Tax Law Changes for 2014

Transcription

1 Legal Updates I Tax - Korea March 24, 2014 Tax Law Changes for 2014 On January 1, 2014, the Korean National Assembly passed, and the government promulgated, amendments to the tax laws, most of which took effect as of the same date (with the exception of those provisions for which different effective dates are specified). Thereafter, amendments to the corresponding Presidential and Ministerial decrees were promulgated on February 21 and March 14, 2014, respectively. We provide below a summary of some of the major amendments that may affect your business or be of interest to you. Please note that this is only a brief outline of select amendments. If you wish to discuss any of the below items in more detail or have concerns that other amendments not addressed herein may have a bearing on your business, please feel free to contact us. I. Corporate Tax and Incentive Revisions 1. Increase in alternative minimum tax ( AMT ) rate The AMT rate on the portion of the tax base exceeding KRW 100 billion has been increased from 16% to 17%. 2. Revisions to tax incentives for R&D activities (1) Expansion of service industries eligible for R&D tax incentives 11 knowledge-based service industries are currently eligible for R&D tax incentives, including R&D tax credits and R&D facility investment tax credits. These industries include information services, architectural engineering-related services, software development & supply, and medical & healthcare services. As a result of the tax revisions, an additional 5 service industries, namely value added telecommunication, publication, production & distribution of films, advertising, and creative art-related services, are now eligible for R&D tax incentives. (2) Expansion of R&D tax credit for R&D businesses The R&D tax credit has been expanded to include for-profit businesses independently engaging in scientific or engineering R&D activities. (3) Abolishment of tax deduction for corporate R&D reserves The system allowing an early tax deduction for corporate R&D reserves has been abolished. Prior to the abolishment, corporations established tax deductible reserves for future R&D investments and were required to actually use such reserves within 3 years of the date of establishing the reserves. (4) Reduction of the maximum R&D tax credit rate applicable to large enterprises R&D tax credits can be taken to the extent of 40% of the increase in R&D expenses over Legal Updates I Tax - Korea 1

2 average R&D expenses for the four previous years (50% in case of small & medium sized enterprises; SME ). Alternatively, a tax credit is allowed as a percentage of qualifying R&D expenses depending on corporate size. The maximum percentage applicable to large enterprises has been reduced from 6% to 4%, and the actual calculation formula is as follows: 3% + (proportion of general R&D and human resource development expenses to total revenue multiplied by 1/2). 3. Expansion of job creation tax credit (1) Expansion of businesses eligible for tax credit The following businesses are now eligible for the job creation tax credit (as well as the special SME tax exemption): (i) exhibition and event agency businesses, (ii) intangible asset rental businesses, (iii) R&D support businesses, and (iv) social service businesses. (2) Expansion of tax credit for regular part-time employees Each regular part-time employee* who satisfies certain statutory requirements shall be counted as a 0.75 employee for the purpose of calculating the increased number of employees for the job creation tax credit. (*) Requirements to qualify for regular part-time employee tax credit: (i) Number of regular employees (excluding part-time employees) should not decrease compared to the previous year; (ii) contract (employment) period should not be pre-determined; (iii) there should be no discrimination against regular employees in terms of hourly wages and benefits; and (iv) hourly wages should exceed 130% of the statutory minimum wage. 4. Differentiation of investment tax credit rates based on corporate size (1) Investment tax credits for energy saving facilities and environment protection facilities The tax credit rates for large enterprises and medium-sized leading enterprises* have been reduced to 3% and 5%, respectively, whereas SMEs continue to be entitled to a 10% rate. (2) Investment tax credits for drug quality control improvement facilities The tax credit rates for large enterprises and medium-sized leading enterprises* have been reduced to 3% and 5%, respectively, whereas SMEs continue to be entitled to a 7% rate (*) In order to qualify as a medium-sized leading enterprise under the tax law, a company must not belong to or be part of a business group restricted from making cross-investments and must have average revenue of less than KRW 300 billion for the most recent 3 years. 5. Introduction of tax incentives for investments in technology innovation SMEs and venture businesses (1) Tax credit for technology innovation M&A A domestic corporation that merges with a qualified technology innovation SME on or before December 31, 2015 shall be eligible for a tax credit equivalent to 10% of the value of the merged company s technology. Legal Updates I Tax - Korea 2

3 (2) Deferral of capital gains tax on shareholders Shareholders who own 10% or more of an unlisted venture business (including certain qualified technology innovation SMEs) will be entitled to a capital gains tax deferral until shares acquired in a qualifying strategic alliance are disposed of. To be considered a qualifying strategic alliance, the shareholder s venture business shares must either be exchanged for treasury stock of a corporation in a strategic alliance with a venture business or shares held by a shareholder who owns 10% or more of such corporation, or be contributed in-kind to the corporation in return for shares equal in amount to the value of the contribution. To qualify for capital gains deferral, the strategic alliance should be formed before December 31, Expansion of tax benefits for donations and promotion of culture and art (1) Increase in maximum deductible cultural entertainment expenses In order to promote corporate expenditures for culture and art, the prior 1% cap on cultural entertainment expense deductions has been eliminated. (2) Extension of carry-forward period for unused statutory donations The carry-forward period for statutory donations has been extended from 3 years to 5 years. Statutory donations include those made to the central or local government for people suffering from natural disasters and to education institutions. 7. Introduction of revision aimed at improving corporate taxpayer convenience (1) Extension of bad debt allowance deferral period for corporations adopting IFRS A corporation that adopts IFRS for the first time had been allowed to not include (in taxable income) the temporary reversal of the bad debt allowance resulting from the change in accounting standards and to later offset the amount against any increase in tax-deductible bad debt allowance amounts, with any remaining balance being added to taxable income for the fiscal year beginning on or after January 1, According to the amendment, this deferral period has been extended by another year to fiscal years beginning on or after January 1, (2) Clarification of tax depreciation for fixed assets when corporations adopt IFRS Where a corporation that has adopted IFRS acquires on January 1, 2014 or thereafter assets identical or similar to its existing assets (for use in the same business as existing assets, the maximum deductible depreciation expense for such assets shall be the greater of (i) the depreciation expense calculated under the tax law based on the useful life and (ii) the depreciation under IFRS plus 25% of the decrease in depreciation expense resulting from the adoption of IFRS. (3) Improvement of valuation rules for foreign currency-denominated monetary assets and liabilities held by corporations other than financial institutions Corporations, other than financial institutions, have been allowed to make an election as to whether or not to recognize (for tax purposes) a valuation gain/loss on foreign currencydenominated monetary assets and liabilities and the associated foreign exchange related derivative products held for hedging purposes but, prior to the revision, had to consistently Legal Updates I Tax - Korea 3

4 maintain such election going forward. The revision enables corporations to change their election every 5 years. II. International Tax Revisions 1. Tax incentives for Foreign Direct Investment ( FDI ) (1) Abolishment of FDI tax exemption on dividends received by a foreign investor Although FDI incentives remain for high-technology businesses and businesses located in designated Foreign Investment Zones, the withholding tax exemption on the distribution of dividends to foreign investors has been eliminated for FDI exemption applications filed on or after January 1, (2) Disallowance of FDI tax exemptions for certain non-treaty countries Foreign investments from certain non-treaty countries* will no longer be eligible for FDI tax exemptions, effective for FDI exemption applications filed on or after January 1, (*) Countries not eligible for FDI incentives include: Lebanon, Botswana, the Dominican Republic, Guatemala, Nauru, Niue, Trinidad and Tobago, Cyprus, and Seychelles. (3) Application of separate bookkeeping requirements for FDI incentives The amendment requires a foreign invested corporation seeking FDI tax exemptions to maintain separate books and records for each business and calculate the FDI exemption separately for each business. (4) Bolstering of post-investment reporting obligations for FDI incentives Detailed reports on capital increases, asset purchases, fund usage and the like are now required to be made at the time of the corporate tax return filing so the government can ensure that FDI incentives are properly utilized in accordance with the original exemption application. (5) Expansion of limitation on reuse of assets with a lapsed tax-exemption Previously, only high technology businesses and industrial support service businesses were subject to a tax exemption limitation where assets whose tax-exemption had lapsed were re-used in a new tax exempt business. Based on recent revisions, however, foreign investments made in Foreign Investment Zones will now be subject to the same limitation. For this purpose, the tax exemption limitation will be triggered when the ratio of re-used assets to total fixed assets exceeds the revised 30% threshold (previously 50%). 2. Clarification on treatment of dividends received by foreign corporate shareholders through a reduction of capital reserves Pursuant to revisions made to the Commercial Code, effective from April 15, 2012, it is now possible to distribute dividends via reduction of capital reserves (e.g., paid-in capital in excess of par value). An amendment was made to clarify that such dividends received by foreign shareholders would be excluded from Korean-source income Legal Updates I Tax - Korea 4

5 3. Reinforced obligation to submit information on overseas subsidiaries The form entitled Schedule of Loss Transactions* for Overseas Subsidiaries has been added to the information/documents to be submitted for overseas direct investment when filing corporate income tax returns (or global income tax returns for individual taxpayers). Non-submission penalties now apply in cases of 10% or greater share ownership (formerly 50%). The administrative fine was formerly imposed in cases in which a taxpayer did not respond to an information request from the tax authority. Now, however, the administrative fine (KRW 5 million +/- 50% depending on case) applies when a taxpayer fails to submit the information at the time tax returns are filed. (*) Overseas losses to be reported: annual losses resulting from disposal/valuation/donation of assets and recognition of liabilities amounting to KRW 5 billion or more per investment (KRW one billion or more for individual taxpayers) or 5-year cumulative loss of KRW 10 billion or more (KRW 2 billion or more for individual taxpayers). 4. Clarification of withholding tax exemption application procedures for Overseas Investment Vehicles ( OIV ) The amended law harmonizes the withholding tax exemption application procedures for Korean source income paid through an OIV with general application procedures already in place to claim reduced withholding tax rates. Specifically, in the case of a tax exemption application for income paid through an OIV, the amendment provides that the OIV shall obtain tax exemption applications from the beneficial owners of such income (with residency certificates attached) and forward such applications to the income payer, who will submit the application to the district tax office. 5. Revision of Controlled Foreign Corporation ( CFC ) rules Prior to the revisions, the CFC rules were applied when overseas subsidiaries located in a tax haven had undistributed retained earnings and such subsidiaries derived more than 50% of their revenue from passive sources. According to the revisions, however, the passive income portion of the undistributed retained earnings shall also be deemed as distributed and taxed currently in Korea if the passive ratio is more than 5% but less than 50%. For this purpose, passive income includes dividends, interest, and capital gains from the holding of stocks & bonds, royalties, income from rental of ships, aircraft, and equipment, and income from investments in trusts or funds. However, if an overseas subsidiary receives dividends from a subsidiary in which it has 10% or greater share ownership, such dividends shall be excluded when calculating the undistributed retained earnings. The new rules will take effect from January 1, Legal Updates I Tax - Korea 5

6 III. VAT and Education Tax Revisions 1. Crediting input VAT in a comprehensive business transfer Under the VAT Law, a comprehensive business transfer is not subject to VAT. As a practical matter, however, it is often difficult to determine whether a transaction is a comprehensive business transfer or not, which resulted in the risk that input VAT would not be refundable if the transaction was treated as an asset transfer subject to VAT and later determined to be a comprehensive business transfer not subject to VAT. Based on the amendment, the transferee will be allowed to credit the input VAT on a proxy basis when VAT is paid by the end of the month in which the transaction is undertaken. 2. Expanded scope of VAT exempt financial services VAT exempt financial services have been expanded to include the offering of credit (loans, payment guarantees, note purchases and discounting) by a comprehensive financial investment business as well as alternative trading system (ATS) services, as prescribed by the Financial Investment Services and Capital Market Act ( Capital Markets Act ). 3. Clarification of treatment of derivative linked securities for education tax purposes As per revisions made to the Capital Markets Act, the scope of derivative-linked securities eligible for profit and loss aggregation/offsetting in the calculation of the education tax base of a financial institution/insurance company has been expanded to include derivative linked bonds (principalguaranteed derivative-linked securities). IV. Local Tax Revisions 1. Local Tax Law ( LTL ) (1) Change of the local income tax calculation Local Income Tax*: 10% of the corporate or personal income tax amount (including penalty taxes) Local Income Tax*: calculated by applying 10% of the corporate or personal income tax rate to the corporate or personal income tax base (progressive tax rate) Change in the tax rate and granting of autonomy over tax credits/exemptions * Formerly Inhabitant Tax The local income tax system has been changed from being subordinate to the national tax (personal income and corporate income tax) to an independent local taxation system. Corporate taxpayers are no longer eligible for a local income tax exemption even if they are Legal Updates I Tax - Korea 6

7 entitled to an exemption of corporate income tax under other tax laws, such as the CITL and the STTCL. As such, tax exemptions will be substantially reduced. The current personal income tax credit/exemption regime shall remain unchanged to limit the additional tax burden on individuals. These Amendments shall take effect and be applicable to tax payments accruing after January 1, Tax on capital gains, retirement income and other income subject to special collection measures (e.g., subject to withholding as is the case for interest and salary income) shall be collected as the concerned income is earned) starting from Taxes on personal income and corporate income attributable to 2014 shall be collected based on the amended LTL from (2) Special collection of the corporate local income tax Newly enacted Where a withholding obligor withholds corporate income tax from a domestic corporation, local income tax equivalent to 10% of the amount withheld shall be collected. It is difficult to collect the local income tax immediately upon effectuation of this new provision due to incompletion of the corresponding modification of the electronic collection system. As such, an additional new provision is scheduled to be enacted soon to suspend application of this new provision for one year to prevent any unreasonable penalty assessments from being made on taxpayers. (3) Enactment of provision regarding joint tax liabilities on majority shareholders of corporations to prevent delinquency in acquisition taxes Where a corporation has more than one majority shareholder, tax liabilities shall be allocated in proportion to their respective ownership ratios. Where a corporation has more than one majority shareholder, tax liabilities shall be borne jointly and severally on a collective basis. This Amendment shall take effect as of January 1, 2014 and be applicable to taxpayers that become majority shareholders after its effectuation. (4) Reduction of acquisition tax on the acquisition of a house Single house owner with a house worth KRW 0.9 billion or less: 2% Single house owner with a house worth more than KRW 0.9 billion KRW 0.6 billion or less: 1% KRW 0.6 ~ 0.9 billion: 2% More than KRW 0.9 billion: 3% Differential tax rates on multiple house owners Legal Updates I Tax - Korea 7

8 or multiple house owner: 4% have been repealed. This Amendment shall take effect as of January 1, 2014 (and be retroactively applicable to houses acquired for consideration on or after August 28, 2013). (5) Addition of items subject to acquisition tax Land, building, vehicles, construction machinery, trees, aircraft, ships, mining rights, fishery rights, golf memberships, condominium memberships, fitness memberships, horse-riding memberships Yacht memberships have been added. This Amendment shall take effect as of January 1, 2014 and be applicable for memberships acquired after its effectuation. (6) Increase in registration and license tax Corporate registration: 0.4% of capital and 1.2% of capital if heavy taxation applies, with minimum tax payable of KRW 75,000 and KRW 225,000 for heavy taxation This Amendment shall take effect as of January 1, Corporate registration: 0.4% of capital and 1.2% of capital if heavy taxation applies, with minimum tax payable of KRW 112,500 and KRW 337,500 for heavy taxation (7) Change of taxpayer subject to property tax on entrusted properties Taxpayer subject to property tax on entrusted properties: Trustor Taxpayer subject to property tax on entrusted properties: Trustee Land subject to property tax on a comprehensive aggregate basis and land subject to property tax on a separate basis shall not be aggregated with trustee s land (trustee s own property), whereas land distinguishable by each trustor shall be aggregated on a trustor by trustor basis. This Amendment shall take effect as of January 1, 2014, but properties on which the property tax payment obligation arises prior to its effectuation shall be subject to the previous provision. Legal Updates I Tax - Korea 8

9 (8) Heavy imposition of local resources and facilities tax 200% of general tax rate on buildings that represent fire-hazards 200% of general tax rate on buildings that represent firehazards, such as amusement facilities and buildings with 4-10-stories; 300% of general tax rate on buildings with the potential risk of major fires, such as large supermarkets, multi-plex theaters and 11-story or higher buildings This Amendment shall take effect as of January 1, Local Tax Basic Law ( LTBL ) (1) Statute of limitations Fraud and other illegal acts: 10 years Non-reporting of tax base: 7 years Other: 5 years Fraud and other illegal acts: 10 years Non-reporting of tax base: 7 years Other: 5 years Acquisition through inheritance: 10 years This Amendment shall take effect as of January 1, The statute of limitations under this Amendment shall begin on the day on which the relevant local tax can be imposed for the first time after its effectuation. (2) Submission of tax clearance certificate Newly enacted When transfer of title to real property acquired through a trust is registered, a tax clearance certificate for the trustor (evidencing no delinquent tax payments outstanding) shall be submitted to the registration office. This new provision shall take effect as of January 1, 2014 and be applicable to title transfers registered for the first time after its effectuation. 3. Local Special Tax Treatment Control Law ( LSTTCL ) (1) Elimination of the local income tax exemption for foreign invested corporations As the local income tax has become an independent tax, the corporate local income tax exemption, which has been automatically granted to foreign invested corporations under Article of the STTCL, has been eliminated. As such, while a foreign invested corporation shall continue to be entitled to the corporate income tax exemption under the STTCL, it shall no longer enjoy the local income tax exemption. However, the individual local income tax exemption shall continue to be granted to individual foreign invested businesses. This Amendment shall take effect as of January 1, Legal Updates I Tax - Korea 9

10 (2) The period for granting acquisition tax exemptions for tourism complexes and the like shall be extended for another year, but the property tax exemption rate for deluxe hotels shall be reduced from 50% to 25%. Exemption of 50% of acquisition tax on real properties acquired by a tourism complex development business under the Tourism Promotion Act until December 31, 2013 Exemption of 50% of property tax on real properties acquired by a hotel management business under the Tourism Promotion Act that satisfy certain statutory requirements until December 31, 2013 Exemption of the heavy acquisition tax for real properties acquired on or before December 31, 2013 to engage in the hotel management business under the Tourism Promotion Act Extended until December 31, 2014 Extended until December 31, 2014, but the exemption rate for the special 1st and 2nd-grade tourism and accommodation businesses has been reduced to 25%. Extended until December 31, 2014 This Amendment shall take effect as of January 1, (3) Enactment of special local income tax provisions Newly enacted To prescribe individual local income tax credits/exemptions in line with the relevant amendments to the LTL These new provisions shall become effective as of January 1, 2014 and be applicable to tax payment obligations accrued for taxable periods that begin after their effectuation. 4. Aggregate Real Property Tax Law Aggregate real property tax assessments by local governments (Relevant tax law amendments have yet to be completed since the aggregate real property tax is levied in December.) The relevant Amendments to be completed shall take effect as of January 1, As of now, the local government should submit property tax information to the Ministry of Security and Public Administration (previously to the Ministry of Land, Transport and Maritime Affairs), and then the Ministry of Security and Public Administration will determine the aggregate real property tax base as well as the tax amount receivable based on the information submitted and notify the National Tax Service. It is anticipated that further amendments to the relevant statutory provisions will be made. Legal Updates I Tax - Korea 10

11 If you have any questions regarding this article, please contact below. Corporate Tax: Dong So KIM Jae Young LYU Daniel LEE Jeremy EVERETT Local Tax: Song Dae LIM Seung Hwan JIN For more information, please visit our website. General Tax Consulting Practice Group 39, Sajik-ro 8-gil, Jongno-gu, Seoul , Korea Tel: Fax: / This service is provided for general informational purposes only and should not be considered a legal opinion of the firm nor relied upon in lieu of specific advice. Recipients of this Newsletter, whether clients or otherwise, should not act or refrain from acting on the basis of any information included in this Newsletter without seeking appropriate legal or other professional advice. The copies (in paper or electronic form) of its contents may be delivered to a third party for personal use only, on terms that KIM & CHANG is acknowledged as the source. If this service should be directed to one or more of your colleagues instead of or in addition to you, please let us know by (return) . Legal Updates I Tax - Korea ckim & Chang