsidiary in substance and accordingly should be included in the prescribed justifiable reasons (for not using the weighted average of the adjusted net earnings) unless there is other valid reason for the exclusion. (Daebeop 2014du14228, ) How to allocate common input VAT to VAT-able business and VAT-exempt business According to Article 17 of the Value Added Tax Law (effective prior to an amendment on June 7, 2013; VATL ) and Article 61, Paragraph 1 of the Presidential Decree of the VATL, a company engaged in both a VAT-able business and VAT-exempt business must allocate the input VAT that is incurred for both VAT-able business and VATexempt business but is not attributable to each of business (so-called, common input VAT) generally based on the ratio of the VAT base of each business over the total VAT base. According to a recent decision by the Supreme Court, the common input VAT must be allocated based on the VAT base of each business only if a business for which the common input VAT is incurred is related to a business from which the VAT base (i.e. the sales amount of goods or services) is generated. If those businesses are not related to each other but separately operated, the decision provides that the common input VAT cannot be allocated based on the VAT base. In addition, in order to determine whether those businesses are related to each other, consideration must be given to a number of facts and circumstances including the circumstances underlying the purpose of the supply of goods to which common input VAT is attributable, type of business operation, the relation of premises of business places, nature of the line of business, etc. (Daebeop 2016du51788, ) How to consider shares acquired via qualified spin-off in determining whether a spun-off business is discontinued Under the Korean tax laws, a qualified spin off results in tax benefits such as an exemption from acquisition tax on the property acquired through the spin off. Samil PricewaterhouseCoopers Page 7

8 However, these tax benefits shall be recaptured if certain cases occur as specified in the Corporate Income Tax Law (CITL), and one of these cases includes that a spun-off entity discontinues the operation of the business transferred as part of the spin off within a period as specified in the Presidential Decree which shall not exceed three years from the date of spin-off. As provided in the Presidential Decree of the CITL, it shall be deemed to discontinue the operation of the transferred business if the spunoff entity fails to maintain or utilize more than 50% of the values of the fixed assets of the transferred business. A dispute arose over the applicability of the regulations as to whether a spun-off business is discontinued in respect of a spin-off involving the business consisting of shares held fundamentally for control purposes (other than investment purposes in general cases). In this case, the Supreme Court ruled that if a majority of the shares in question, other than tangible assets, of the transferred business are disposed of, the spun-off business shall be treated as being discontinued, and that the value of the shares in question must be included in the value of fixed assets of the business transferred through a spin off for purposes of determining the status of business discontinuity. Also, the Court ruled that whether the spun-off business is discontinued must be determined based on the entire business transferred rather than on an individual division or premise of the transferred business. (Daebeop 2016du51535, ) Whether a contribution in kind by Korean branch would be eligible for preferential tax treatment in a qualified contribution in kind A Bermuda-based corporation having a branch in Korea was considering making a contribution in kind by its branch to a subsidiary in order to expand its business in Korea, and raised an inquiry whether it would be eligible for a deduction of capital gains incurred from the contribution in kind under Article 47-2 of the CITL, given the following facts: The foreign corporation makes an initial capital contribution to form a subsidiary in Korea. The existing Korean branch of the foreign corporation makes a contribution in kind to the new subsidiary, and in return, the subsidiary distributes newly issued shares to the Korea branch. The subsidiary continues to carry out the operation of the transferred business from the branch, and the branch continues to hold the shares of the subsidiary distributed. In response to the inquiry, the NTS advised that where a foreign corporation having a business place in Korea makes a contribution in kind which meets all of the requirements under Article 47-2, Paragraph 1 of the CITL, an amount equivalent to capital gains from the transfer of property as part of the contribution in kind, out of the value of shares in the subsidiary distributed, can be included in deductible Samil PricewaterhouseCoopers Page 8

9 expenses in calculating the foreign corporation s Korean source income for the fiscal year when the in-kind contribution is made. (Seomyon-2016-Kukjesewon-4771, ) According to Article 47-2, Paragraph 1 of the CITL, a domestic corporation making a contribution in kind is allowed to include in deductible expenses the amount equivalent to the capital gains from the transfer of assets as part of the contribution in kind out of the value of shares in the contributed company which the domestic corporation has acquired in return for its contribution in kind, provided all of the requirements are met under this Article. Samil PricewaterhouseCoopers Page 9

10 For more information, please contact: 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 Il-Kyu Cha Nam-Gyo Oh Young-Ok Kim Domestic Tax Services Jung-Il Joo Yeon-Gwan Oh Young-Sin Lee Chul-Jin Hwang Jin-Ho Kim Min-Soo Jung Chan-Woo Chung Bok-Suk Jung Hyungsuk Nam Dong-Jin Nam Seungdo Na Sung-Wook Cho Sun-Heung Jung Youngsuk Noh Transfer Pricing & International Trade Heui-Tae Lee Henry An Won-Yeob Chon Junghwan Cho Human Resources Service Younsung Chung Inheritance & Gift Tax Hyun-Jong Lee m Financial Tax Services In-Hee Yoon Taejin Park Nonprofit Corporation Service Center YoungSun Pyun Small and Midsize Enterprise and Startups Service Center Bong-Kyoon Kim Knowledge & Innovation Sang-Keun Song Han-Chul Cho Stay current and connected. Our monthly newsletters and ad hoc alerts keep you updated on Korean tax laws as well as significant business regulatory developments. Please send an if you like to subscribe or want to add someone to the mailing list to: 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 2017 Samil PricewaterhouseCoopers. All rights reserved. Samil PricewaterhouseCoopers Page 10