Singapore SMEs. Introduction to Korean taxation. July 2013

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1 Singapore SMEs Introduction to Korean taxation July 2013

2 Topics to cover Korean tax system Overview Corporate Income Tax (CIT) Individual Income Tax (IIT) Value Added Tax (VAT) Customs Duty (CD) Entity type Corporation Branch Singapore-Korea tax treaty Tax holidays on Foreign Direct Investment (FDI) Foreign exchange (FX) control Page 2

3 Korean tax system Page 3

4 Korean tax system Overview Korean tax system consists of national and local taxes as follows: Individual Income Tax Corporate Income Tax Inheritance Tax Comprehensive Real Estate Tax Value Added Tax Individual Consumption Tax Internal Tax Liquor Tax Transportation, Energy, Environmental Tax Stamp Duty Tax National Tax Securities Transaction Tax Education Tax Special Tax for Rural Development Customs Duty Customs Duty Acquisition Tax Tax Registration Tax and License Tax Leisure Tax Tobacco Consumption Tax Local Consumption Tax Local Tax Resident Tax Local Income Tax Property Tax Automobile Tax Regional Resources Facilities Tax Local Education Tax Page 4

5 Korean tax system Overview-continued Source of Tax Law The National Assembly, the legislative body, enacts tax laws. Tax laws authorize the Ministry of Strategy and Finance (MOSF) and the National Tax Service (NTS) to issue the related rulings and guidelines to enforce the tax laws. Tax audits The regional and district tax offices of the NTS conducts tax audits by reviewing the tax return, accounting books and supporting documents. During the course of a tax audit, the taxpayer may be requested to explain questionable items and present additional supporting documents to NTS. If NTS is not satisfied, additional taxes may be assessed. NTS have the right to conduct an audit at any time, generally within five years after a return is filed. Tax appeals A preliminary appeal can be filed to the regional or district tax office within 30 days from receiving a pre-assessment notice from the tax authorities. Once a formal assessment is issued, taxpayers are required to pay the tax assessed within the time limit and then to make an appeal to the National Tax Tribunal (NTT) or the Board of Audit and Inspection (BAI) no later than 90 days from the receipt of the assessment notice. The taxpayer can file a law suit to the judicial court if the taxpayer is not satisfied with the prior tax appeal process. Page 5

6 Korean tax system Corporate Income Tax (CIT)-Resident corporations Territoriality Resident corporation, defined as companies having its head/main office or the actual business management place in Korea, are subject to CIT on their worldwide income. Subsidiaries in Korea of foreign companies are classified as resident corporations for CIT purposes. Branches of foreign companies need to pay tax only on their Korean-source income. CIT rates 11% (including the local income tax, LIT) on the taxable income up to KRW 200m 22% (including the LIT) on the taxable income between KRW 200m and 20b 24.2% (including the LIT) on the taxable income exceeding KRW 20b Relief for losses Tax losses can be carried forward for 10 years. Small and medium-sided enterprises may carry back losses one year. Administration A resident corporation must file a tax return within three months after the end of its fiscal year, along with the payment. However, if tax liability exceeds KRW 10m, the tax due may be paid in two installments. Page 6

7 Korean tax system Corporate Income Tax (CIT)-Non-resident corporations Territoriality Foreign corporations are subject to CIT only on income derived from sources in Korea If a foreign corporation has a business place or permanent establishment (PE) in Korea, it must file a CIT return and pay tax on Korean source income attributable to the PE at the rates applicable to resident corporations. Korean source income that is not attributable a Korean PE of a foreign corporation is basically subject to tax on a withholding basis according to the tax laws and an applicable tax treaty. PE (domestic rule) A PE includes a site where employees of a foreign corporation provides services for more than 6 months during a period of 12 consecutive months, or if services are performed for not more than 6 months during a period of 12 consecutive months, but similar services are continuously and repeatedly performed for two years or more. Sites used only for purchasing assets, storing assets that are not available for resale/processing in Korea, or sites only for advertising, public relations or market surveys are not deemed to be a PE. Source rule Even if certain income is classified as Korean-source income under the Korean tax law, Korean tax is not imposed thereon if it is categorized as foreign-source income under a tax treaty. Page 7

8 Korean tax system Individual Income Tax (IIT) Residents and Non-residents A resident individual who is defined as a person domiciled in Korea or resident for on or more years, is subject to IIT on worldwide income. A non-resident is liable to IIT only on income derived from sources within Korea. IIT rates IIT rates are in four brackets from 6.6% (including local income tax) on the tax base of up to KRW 12m to 41.8% (including local income tax) on the excess of KRW 300m. Tax benefits for foreigners Certain qualified foreign technicians may be exempt from 50% IIT on the employment income for 2 years. Foreign employees may elect to apply 18.7% flat IIT rate (rather than the progressive IIT rates) for their earned income, derived by providing services in Korea until the end of 2014, without any exemption, deduction, or credit thereto. Administration To elect the flat IIT system, the taxpayer must file an application for the use thereof at the time of year-end settlement to the withholding agent or alternatively along with the Composite IIT return to the competent tax office. Page 8

9 Korean tax system Value Added Tax (VAT) Taxpayer Any person that independently undertakes the supply of goods or services in the course of business, whether or not for profit, is liable to VAT. Any person that begins a business must register the particulars of each place of business with the tax authorities within 20 days after the date of business commencement. A trader that receives supply of services from a nonresident or foreign corporation must collect the VAT at the time of the payment if the services received are used in non-vat leviable operations. (Reverse charge) VAT rates The standard VAT rate is 10%, which applies to all supplies of goods or services unless a specific measure provides for the zero rate or an exemption. Recovery of input VAT Generally, a VAT trader may recover input VAT, which is charged on goods and services supplied to him for business purposes by another VAT trader in the due course of business as long as it is supported by a valid VAT invoice. Administration VAT returns must be filed on a quarterly basis along with its payment. Page 9

10 Korean tax system Customs Duties (CD) CD on imported goods Imported goods must be appraised and CD levied in accordance with the tariff schedule. CD is imposed on the adjusted value of imported goods, which includes cost, insurance, and freight at the time of declaration. The dutiable value of imported goods is generally the transaction price plus or minus various costs and other items. When the transaction price is unavailable, it could be determined based on the valuation methods under the CD Act. CD rates Most of manufactured products are subject to an 8 percent tariff rate, subject to change depending on specific items Recovery of CD When imported goods are offered for use in manufacturing goods to be exported, the CD may be refunded, up to the limit of the amount of customs duties previously paid. Documentation and requirements The documents generally required for an import declaration are a copy of the invoice, a packing list, the certificate of origin and other documents deemed necessary by the Customs House. Page 10

11 Entity type Page 11

12 Entity type Available business entity types Available business entities for foreign investors are liaison office, branch and corporation. Liaison office is not taxable entity and the rest are taxable entities. Liaison office (LO) LOs are not subject to Korean taxation but required to withhold/pay payroll taxes. An LO must also report its establishment to the designated foreign exchange bank (DFEB). Branch The establishment of a branch by a foreign company requires registration with the court, and the district tax office as well as report to the DFEB There are no minimum investment requirements to establish a branch of a foreign company. Corporation The establishment of a subsidiary by a foreign company requires registration with the court, and the district tax office as well as report/registration to the DFEB Establishment of a Korean subsidiary may be governed by the Foreign Investment Promotion Law (FIPL) as well as the Korean Commercial Code (KCC), if the foreign direct investment (FDI) amount is KRW 100m or more. Page 12

13 Entity type-continued Liaison office Branch Subsidiary Activity No commercial activity Commercial activity Commercial activity Taxable income N/A Income attributable to Branch World Wide Income Governing law KCC* KCC* KCC* and FIPA** Capitalization N/A N/A FDI of KRW 100m (under FIPA) Report DFEB DFEB DFEB Registration N/A court and district tax office court and district tax office * Korean Commercial Code ** Foreign Investment Promotion Law Page 13

14 Singapore-Korea tax treaty Page 14

15 Singapore-Korea tax treaty Taxes covered Article 2 Corporate Income Tax (CIT), Individual Income Tax (IIT), Local Income Tax (LIT) Dividend Article 10 Interest Article 11 Royalties Article 12 Capital Gains Article 13 10% of the dividends paid to controlling shareholder with 25% or more shares 15% of the dividends in all other cases 10% if a Singapore resident recipient is the beneficial owner of the interest 15 % of royalties (including payment for the use of industrial/commercial/scientific equipment) Gains of Singapore resident derived from alienation of properties in Korea may be subject to Korean Capital Gains Tax. Properties that may be subject to Korean taxation includes: - Immovable properties; - Business properties; and - Korea Real Property Interests in the form of non-listed shares Page 15

16 Tax holidays on Foreign Direct Investment (FDI) Page 16

17 Tax holidays on Foreign Direct Investment (FDI) High tech vs. Free Economic Zone (FEZ) High tech incentives FEZ incentives Requirement Eligible high tech category (High tech list) Significant economic/technical influence New technology (three years) High technology process taking place in Korea New facilities in FEZ FDI threshold depending on the business type USD 10m for manufacturing/tourism business USD 5m for logistics/medical business Tax benefits 100% (five years) + 50% (two years): CIT, WHT on dividend, certain local taxes *CIT exemption/reduction up to 70% of the FDI 100% (five years): Customs duty, VAT, Special Consumption Tax 100% (three years) + 50% (two years): CIT, WHT on dividend, certain local taxes *CIT exemption/reduction up to 70% of the FDI 100% (five years): Customs duty Comments A bit broader tax incentives than FEZ ones Relatively difficult approval process (requiring high technology to be involved) Relatively simple approval process (for FDI exceeding the threshold) A bit narrower tax incentives than High tech ones Page 17

18 Foreign Exchange (FX) control Page 18

19 Foreign Exchange (FX) control Inbound FX remittance Inbound remittance of foreign exchange to foreign operations in Korea by overseas related parties for business purposes is freely allowed, with certain reporting requirements. Outbound FX remittance Outbound remittance by foreign operations in Korea for current transactions such as purchase of goods/services can be made freely. Notably, outbound remittance by foreign operations in Korea for capital transactions such as investment overseas may require an approval from the FX authorities. Transactions for speculation in KRW currency are not allowed. Page 19

20 Page 20 Thank You

21 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services w e deliver help build trust and confidence in the capital markets and in economies the w orld over. We develop outstanding leaders w ho team to deliver on our promises to all of our stakeholders. In so doing, w e play a critical role in building a better w orking world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of w hich is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young Solutions LLP. All Rights Reserved. Ernst & Young Solutions LLP (UEN T08LL0784H) is a limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A). ED None APAC No In line w ith EY s commitment to minimize its impact on the environment, this document has been printed on paper w ith a high recycled content. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

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