Samil Commentary. Korean Tax Update. The Second Early Release of Statistics on National Taxes. November 30, 2017

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1 Samil Commentary November 30, 2017 Second Early Release of Statistics on National Taxes Government s Plan to Create Innovative Startup Ecosystem Draft Plan for National Tax Administration Reform Rulings Update The Second Early Release of Statistics on National Taxes The National Tax Service (NTS) recently released a summary of key national tax statistics ahead of the publication of its annual statistics book this December. This is the second of its kind after the first release of national statistics last July. The early release of the national tax statistics data helps the public to utilize them in a timely manner instead of waiting till the publication of the National Statistical Yearbook. Key takeaways of the latest summary are provided below: National tax revenue per NTS employee (i.e. the total amount of national tax revenue divided by the total number of NTS employees) amounted to KRW12.3 billion, a 12.4% increase from KRW11 billion in Tax collection cost per tax revenue of KRW 100 dropped by 8.5% from KRW0.71 to KRW0.65. The number of corporations which filed tax exemptions for start-up (or venture) small and midsize companies (SME) totaled 6,441 in 2016, an 8.7% increase from 5,925 in The total amount of tax exemptions filed rose by 13.8% to KRW130.9 billion in 2016 from KRW115 billion in The NTS attributed the increase to a growing number of start-up (venture) SMEs. The number of foreign-invested corporations and foreign corporations (branch, liaison office) has shown a steady rise. Specifically, the number of foreigninvested corporations totalled 8,513 in 2016, a 1.6% increase from the previous year. Also, the number of Korean branches and liaison offices of foreign corporations increased by 2.2% to 1,880 and by 0.5% to 1,692, respectively, in the same year.

2 By country, Japan (2,197 or 25.8%) and the US (1,535 or 18.0%) combined took up 43.8% of the total number of foreign-invested corporations in 2016, followed by China (8.9%), Germany (5.4%) and Singapore (5.1%). The total number of foreigninvested corporations by industry breaks down to: wholesale (3,204), manufacturing (2,076), services (2,062), transport, warehousing and telecommunications (357) and finance and insurance (248). For Korean branches of foreign corporations in the same year, the US (420 or 22.4%) and Japanese corporations combined (395 or 21.0%) accounted for 43.4% of the total in 2016, followed by Hong Kong (9.1%), Singapore (8.8%) and China (6.9%). By industry, the total number breaks down to: services (855), wholesale (584), transport, warehousing and telecommunications (108), finance and insurance (91) and manufacturing (59). Electronic filing of corporate tax returns registered 98.8% in 2016 coming further close to 100% with a rise of 0.2% year-on-year. Especially, most of withholding tax returns (99.3%) were filed electronically. The relevant proportions of electronic filing for global income tax and value added tax were 95.2% and 91.6%, respectively. The Government Released a Plan to Create an Innovative Startup Ecosystem The government announced its plan to create an innovative startup ecosystem in an extended cabinet meeting held on November 2, The plan is the first measure released by the government as part of the Innovative Growth Strategy, which is a core policy task advocated by the new administration. The plan seeks to promote innovative start-ups as a key driver behind an innovative growth. The three main directions of the plan are as follows: i) Building an innovative startupfriendly ecosystem so as to foster entrepreneurship among talents; ii) Stimulating investment in innovative startups and increasing venture capital funds so that the outcome of successful investment can be shared by entrepreneurs and investors; and iii) Creating a virtuous cycle between start-up and investment, such as a cycle between startup, failure and retrial and that between investment, recovery and reinvestment. The plan includes new or existing tax benefits to stimulate investment in innovative startups: i) the sunset clause on start-up tax exemptions will be extended for additional five years through the year 2022, ii) quasi-tax exemptions (15 kinds) and the beneficiaries (knowledge service business counted in) will expand; iii) 100% exemption from property tax will be available for the first three years since business commencement; and iv) corporations promoting technology innovation will not be subject to a higher acquisition tax rate that is generally applicable to companies located in the Seoul metropolitan area. The government s plan also includes a package of four major tax breaks to stimulate venture capital funding and to share the outcome of a business growth. Income deduction for angel investment: Income deduction will be significantly expanded to encourage investment in startups by angel investors including retirees and senior entrepreneurs. Samil PricewaterhouseCoopers Page 2

3 Current Investment bracket KRW15 million or less Over KRW15 million to KRW50 million More than KRW50 million Income deduction rate 100% 50% 30% Proposed Investment bracket Income deduction rate KRW30 million or 100% less Over KRW30 million to KRW50 70% million More than KRW50 30% million Non-taxation of gains from the exercise of stock options: In order to attract more talents to innovative startups, the government will reintroduce non-taxation of gains from the exercise of stock options up to KRW 20 million in 10 years after its abolishment. Income deduction for contributions to employee stock ownership associations: In order to help promote shared growth of founders and employees, the existing threshold of income deductions for contributions to employee stock ownership associations will be lifted from KRW4 million to KRW15 million. Tax breaks for public offering-financed venture capital associations: The government will revise related laws to establish a legal framework to allow venture capital associations to raise funds through public offerings ( public offering-financed venture capital associations ). Under the revised laws, the existing tax breaks for venture capital associations will apply to public offering-financed venture capital associations in the same manner. In other words, capital gains from the sale of shares invested by a venture capital association will not be taxed and the 10% income deduction will apply to individual investor contributions. Draft Plan for National Tax Administration Reform The National Tax Administration Reform Committee held its first meeting on November 22, 2017 after the inauguration of the new Commissioner and appointed new committee members. The agenda of the meeting includes: The Way Forward for Tax Administration, Tax Administration Putting Taxpayers First and Big Data-engineered Scientific Tax Administration. Increased Focus on Protection of Taxpayer s Rights and a Fairer Tax Administration The NTS plans to establish the Taxpayers Advocate Committee which will be mandated to review the deliberation results of tax offices or NTS Regional Office committees at the request of taxpayers. The new Committee will be run as a quasi-independent organization whose members will be sourced entirely from the private sector except for NTS officials of the Taxpayer Advocate Office. The Committee will be launched to enhance fairness and transparency in the deliberation process and results. Also, it will be mandated to revise the Charter of Taxpayers Rights to better protect taxpayers rights and bring about a Samil PricewaterhouseCoopers Page 3

4 fairer tax administration. Plan for Scientific Tax Administration Engineered by Big Data The NTS also plans to set up the Big Data center in 2019 to provide customized and integrated service for taxpayers, and intercept sophisticated tax evasion attempts, thereby taking NTS service quality to another level. In that regard, the NTS will launch the Big Data Task Force to draft a roadmap and detailed action plans, and recruit required professionals on a step-by-step basis. Further, the NTS will reinforce its capacity for scientific fraud detection by actively take advantage of advanced analytics, thereby uncovering hidden fraud and suspicious cases and tackling new forms of evolving tax frauds. Rulings Update Whether a foreign corporation (fund) would be deemed to have a PE in Korea, thereby subject to corporate income tax There have been the disputes between Korean tax authorities and Lone Star Funds ( Lone Star ) which stem from the taxation of capital gains derived by Lone Star from the sales of its shares in Korea Exchange Bank (KEB). The recent Supreme Court case concerns on whether a Korean subsidiary of Lone Star would be regarded as a permanent establishment (PE) in Korea with respect to the revenue-generating business by Lone Star in Korea. In October 2017, the Supreme Court decided that Lone Star would not be deemed to have a PE in Korea for the following grounds: (i) important business decisions were made outside Korea through their owned foreign entities in the course of generating revenue for Lone Star in Korea, which include fund raising from investors, decision to invest in KEB shares and activities to sell KEB shares; (ii) although Steven Lee, etc. was substantially involved for the revenue generation of Lone Star in Korea by participating in the negotiations, etc. for the acquisition of KEB shares, such activities may be viewed as being performed in the capacity of the representative director or similar positions of the Korean subsidiary which is legally a separate entity from Lone Star as long as such activities were outsourced to the Korean subsidiary; and (iii) in light of the purposes of incorporation of the Korean subsidiary, it is considered that the activities performed by Steven Lee, etc. with respect to the acquisition and management of KEB are limited to preliminary activities for the important revenue generation activities of Lone Star or auxiliary activities for supporting the management and disposal of investment assets held by Lone Star. In addition, the Supreme Court ruled that in order to conclude that a foreign enterprise has a dependent agent PE in Korea, the agent of the foreign enterprise should habitually exercise an authority to conclude contracts in the name of the foreign enterprise, and such authority should not be of the preparatory or auxiliary character, but form the essential and important part of business activities. The Supreme Court further decided that as there were no evidences supporting that Steven Lee, etc. owned, and repeatedly exercised, the authority to conclude contracts in Korea on behalf of Lone Star, no PE Samil PricewaterhouseCoopers Page 4

5 would be deemed to exist in Korea. (Daebeop2014 du 3044 and Daebeop2014 du 3051(combined), ) Based on the above Supreme Court case, it may be inferred that from Korean PE perspectives, for investment funds that generate revenues through mergers and acquisitions of companies, the activities such as placement of funds, investment decisions and sales activities are primarily considered to form the important and essential part of business activities while some other supporting activities may be considered to be of the preparatory and auxiliary character depending on all surrounding facts and circumstances of the case concerned. How to determine a starting date of the statutory filing period for amended tax return for tax refund request based on subsequent reasons for amendment In 2015, the Supreme Court (Daebop 2014du5514, ) decided that although a taxpayer was liable to pay income tax on illegal income earned from its criminal act, provided that the taxpayer is deprived of the illegal income due to a subsequent event such as the forfeit of its assets or restitution for crimes due to a court decision, the taxpayer should be allowed to file an amended tax return for the refund of previously paid income tax on the illegal income based on the subsequent reasons for amendment as prescribed under the National Basic Tax Law (NBTL). This decision overturned the previous decisions that the illegal income earned from criminal act should be subject to individual income tax regardless of whether such illegal income is later confiscated by a court decision. The change in the interpretation on tax laws by the Supreme Court has triggered a dispute between a taxpayer and the tax authority over whether the date of the Supreme Court decision resulting in the change in the tax law interpretation would be viewed as a starting date of the statutory filing period for amended tax return for tax refund request based on subsequent reasons for amendment. Regarding this, the Supreme Court recently ruled that the change in the tax law interpretation (that is, change in the court decision) would not fall under the subsequent reasons for amendment. The Supreme Court further decided that in case where a taxpayer submits amended tax return for tax refund request based on a valid subsequent reason (instead of the change in tax law interpretation), the starting date of the statutory filing period for amended tax return for tax refund request based on a valid subsequent reason should be the date when the taxpayer becomes aware of such reason occurred, meaning the date of making full payment to a defendant in restitution for the crimes according to a court decision. (Daebop2017 du 38812, ) Under the former NBTL, the statutory filing period for amended tax return for tax refund request based on subsequent reasons starts from the date when a subsequent reason occurs and ends in two months (currently, three months) from the starting date. As such, if the two month period (currently, three month period) has already passed since the starting date of the statutory filing period (i.e., the date of payment in restitution for the crimes), the taxpayer would not be entitled to request for a tax refund by submitting amended tax return based on a subsequent reason if the amended tax return is filed after the two month period from the date of payment in restitution for the crimes but before the two month period from the date of the Supreme Court decision changing interpretation on tax laws. Samil PricewaterhouseCoopers Page 5

6 Whether early termination payment in breach of a mandatory usage period would be subject to VAT Where a customer agreed to use a telecommunications service for a mandatory usage period in return for a discounted monthly service fee offered by a telecommunication service provider under a service agreement, there was a dispute between the service provider and the tax authority as to whether early termination payment paid by the customer to the service provider due to the termination of the agreement before the lapse of the mandatory usage period should be subject to VAT under the VAT Law. The Seoul High Court recently ruled that the early termination payment would not be regarded as a consideration for telecommunications services provided by the service provider, and therefore, it would not be subject to VAT, upholding the decision in the first instance court. The grounds for the court decision include that (i) the customer had already paid a service fee to the service provider for the provision of telecommunications service on a monthly basis pursuant to the agreed discounted fee arrangement, (ii) the cause for the early termination payment would be the customer s act to terminate the service agreement in the breach of the agreement, and it would not be viewed as a part of the payment for the provision of telecommunication services, and (iii) the early termination payment would fall under the compensation for damage as a penalty for breach of the agreed mandatory usage period, separately from the service fee for the provision of services on a monthly basis. (Seoul High Court2017 nu 32915, ) In light of the latest decision at the Seoul High Court, it may be inferred that a penalty for the early termination of a services agreement should be recognized as a separate payment from the ordinary service fee for the use of the agreed service, and so, it should not be subject to VAT. However, a final decision by the Supreme Court is not yet rendered and it would be necessary to monitor such final decision until it is released. 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 Robert Browell 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 Hye-Won Choe Transfer Pricing & International Trade Heui-Tae Lee Henry An Won-Yeob Chon Junghwan Cho Global Mobility Services (GMS) Younsung Chung Corporate Administrative Services (CAS) Jina Park Inheritance & Gift Tax Services Hyun-Jong Lee Financial Tax Services In-Hee Yoon Taejin Park Hoon Jung Nonprofit Corporation Service Center YoungSun Pyun Small and Midsize Enterprise and Startups Service Center Bong-Kyoon Kim Knowledge & Innovation Han-Chul Cho Samil Infomine/ Samil Academy Sang-Keun Song Mirah Kang Samil Tax Corp. Nam-Bok Jo PwC Customs Service Sang-Tae Moon 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 7