Tax Brief KPMG Update on Current Issues and Trends in Korean Tax

Transcription

1 October 2012, Issue 74 SAMJONG KPMG Tax Brief KPMG Update on Current Issues and Trends in Korean Tax Contents Tax Brief October I. Tax Trend 1 II. Major recent tax court cases and authoritative rulings 2 III. Tax Topic 4 1 Tax Brief 2012 October I. Tax Trend The NTS crackdown on luxurious living tax delinquents in an attempt to reign in alleged tax dodgers The National Tax Service ( NTS ) has been beefing up its clampdown on tax evasion since it launched a special task force in February intended to trace down the hidden wealth of high value tax delinquents. The NTS said it cracked down on high value tax delinquents, finding that massive number of high-income earners have engaged in dodging taxes through diverse tactics. Those tax delinquents were found to have dodged taxes through purchasing houses under the names of others, setting up false right to collateral security or not transferring real estate title registration, and even purchasing luxurious condominiums. A few of these tax delinquents have been living in luxury apartments under their spouses names, going on overseas golf trips, or driving expensive vehicles with their concealed assets in spite of their large amount of unpaid taxes.

2 2 Tax Brief 2012 October As a result of their aggressive attempt to secure unpaid taxes from these high value tax delinquents who live luxury lifestyles by concealing their assets under other names, the NTS has collected or secured about 860 billion won in unpaid taxes from high value tax delinquents during the first seven months of this year. The NTS said it has ordered them to pay billion won in cash for unpaid taxes and seized billion won worth of their properties. The tax agency has also secured tax claims estimated at around billion won from revoking of fraudulent act lawsuits. The NTS accused about 62 tax delinquents who intentionally or intelligently attempted to evade taxes, including families and relatives who aided and abetted making fraudulent arrangements with an intention to evade delinquent taxes. In order to effectively tackle intelligent tax evasion, the NTS said it would use sophisticated surveillance systems such as Hidden Asset Tracking Software to analyze concealed asset charges such as real estate transactions before the delinquent taxes arose, overseas money transfer, expenditures etc. and identify borrowed-named assets and cashable assets of tax delinquents with a high possibility of tax evasion by tracking their financial transactions. The NTS has also implemented an Offshore Delinquent Tax Tracking Taskforce to identify individuals living luxury lifestyles and constantly traveling abroad while hiding assets overseas. It is planning on actively utilizing the Convention on Mutual Administrative Assistance Tax Matters which was developed jointly by Korea and other OECD countries to investigate tax criminals by sharing information on suspects and their associated parties engaging in economic activities in both Korea and offshore. The NTS said it will analyze taxpayers lifestyles in-depth and when intentional asset concealment is discovered, will take measures to not only claw back the assets, but also applying criminal charge and enforcing the Punishment of Tax Evaders Act. On the other hand, the NTS has declared that it will intensify on-site tax collection through searching place of businesses for those tax delinquents who are financially well off and conceal assets while living luxuriously. II. Major recent tax court cases and authoritative rulings (1) Withholding Tax on Independent Personal Services (Gukje Sewon-402, ) If a Malaysia corporation s stay in Korea is for a period exceeding the aggregate 183 days in the respective calendar year concerned or if the

3 Tax Brief 2012 October 3 remuneration for its services in Korea exceeds USD 3,000 concerned notwithstanding that its stay in Korea is for a period less than 183 days during that calendar year, the Malaysia corporation s income in respect of independent personal services may be taxed in Korea in accordance with Article 14 of the Korea-Malaysia Tax Treaty and Article 98 (1) 2 of the Corporate Income Tax. (2) When allocating total parcel price to land and building, whether the price of Land for Contributed Acceptance is included in the Fair Market Value of the Land (Bubgyu Buga , ) When a business constructs and parcels out of a knowledge industry center on his land, the allocation of the land and building prices is based on the actual transaction price of the parcelling-out contract in accordance with Article 48-2 (4) of the Presidential Decree of the VAT Law. If the allocation based on the actual transaction price is not accepted as appropriate from the social norms considering the building s size and form as well as general transaction price between third parties, the building price is calculated in accordance with each clause of Article 48-2 (4) of the Presidential Decree of the VAT Law. When proportionally calculating the total parcel price for allocation to the price of land and building in accordance with each clause of Article 48-2 (4) of the Presidential Decree of the VAT Law, the price of land for contributed acceptance used as public use (conditions for the building permission) is not included in the land price for the allocation. (3) Whether the sale of the trusted real estate is exempt from VAT where an Asset-Backed Securitization sells the trusted real estate through a trust to collect the principal of the insolvent obligations as well as the interest incurred (Bubgyu Buga , ) In the case an Asset-Backed Securitization purchases non performing loans from a bank with the prior beneficiary right to be secured from the obligation becoming uncollectable, and entrusts the trust with the public sale of the trusted real estate, and then further collects the principal along with the interest with the sales proceeds, the VAT is exempt under the VAT Law Article 12-1 (10) and Presidential Decree of the VAT Law Article 33-1 (15). However, in the case the real estate is used for the purpose of lease before it is to be sold, it is taxable.

4 4 Tax Brief 2012 October III. Tax Topic The following is the detailed explanation of the taxation system. 1. The significance of the taxation system The taxation system is the filing and payment system of corporate income tax by treating the parent and its subsidiaries as a single taxation unit and summing up their income in accordance to its economic The taxation system is contrary to the separate tax system where a taxation unit is only legally independent corporations. The taxation system treats a conglomerate as a taxation unit, in which companies are financially and practically, although legally independent. The number of countries introducing the taxation system is gradually increasing as we can see more conglomerates being formed through ownership of shares by companies, and management being converged to the parent which supervises and controls its subsidiaries. During the December 26th 2008 Tax Amendment, the taxation system was introduced and enforced as of the 1st of January 2010 to warrant the tax neutrality of companies selecting their organization form and therefore enabling companies to flexibly respond to the business environment. Another purpose of introducing the system is to impose tax based on the economic substance and contribute in becoming an advanced business taxation system. The basic element of the taxation system is summing up profit and loss by offsetting the net profit and net loss of each in the conglomerate. In the separate taxation system, the amount of income depends on the split or division of the because each parent and subsidiary is regarded as an independent corporation and their income amounts are calculated accordingly. However, in the taxation system, the split or division does not impact the amount of income. Therefore, it can be said that the purpose of the taxation system is to support the restructuring of an organization by keeping tax neutrality regardless of split-up. 2. Subjects of the taxation system A domestic (hereafter parent ) and another domestic which is wholly owned by the parent corporation (hereafter fully controlled subsidiary ) can apply the taxation system by obtaining approval from the Director of the National Tax Service.

5 Tax Brief 2012 October 5 If there are two or more fully controlled subsidiaries, they should all apply the taxation system. (1) Scope of parent A parent is a domestic which has full control over the other companies in the group excluding the following companies. 1 Non-profit domestic 2 A under liquidation due to dissolution 3 A eligible for applicable for dividend declared deduction such as special purpose for asset securitization defined in Article of the Corporate Income Tax Act 4 A which is under complete control of other domestic (excluding non-profit domestic companies) 5 A eligible for special partnership taxation defined in Article of the Special Tax Treatment Control Law 6 A eligible for application of special corporation tax base calculation for marine transportation companies defined in Article of the Special Tax Treatment Control Law (2) Scope of fully controlled subsidiary A fully controlled subsidiary is a domestic which is completely controlled by parent excluding the following companies. 1 A under liquidation due to dissolution 2 A under the application of dividend declared deduction such as Special Purpose Company for asset securitization defined in Article of the Corporate Income Tax Act. 3 A eligible for special partnership taxation defined in Article of the Special Tax Treatment Control Law. 4 A eligible for application of special corporation tax base calculation for marine transportation companies defined in Article of the Special Tax Treatment Control Law. 3. Income and Tax Base of Each Consolidated fiscal year (1) Income of each fiscal year The income for each fiscal year is the combined income or loss of each calculated in the following order.

6 6 Tax Brief 2012 October Classification Calculation of fiscal year s taxable income per each Elimination of tax adjustment items for each 1 2 Major Details Each calculates their taxable income or loss for the fiscal year Include the non-taxable dividend income in taxable income which is in general an exclusion from taxable income Include the non-deductible contributions and nondeductible entertainment expenses as deductible expenses which is in general an exclusion from deductible expenses Adjustment of profit and loss for transactions between entities 1 2 Exclude the dividend income from taxable income which a received from another Exclude the entertainment expense from deductible expenses which a provided to another 3 4 Exclude the bad debt allowance from deductible expenses which a had made for the receivables from another Exclude the profit or loss from taxable income or deductible expenses which a incurred from fixed assets transferred to another Allocation of adjustment items per each The group is treated as if it is one domestic the dividend income excluded from taxable income, and contributions and entertainments which are excluded from deductibles expenses are allocated to each on a pro rata basis (2) Tax Base of Each Consolidated fiscal year The tax base of income for each fiscal year income is the amount by subtracting the loss carried forward, non taxable income, and dividend declared deduction from the fiscal income, one after another within the limit of income for each fiscal year. The amount of loss carried forward is the loss (including the loss incurred before the tax system is applied) for the newly fiscal year that the incurred up to 10 years prior to the consolidation date. The limitation for the loss carried forward is shown in the below table.

7 Tax Brief 2012 October 7 Classification The loss incurred before the tax system was applied In the case the parent succeeds the assets of the merging in accordance with a merger which is qualified under the Corporate Income Tax Law, the loss of the merging (i.e. the which is not a as of the merger registration date) as of the merger registration date In the case the parent succeeds the assets of the extinguished divided in accordance with a qualified merger division, as of the division registration date the extinguished divided s loss that reverts to the business succeeded by the parent Limit of Deduction The individually reverted amount of income of the The parent s individually reverted amount of income which is incurred from the succeeded business of the merging The parent s individually reverted amount of income which is incurred from the succeeded business of the extinguished divided 4. Other Issues (1) Consolidated fiscal year A fiscal year is 1 accounting period in calculating the income of the group, which cannot exceed 1 year, and should be the same throughout the consolidating companies who use the tax return system. However, for fully controlled subsidiary companies whose fiscal year cannot be coincided with the fiscal year for reasons which are regulated under the law, and which fall under the following conditions, the fiscal year of the fully controlled subsidiary shall be the fiscal year of such domestic when applying the tax return system. 1 The fiscal year is stipulated in the tax regulation and cannot be changed randomly 2The quarterly or bi-annual financial statements should be prepared as of the end of the fiscal year end according to the tax regulations and is to be audited as per the Act of External Audit of Stock Companies. (2) Place of tax payment for a The place of tax payment of a shall be the place of tax payment of the parent. (3) Application and Approval of the tax system The parent and the fully controlled subsidiary is to submit the tax return system application form (Form No. 76-2) on or before 3 months of the first fiscal year to the NTS through the parent s head of a district tax office in the place of tax payment. After the Director of the NTS receives the application form, the Director is to notify whether the application has been approved to the prior to the first fiscal year, and in the case a notice is not provided, it is assumed that the application form has been approved.

8 Contact us For more information about how KPMG can help your business with tax matters, Please contact one of the following professionals at Samjong KPMG. Head of Tax Lee, Moon Se T. +82(2) M. Corporate Tax Services & Indirect tax Kang, Dong Suk T. +82(2) M. International Tax Services M&A Tax Ihn, Byung Choon T. +82(2) M. International Tax Services Tax Audit and Dispute Resolution Service Choi, Jeong Wook T. +82(2) M. Accounting and tax outsourcing & International Executive Service Kim, Ui Sung T. +82(2) M. Transfer Pricing & Business Valuation Service Kang, Gil Won T. +82(2) M. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. While every effort has been made to ensure the correctness of the information provided and the opinions expressed in this publication, no warranty is given or implied as to the correctness of the information provided and no liability is accepted for any opinion stated herein. Appropriate tax advice or other professional advice should be sought or obtained for any specific issues that may arise from the information provided in this publication. c 2012 KPMG Samjong Accounting Corp., the Korea member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.