Samil Commentary Korean Tax Update

Transcription

1 Samil Commentary September 28, 2016 Korea s Income Tax Treaty with Hong Kong Becomes Effective Korea-US Agreement on Automatic Exchange of Tax Information Enforced New System on Payment of Input VAT for Supply of Scrap Iron Government s Finalized Tax Reform Proposals for 2016 Rulings Update Korea s Income Tax Treaty with Hong Kong Becomes Effective from September 27, 2016 On September 7, Korea s National Assembly ratified the income tax treaty with Hong Kong without any change from the original agreement which was signed on July 8, 2014, according to the National Tax Service ( NTS ). The income tax treaty becomes effective from September 27 after the ratification is exchanged between the two countries. The taxes covered by the income tax treaty include income tax, corporation tax, local income tax, and special tax for rural development in the case of Korea and includes profits tax, salaries tax and property tax in the case of Hong Kong. The tax treaty provisions will generally become effective on April 1, 2017 in Hong Kong. In Korea, for the taxes withheld, the treaty provisions will become effective on April 1, 2017, while for other taxes, the provisions will become effective on January 1, The income tax treaty will serve the purpose of relieving resident individuals and corporations from double taxation as well as preventing offshore tax evasion. The NTS expects to obtain tax information relating to tax evasion such as information on offshore accounts in Hong Kong and other financial information which has not been accessible to the NTS before the income tax treaty. According to the NTS, it is anticipated that Hong Kong will provide the NTS with information on the accounts of Korean nationals from 2018 at the earliest. Also, the NTS may obtain access to certain tax information to confirm suspected tax evasion of specific taxpayers during tax audits since the tax treaty provides for the exchange of information which is foreseeably relevant for carrying out the provisions of this Agreement or to the administration or enforcement of the domestic laws of Korea concerning taxes.

2 The key points of the treaty are shown in the table below. Item Key points (rates below include local income tax) More than 12 months in case of building site or Threshold for permanent construction, assembly or installation project or establishment related supervisory activities Income from immovable Taxed on the country where such property is situated property Profits from international Taxed on the country where the enterprise engaging transportation in international transportation resides 10% withholding tax if the beneficial owner is a Dividends company holding directly at least 25% of the capital of the company paying dividends; otherwise, 15% tax Interest 10% withholding tax Royalties 10% withholding tax If the capital gains arise from the alienation of shares of a company deriving more than 50% of its asset value directly or indirectly from immovable property Capital gains situated in a country, taxed in the country Taxed in a country of source if the gains arise from the alienation of other property Income from dependent Taxed in the country where such services are personal services performed Korea-US Agreement on Automatic Exchange of Tax Information Comes into Force in September 2016 The Korea-U.S. agreement on Automatic Exchange of Tax Information has been ratified by the National Assembly on September 7, 2016 after the Model 1 Intergovernmental agreement for the enforcement of Foreign Account Tax Compliance Act ("FATCA") was signed on June 10, 2015 by the U.S. and Korea. Based on the agreement, the tax authorities of both countries will collect financial information on financial accounts held by individuals and entities and exchange this information. As a result, Korea-based financial institutions will need to conduct their FATCA due diligence procedures and report information on certain financial accounts (e.g., accounts of more than USD 50,000 if held by individuals) held by US individuals and entities to the NTS, and then, the NTS will report this information to the Internal Revenue Service. The type of information that should be reported to the NTS varies by the reporting period, but in general, it would include the name, address, tax identification number, account number, account balance as of the end of a relevant reporting period, and gross amount of income (such as interest and dividends). Samil PricewaterhouseCoopers Page 2

3 The timing of exchange has not yet been determined. Initially, the date for exchange of information was scheduled to be in 2015 which was postponed to September Further negotiations are taking place to determine the timing of exchange. In addition, starting from 2017, Korea will exchange with 53 countries including the UK, Cayman Islands, BVI, etc. certain information on financial accounts and income according to the Multilateral Competent Authority Agreements (MCAA). From 2018, Korea will exchange such information with 100 countries because an additional 47 countries including Switzerland, Singapore, etc. signed the MCAA. This may motivate the NTS to actively mobilize its infrastructure to exchange offshore financial and nonfinancial tax information for the purposes of pursuing taxpayers suspected of being engaged in offshore tax avoidance and conducting tax audits of such tax avoidance. To comply with the requirements for reporting offshore financial accounts (worth more than KRW1 billion), a total of 1,053 Korean residents reported a total of KRW56.1 trillion of account holdings in 2016, according to the NTS. The figures are a 27.5% increase in the number of those who filed the reports and a 52% increase in the amount filed from the previous year. One of the factors behind these substantial increases was the country s temporary tax amnesty for offshore income and assets which exempted taxpayers making voluntary disclosures of undeclared offshore income and assets for the period from October 1, 2015 through the end of March New System on Payment of Input VAT for Supply of Scrap Iron The NTS announced that traders of scrap iron (*) must set up their exclusive accounts at a designated financial institution for the sale and purchase of scrap iron and make payment via those accounts (effective October 1, 2016). Unless they use the authorized account, a penalty equal to 10% of the supply price of scrap iron will be imposed on the purchaser of scrap iron as well as the supplier, while the purchaser shall not be able to claim the deduction of input VAT incurred on the purchase of scrap iron. (*) Including ferrous waste and scrap as well as scrap ingot for remelting of ferrous metal Under the new system, the purchaser of scrap iron does not pay the purchase price to the supplier, but instead, it should wire transfer the price (including input VAT) to the supplier s authorized account set up in a designated financial institution. While the supply price excluding VAT are paid to the seller, the VAT on the supply of scrap metal is managed and transferred by the designated financial institution to the NTS. The new system will apply to the trade of scrap metal between tax-registered businesses and not apply to the trade with individuals. Samil PricewaterhouseCoopers Page 3

4 Korean Government Finalizes 2016 Tax Reform Proposals with a Few Changes The Korean government finalized its 2016 tax reform proposals with a few changes compared to the original proposals announced by the Ministry of Strategy and Finance ( MOSF ) on July 28, The finalized reform proposals have been submitted for review and approval by the National Assembly. The finalized proposals include the following significant changes. The government will establish a procedure for foreign organizers including the International Olympic Committee and related organizations as well as foreign partners to claim the refund of VAT charged on goods and services. These foreign partners will include official broadcasting companies of the Games and foreign broadcasting companies which have signed agreements for exclusive rights to broadcast the Games in their countries. The VAT refund will apply to goods and services in connection with food, accommodation, advertising, electricity and broadcasting. The VAT refund will be available until December 31, When a domestic company contributes land and buildings to acquire shares in a real estate investment trust (REIT) which is not a private equity fund, the tax deferral will be allowed for the gains from the in-kind contribution until the shares in the REIT are sold. The original proposal required such gains to be included in the domestic company s taxable income in equal installments over three years. The tax deferral will be available until December Rulings Update Whether an individual can be viewed as having an occupation requiring his stay for one year or more outside Korea in determining tax residence The Supreme Court upheld a decision by the Seoul High Court to determine the residence of a Korean individual who was found to have a dual tax residence in Korea and Saudi Arabia according to the domestic tax laws of Korea and Saudi Arabia. Based on the tie-breaker rule under the Korea-Saudi Arabia tax treaty, the High Court made a judgment that the individual working for a Saudi Arabian company should be treated as a Korean resident liable to tax under the Individual Income Tax Law ( IITL ) since he had closer personal and economic relations with Korea in light of the following factors: i) the length of the individual s stay in Korea during the years in question was longer than that in Saudi Arabia; ii) the individual and his spouse held their major property in Korea and transferred a great majority of income received from a Saudi Arabian company to Korea to finance the living cost of the individual and his family; iii) a principal trading partner of the Saudi Arabian company was a Korean company s subsidiary in Saudi Arabia; and iv) a substantial amount of important decisions relating to the business of the Saudi Arabian company were made in Korea. Samil PricewaterhouseCoopers Page 4

5 However, the taxpayer argued that he should not be treated as a Korean resident since Article 2, Paragraph 4 of the IITL (effective prior to the amendment on February 3, 2015) stipulated that if an individual has an occupation requiring their stay for one year or more outside Korea, he or she would be treated as having no address in Korea (thereby being treated as a non-resident). The Supreme Court decided that the original judgement by the High Court was appropriate in light of the above mentioned factors and the individual in question would not be viewed as having an occupation requiring his stay for one year or more outside Korea. (2016du37854, ) Whether a price reduction due to use of mileage would constitute VAT base The Supreme Court Justices' Council overturned the High Court decision by deciding that if mileage obtained by a customer from the first supply transaction with a taxpayer is used for the customer s purchase of the goods in the second transaction with the taxpayer, such mileage should not be viewed as constituting consideration for the goods supplied in the second transaction. The Supreme Court Justices' Council were of the view that since mileage or points are just a quantification or representation in numerical form of the prior agreement with a customer for supply terms (ie discount in purchase price at the supply of goods in the second transaction), rather than having a monetary value as consideration for the second supply and therefore, such mileage should not be included in the taxpayer s VAT base. The Supreme Court Justices' Council viewed that since the VAT Law provides that 'sales discount' excluded from VAT means the amount directly deducted from the normal supply price of goods according to supply terms such as quality, quantity, delivery, payment terms for supply price, etc., the mileage at issue should be viewed as 'sales discount' and as long as the mileage is considered as sales discount, Article 48 of the presidential decree would not apply to the present case under review. (Daebeop 2015du58959, ) Whether a price reduction due to use of discount coupons would constitute VAT base Where a sales agent or intermediary provides purchasers with discount coupons which reduce prices of certain goods charged by a seller and deducts the amount discounted by means of these coupons from the fees receivable from the seller, the amount reduced directly by means of the discount coupons shall be considered as a sales discount thereby being excluded from the seller s VAT base. (Advance Beopryeonghaeseokgookjo ) Samil PricewaterhouseCoopers Page 5

6 Whether consideration paid by a domestic company to an Indian company for the transfer of intellectual property rights would be subject to tax in Korea When an Indian company without having a permanent establishment in Korea transfers to a domestic company intellectual property rights, technical know-how and any other rights in relation to the manufacturing technology of chemical products, the consideration paid by the domestic company to the Indian company for the transfer of such rights shall not be taxed in Korea according to Article 14, Paragraph 4 of the Korea-India income tax treaty, providing that capital gains are taxed based on the country of residence. The term transfer in this case shall have the meaning under the law of India where the property in question is situated. (Seomyeon Gookjesewon-4018, ) Whether the loss from the disposal of common stocks by a Japanese company can be offset with the gain from the disposal of preferred stocks Where a Japanese company without having a permanent establishment in Korea acquired common stocks and preferred stocks issued by the same domestic company (X) at different times and sold them to another domestic company (Y) at the same time, a question was raised on whether the Japanese company can offset the loss on the sale of common stocks with the gain on the sale of preferred stock in calculating its Korean sourced capital gains for the transfer of the common stocks and preferred stocks. The NTS interpreted that in such case, the loss from the sale of common stocks cannot be offset against the gains from the sale of common stocks. (Advance Beopryeonghaeseokgookjo ) Samil PricewaterhouseCoopers Page 6

7 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 Enterprice 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 2016 Samil PricewaterhouseCoopers. All rights reserved. Samil PricewaterhouseCoopers Page 7