On July 28, 2016, the Ministry of Strategy and Finance (“MOSF”) announced the annual proposal to amend the tax law for 2017 (the “Proposal”). The Proposal was submitted to the National Assembly on 2 September 2016.
The Proposal will strengthen taxation on multi-national enterprises in 2017 including increase in flat tax rate for foreign expatriates, limitation to deduction of carried-over net operation loss, introduction of country-by-country reporting, etc.
The key features of the Proposal having an impact on the multi-national enterprises are summarized below.
1. Capital Gains Tax on Equity Linked Warrant (ELW) (Article 159-2 of the Individual Income Tax Law)
Under the existing law, capital gains from the disposal of KOSPI 200 futures and options are subject to capital gains tax at 22% (including local surtax). Under the proposed amendment, capital gains from the disposal of KOSPI 200 ELWs (equity linked warrants) will also be subject to capital gains tax. This amendment will be applicable to taxable transfers occurring on or after April 1, 2017.
2. Increase in Flat Tax Rate applicable to Foreign Expatriates (Article 18-2 of the Special Tax Treatment Control Law)
The flat tax rate benefits allowed for foreign expatriates have been extended to apply until 31 December 2019 but the applicable rate will now be raised to 20.9% (including local surtax) from previous 18.7%. With respect to the foreign expatriates who started to work in Korea prior to January 1, 2014, the flat tax rate benefit was allowed without limitation. However, under the proposed amendment, it will be allowed until December 31, 2018.
3. Introduction of Limitation to Deduction of Carried-over Net Operating Loss for Korean Branches of Foreign Corporations (Article 91 of the Corporate Income Tax Law)
Under the existing law, Korean branches of foreign corporations are entitled to deduct the carried-over net operating loss (“NOL”) for 10 years with limitation as opposed to domestic corporations having a limitation of 80% of taxable income by each taxable year. Under the proposed amendment, in order to be consistent with the limitation of NOL deduction, Korean branches of foreign corporation will also be subject to a deduction limit of 80% of annual taxable income. This amendment will be applicable to the taxable year starting from January 1, 2017.
4. Introduction of Country-by-Country Reporting Standards (Article 11 of the Law for the Coordination of International Tax Affairs )
The Korean transfer pricing regime, governed by the Law for Coordination of International Tax Affairs (the “LCITA”) was amended to implement the new transfer pricing documentation requirements in line with Action 13 of the OECD BEPS project. On April 6, 2016, the Korean Ministry of Strategy and Finance (the “MOSF”) announced the final regulation for the local and master files as introduced by the OECD BEPS final report on Action 13, effective January 1, 2016. The local and master files are collectively referred to as the Combined Report of International Transaction Information (the “CRITI”).
Under the proposed amendment, the Country-by-Country Reporting (“CbC Reporting”) will be required for any domestic parents of multinational enterprises having total consolidated group revenue of more than KRW 1,000 billion during the Fiscal Year immediately preceding the Reporting Fiscal Year. The first CbC reporting will be required to be submitted within 12 months from the end of fiscal year on or after January 1, 2017.
5. Taxation of the Income for Personal Services performed outside of Korea (Article 93 of Corporate Income Tax Law)
The personal service income is currently taxable only when arising from the services performed within Korea. Under the proposed amendment, however, the income from technical services performed overseas will be taxable in case where it is expressly allowed under the relevant tax treaties (e.g., the tax treaty concluded between Korea and India Tax Treaty). This amendment will be applicable to the technical services rendered on or after January 1, 2017.
6. Statute of Limitation in case of withdrawal of the Mutual Agreement Procedures (Article 23 of the LCITA)
Currently, in case a taxpayer requests for the Mutual Agreement Procedures (“MAP”) for taxable years within the statute of limitation and later withdraws the request, no tax assessment is permitted on the period for which the statute of limitation for assessment has expired. Under the proposed amendment, however, the tax assessment may still be made within a year from the date of withdrawal.
7. Extension for Submission Due Date of the Local File and Master File (Article 11 of the LCITA)
The Local File and Master File under the BEPS Report Action13 are required to be submitted within 3 months from the fiscal year-end. Under the proposed amendment, for maintaining consistency with the due date of submission for CbC Reporting and to lower the cost of complying with this rule, Local File and Master File may be submitted within 12 months from the fiscal year end. This amendment will be applicable to the Local File and Master File submitted on or after January 1, 2017.
8. Improvement of MAP System
Currently, only non-resident or foreign company having a permanent establishment in Korea as well as resident or domestic company is entitled to apply for the MAP. Under the proposed amendment, non-resident or foreign company having no permanent establishment will also be entitled to apply for the MAP. The amendment will be applicable to the MAP applied on or after January 1, 2017.