WH Baik, Jeremy Everett
In recent years, record budget deficits and shortfalls in tax collections have led to substantial increases in the number of tax audits and aggressive tax audit practices, including dawn raids.
As tax auditors have become more aggressive, tax appeals and disputes have been on the rise, and taxpayers have been winning more cases than ever before. This has, in turn, caused the National Tax Service (NTS) Commissioner to take notice and restructure the division responsible for tax litigation.
Numerous tax appeals to the Tax Tribunal, courts and competent authority remain outstanding and will take several years to reach resolution. These include cases involving beneficial ownership, treaty shopping and tax exemption qualifications in corporate reorganisations. In the meantime, tax audits are expected to continue at the current rate, though they will likely not increase substantially during the remainder of 2016 given the fact that the taxing authority exceeded its tax collection goals for 2015.
Though President Park Geun-hye has promised not to increase taxes, the National Assembly (which her party no longer controls) has been seeking to increase the corporate income tax rate (from 24.2%) and/or the maximum personal income tax rate (from 41.8%). These debates are expected to continue. Even if the rates remain the same, tax exemptions and credits are largely being phased out, with the exception of those aimed at increasing employment for young workers.
In addition, Korea has signed an automatic exchange of information agreement with approximately 80 countries, which will take effect from July 2017. We expect this to lead to increased scrutiny of foreign bank accounts and transactions and an increase in efforts to identify tax evasion.
Korea is also an active participant in the OECD BEPS initiative and has already instituted major changes to its transfer pricing documentation requirements in line with the BEPS reports, some of which we have summarised below.
In an effort to ensure greater income tax compliance for high-income expatriates seconded to Korean entities rendering air transportation, construction, professional, scientific and technical services, a new 17% withholding tax (18.7% including local income tax) now applies when a Korean host company makes payments exceeding KRW 3 billion ($2.7 million) to a non-resident company. This new rule will apply if a Korean host company has prior fiscal year revenue amounting to at least KRW 150 billion or assets amounting to at least KRW 500 billion.
From July 1 2016, the zero-rate VAT for professional and business support services rendered by a Korean company to an offshore service recipient applies on a reciprocal basis. In other words, the zero-rate VAT will only be allowed if the country where the service recipient is resident also provides the same treatment for similar services provided by its residents to a service recipient in Korea. The new Enforcement Decree to the VAT Law requires evidence of such reciprocity (tax law provisions of the relevant foreign country or interpretations thereof) to be attached to the zero-rate VAT application.
On July 14 2016, the Korean Supreme Court ruled in favor of a French multinational in a landmark tax case involving the beneficial ownership of dividend income derived by an intermediate UK holding company. The multinational invested in a Korean company through the UK intermediate holding company and withheld tax on dividends at the 5% reduced rate under the Korea-UK tax treaty. However, the Korean tax authority argued that the intermediate holding company in the UK is a mere conduit established to take advantage of the lower withholding tax rate under the tax treaty and refused to view the UK entity as the beneficial owner of the dividends under the Korea-UK tax treaty.
As a result, the Korean tax authority assessed additional withholding tax on the taxpayer by alleging that the French parent company is the beneficial owner and applying the 15% dividend withholding rate under the Korea-France tax treaty. The Supreme Court ruled that the intermediate UK holding company can be viewed as the beneficial owner of the Korean source dividends in consideration of the surrounding circumstances, and as such, the tax assessment was ruled as unlawful.
On July 28 2016, the Ministry of Strategy and Finance (MOSF) announced proposed tax law amendments for 2017. In its announcement, the MOSF stated that the amendments are focused on economic growth, improving tax equity and ensuring a stable revenue base in line with the Korean government's mid to long-term tax policy.
The proposed amendments will generally be effective for fiscal years commencing on or after January 1 2017, unless otherwise indicated. The draft tax bill is expected to be promulgated on or before December 31, 2016 following the completion of the legislative process, which may result in additional revisions.
We have selected and highlighted below key amendments that may be of interest (see Table 1 for a list of abbreviations).
|Table 1: Abbreviations|
|CITL||Corporate Income Tax Law (????)|
|IITL||Individual Income Tax Law (????)|
|ITCL||International Tax Coordination Law (???? ??? ?? ??)|
|STTCL||Special Tax Treatment Control Law (???????)|
|-PD||*-Presidential Decree (???)|
In the wake of the OECD/G20's ongoing efforts to prevent base erosion and profit shifting, country-by-country (CbC) reporting is scheduled to be added to the Comprehensive Report on International Transactions (CRIT), which requires the disclosure of information on international transactions with overseas affiliates. Korean-based MNEs with prior fiscal year consolidated revenue exceeding KRW 1 trillion will be required to submit the CbC report within 12 months of fiscal year end. The CbC report will include details of business activities of overseas affiliates (e.g. revenue, profit, headcount, assets) as well as taxes paid in foreign jurisdictions.
The proposed amendment applies to CRIT filed on or after January 1 2017 (for 2016 calendar year taxpayers) and requires the filing of the CRIT complete with CbC by the end of 2017. Korea has signed the CbC Multilateral-Competent Authority Agreement (MCAA), allowing the automatic exchange of CbC reports with other signatories beginning in 2018. Based on the proposed amendment, the Korean subsidiary or branch of the MNE is required to file the CbC report where a foreign parent company is not required to prepare the CbC under the tax law of the jurisdiction in which it resides or if such jurisdiction is not a party to the CbC MCAA.
Currently, companies required to file the CRIT are also required to prepare a local file, regardless of whether or not an APA is in place for the same related-party transactions. In light of similarities in the information required to be included in APA applications and the local file, the proposed amendment allows the local file reporting requirement to be waived when an APA has been approved.
The proposed amendment applies to CRIT filed on or after January 1 2017.
Currently, the CRIT (comprising the local file and master file) is required to be submitted by the tax return filing due date. Under the proposed amendment, the due date for filing the CRIT has been extended to 12 months from the end of the relevant fiscal year.
The proposed amendment applies to CRIT filed on or after January 1 2017.
Under the CITL and IITL, where a non-resident individual or a foreign company deriving Korean source income has not obtained an exemption or tax reduction under a tax treaty, such taxpayer or its withholding agent may claim a refund of any overpaid withholding tax within three years from the end of the month in which the tax was withheld by filing a refund application at the tax office having jurisdiction over the withholding agent.
Based on the proposed amendment, in order to provide a level playing field for non-resident individuals and foreign companies, the time period for claiming a withholding tax refund has been extended from three years to five years – consistent with the general tax refund period under the National Tax Basic Law.
The proposed amendment will apply to refund claims made on or after January 1 2017.
Until fiscal years ended on or before December 31 2015, net operating losses of domestic companies may be carried forward 10 years and fully deducted against taxable income in subsequent years.
However, as a result of the 2015 tax law amendments, beginning on January 1 2016, NOL carry-forwards will only be utilisable each year to the extent of 80% of taxable income. The new limit does not apply to foreign companies with a permanent establishment in Korea (Korean branch), which gives rise to inequitable treatment, but the proposed amendment will treat Korean branches in the same manner as domestic companies.
The proposed amendment will apply from fiscal years commencing on or after January 1 2017.
Currently, foreigners working in Korea may choose to be taxed at a flat 18.7% tax rate (including local income tax) without tax deductions or credits; or progressive tax rates ranging from 6.6% to 41.8% (including local income tax) with applicable tax deductions and credits. The flat rate is scheduled to expire on December 31, 2016.
In order to continue attracting high quality foreign workers to Korea, the flat tax rate has been extended to December 31 2018 for employees who began working in Korea prior to January 1 2014, while employees who began working in Korea after January 1 2014 will remain eligible for the flat tax for a period of five years (though the flat tax will not be available for those whose employment commences after December 31, 2019). The flat tax rate is proposed to increase from 18.7% to 20.9% (including local income tax).
These new provisions apply with respect to salary income arising on or after January 1 2017.
The NTS has continued bolstering its tax data analysis capabilities, with the establishment of a new investigation and analysis division and two new tools it refers to as "tax gap analysis" and "big data analysis". Data analysed by the new division will be used to ensure accurate tax return filings as well as to support audit activities, with a focus on the following:
Due to record budget deficits and shortfalls in tax collection, the Korean tax market continues to be driven by tax compliance enforcement activity. "As tax auditors have become more aggressive and less willing to compromise, tax assessments have increased substantially, leading to a dramatic increase in tax appeals and disputes," said Jeremy Everett of Kim & Chang.
Measures such as development and application of new audit techniques, implementation of incentives for high-performance auditors, continuous training of specialised auditors and the introduction of advanced audit manuals have helped the Korean tax authorities to carry out more focused, intense tax audits.
"Audits generally seem much more directed than in the past, perhaps driven by improvements and refinements in identifying 'at-risk' taxpayers and increases in whistleblower payouts," said Henry An of Samil PwC. "[We] also seem to be observing an increase in non-periodic tax audits and more audits involving the use of forensics."
Because of a significant level of fiscal losses, hostile public opinion against offshore tax evasion, and an anti-base erosion movement against multinational enterprises, the Korean tax authorities are willing to bring criminal tax evasion charges against foreign multinational companies operating in Korea, where appropriate.
"This is a real threat to taxpayers if the audit is converted to criminal tax evasion," said Kyu Dong Kim of Yulchon. "But I believe taxpayers will be able to manage their audits and avoid risks of their audits converting to criminal cases by seeking out professional legal advisers. It will be very rare that the audits will turn into criminal charges. The tax authorities' real interest is to increase the assessments."
Continuing in its push against evasion, the government initiated a tax amnesty to offshore tax evaders by offering exemption of penalties or legal punishments as long as the taxpayers voluntarily report their gains from overseas investments from October 1 2015 to March 31 2016.
Transparency is also high on the authorities' agenda, and according to Korean tax law corporations and individuals in Korea are subjected to income or asset-reporting obligations if said income or assets held overseas are worth KRW 1 billion ($900,000) or more.
Korea has also signed an automatic exchange of information agreement which will come into effect from July 2017. "We expect this to lead to increased scrutiny of foreign bank accounts and transactions and an increase in efforts to identify tax evasion," said Everett. This will mainly impact high net worth individuals who hold significant assets and bank accounts outside Korea.
"Due to worldwide consensus regarding [the OECD's BEPS Project], overseas private banks are not actively soliciting funds from Korean high net worth individuals since they cannot provide the protection they provided in the past anymore once the automatic exchange of information rule is implemented in the coming years," said Kim. "Together with the CRS [common reporting standard], it is becoming very difficult for high net worth individuals to hide and manage their assets through setting up bank accounts or offshore entities outside Korea."
Korea is an active participant in the BEPS Project and has already made various changes to its transfer pricing document requirements corresponding to BEPS. Most tax practitioners in Korea expect additional tax legislation to be aimed at implementing further BEPS recommendations.
EY Han Young
10-2 Taeyoung Bldg,
Seoul, Korea 150-777
Tel: +82 2 3787 6600
South Korea Tax Leader
Min Yong Kwon
Tel: +82 2 3770 0934
Tax Market Segment Leader
Min Yong Kwon
Tel: +82 2 3770 0934
Business Tax Services
Dong Chul Kim
Tel: +82 2 3770 0903
Jong Yeol Park
Tel: +82 2 3770 0904
Global Compliance and Reporting
Yong Pyo Lee
Tel: +82 2 3787 4065
International Tax Services
Kyung Tae Ko
Tel: +82 2 3770 0921
Seung Yeop Woo
Tel: +82 2 3787 6508
Jin Hyun Seok
Tel: +82 2 3770 0932
Sang Min Ahn
Tel: +82 2 3787 4602
Kim & Chang
39, Sajik-ro 8-gil,
Seoul 03170, Korea
Tel: +82 2 3703 1114
Fax: +82 2 737 9091/2
Contact: Woo-Hyun Baik, leader of tax practice
LS Yongsan Tower
92, Hangang-daero, Yongsan-gu
Seoul 04386, Korea
Sung-Chun Ko, Tax Leader
Tel: +82 2 709-0725
Tel: +82 2 709-0288
Tel: +82 2 709-8833
Tel: +82 2 709-4767
Tel: +82 2 3781-3264
Tel: +82 2 3781-3173
Tel: +82 2 709-0905
Tel: +82 2 709-4055
Tel: +82 2 709-3383
Email: hoon.gp6 @kr.pwc.com
Tel: +82 2 709-7902
Tel: +82 2 3781-9812
Cross-border M&A Tax
Alex Joong-Hyun Lee
Tel: +82 2 709-0598
Tel: +82 2 709-0707
Tel: +82 2 709-4761
Tel: +82 2 3781-2594
Tel: +82 2 3781-9083
Tel: +82 2 3781-2599
Tel: +82 2 709-8895
Tel: +82 2 709-4098
Tel : +822 3781 2375
Tel: +82 2 709-4768
Tel: +82 2 709-4754
|Corporate Income Tax||22%||A B|
|Capital Gains Tax||22%||A B C|
|Branch Tax||22%||A B|
|Branch profits tax rate (additional tax)||0%||D|
|Net Operating Losses (years)|
|Royalties from, for example, patents, know-how||0%||E|
Led by Kim Tae Kyoon, Bae, Kim & Lee's tax services cover all aspects of tax including tax planning, financial services-related issues resolution, corporate tax, securities, M&A and cross-border transactions. Wee Soo Han and Tae Chul Kwak are notable partners at the practice. Both have decades of tax experiences, specialising in tax disputes and administrative and constitutional litigation.
Deloitte Anjin employs more than 40 partners and 371 other professionals, who focus on all aspects of domestic and international tax. The firm hired five directors, two advisers and a senior manager over the past year from the tax office, law firms and banks. Jung Hee Lee is a managing partner and the leader of the firm's tax group. He has more than 30 years of experience and specialises in international tax, transfer pricing, corporate tax, M&A, particularly for multinational companies.
The firm's services include business tax, local tax, tax controversy, business process solutions, global employer services, cross-border tax, M&A, government incentives, tax management consulting and indirect taxes. The firm also has a special service group focusing on Korean services, which already has service desks in 41 cities in 38 countries providing one-stop services for Korean multinationals in foreign locations.
The practice's tax service lines are supported by specific industry teams focusing on each sector, including financial services, manufacturing, technology, media and telecommunications (TMT), consumer business and transportation, energy and resources, life science and healthcare and the public sector.
EY's tax practice boasts nearly 20 partners and more than 260 professionals with various experiences and insights in tax matters and different industries. The practice is headed by Min Yong Kwon, the tax managing partner and Kyung Tae Ko, the international tax service leader.
The firm's service lines of business tax, international tax and indirect tax led several tax refund and tax appeal assignments with domestic and foreign companies, which resulted in returning or achieving multi-million dollar tax cost savings to the clients. The clients for these tax refund projects included major Korean banks and manufacturing companies.
The practice expanded by hiring a new partner, Seung Yeop Woo, from Kim & Chang in October 2015, and a senior adviser, Sae Gyun Shin, from a regional tax office in January 2016. Woo has more than 15 years of experience of assisting major Korean companies as well as Japanese companies on all aspects of tax and transfer pricing.
Kim & Chang is, by far, the largest and the strongest law firm in Korea. Its tax practice comprises 33 partners and more than 130 other professionals, including tax lawyers and accountants, led by Woo Hyun Baik and Byung Moon Jung.
Baik has more than 28 years of experience advising corporations on a broad range of tax issues including finance tax, corporate tax planning, M&A and restructuring. Jung primarily focuses on tax audits and dispute resolution. As a former judge, he has first-hand experience of the tax issues which arise in court. He is an expert in various tax issues including tax treaties, tax audit support, controversy resolution and tax rulings.
The team has represented SICAV (Société d'Investissement à Capital Variable) funds in litigation pending before the Korean Supreme Court regarding the application of the Korea-Luxembourg tax treaty with respect to reduced treaty rates on Korean-source interest and dividends. In this case, the tax authority considered the SICAV fund to be a special holding company and assessed taxes of around $117 million. The team worked collaboratively with a law firm in Luxembourg and presented arguments to persuade the courts to rule that the SICAV fund did not meet the requirements for designation as a "special holding company".
One client said: "I have known K&C [Kim & Chang] as a first class tax firm since 1980. At that time, there was no question that in all of Asia they were the tax folks who had the best sense of what international tax and tax treaties are about and the inter-relationship with local tax law. Note that our recent intensive experience with K&C has been in both transfer pricing and in tax litigation. Their litigation team has done a great job, fabulous performance: alert, pro-active, technically and analytically savvy, and great in communication."
Jay Shim is the head of Lee & Ko's tax practice, which houses 28 partners and 35 professionals. The firm has grown significantly by recruiting industry-leading professionals as partners over the past year, namely Myung Sub Kim, Ok Hyun Ma, Young Mo Lee and In Soo Bae, along with several associates.
The practice has four major parts: corporate tax consulting, tax audits, dispute resolution and customs. In corporate tax consulting, the team provides fully-integrated services including general advisory, gift and inheritance tax planning, tax health check, tax audit defence, advance pricing agreement (APA) filing, due diligence, transfer pricing studies and documentation and tax legislative consulting.
In December 2015, Shim and Jin Young Hwang worked on a tax audit against sale of Korean subsidiaries through a Dutch holding company. The firm said that this case was in direct relation to the recent discomfort experienced by the international tax community triggered by the tax authority's aggressive position with respect to the applicability of tax treaties when a foreign holding company sold its Korean investments. Lee & Ko's tax audit defence team, however, was able to identify and emphasise weaknesses in the tax authority's basis for taxation and reduced the potential tax assessment amount to less than 5%.
Samil PwC represents approximately 40% of the market in terms of tax revenues among Big 4 accounting firms in Korea. Its multidisciplinary practice has various experts experienced in different industries, in addition to former auditors and senior officers. With nearly 580 professionals with Seong Cheon Ko at the helm, the firm has the largest tax practice in Korea. He has strong expertise in corporate and international taxation particularly handling Japanese companies in Korea, transfer pricing and company restructuring.
The practice provides a full suite of tax services, from tax compliance and global tax structuring to cross-border M&A and litigation support.
One client said: "We have positive experience with Samil PwC, especially they have helped us very actively and voluntarily to solve our issues." The same client said that in their experience of the Big 4 firms, "Samil PwC was the best".
In March 2016, Byoung Ha Hwang joined the practice as the head of financial taxation team. He is a former officer at the ministry of strategy and finance.
Ihn Byung Choon is the tax leader at Samjong KPMG, which boasts nearly 30 partners and more than 380 other professionals. The firm's main clients are major industry leaders in Korea in industries such as manufacturing, financial services, consumer goods, hospitality, energy and utilities.
The team provides a classic range of tax services including advisory and compliance, dispute resolution, domestic tax advice, international tax, indirect tax and trade and customs services.
In September 2015, the firm provided tax advisory services regarding a merger between two multinational banks headquartered in Korea. It was the first Korean accounting firm to provide evaluation of unlisted stock regarding such a large bank's stock value in accordance with the inheritance and gift tax act.
Choon Cho and Hyeon-Jin Kim head the tax practice at Shin & Kim, which consists of six partners and 15 other professionals including tax lawyers, certified public accountants and tax accountants. The firm works with domestic and international clients, particularly in the financial sector, on a range of tax-related issues.
These issues include complex cross-border structuring matters, tax disputes and various transactions.
Shin & Kim provided advice to Korea Gas Corporation on appeal against the Korea Customs Office's rejection of a reassessment request with respect to individual consumption tax. The team focused on how the company use plan should be drafted and how to file returns for individual consumption tax following the amendment of the Act. The team also represented the company in raising questions to the governmental authority and filing a request for tax reassessment with the Korea Customs Office.
Yoon & Yang's tax practice comprises eight partners and 22 other professionals including attorneys, public and tax accountants, and customs attorneys. Oh Young Jeon is the leader of the tax practice and his core experience includes disputes and M&A, foreign investment.
The services offered by the firm include tax advisory, corporate tax, international tax, local tax, indirect tax, tax due diligence, foreign investment, tax litigation and disputes, tax reviews, criminal tax defence and transfer pricing.
In December 2015, the team represented a client during litigation. The client wanted to invalidate an additional corporate tax burden which had been imposed by the tax authorities. During the case, Yoon & Yang argued the distinction standard and application scope of the exclusion period and extinctive prescription. As a result, the client received a tax refund of approximately $44 million.
One client said: "I had a positive experience with Yoon & Yang's tax practice group. In fact, my company was very satisfied with Yoon & Yang's services, which include the professionals' expertise with the tax matters and their customised correspondence for our needs."
Yulchon's tax practice is directed by the joint leadership of Sai Ree Yun, Soon Moo Soh, Seok Hoon Kang and Dong Soo Kim. The practice has nearly 80 professionals including 39 partners. The firm is recognised for its various tax services such as M&A, inbound and outbound structuring, tax compliance and tax audit and appeal defence.
The team, led by Kim, provided tax advice to automotive supplier Visteon Corporation in the sale of its majority interest in Halla Vistion Climate Control Corporation (HVCC), the world's second largest manufacturer of automotive climate control products.
At the time it was finalised, the Visteon deal was the second largest private equity M&A deal in Korea's history. The work involved resolving withholding tax issues arising from a complex international holding structure and required the firm to provide advice on evolving areas of Korean tax law, such as beneficial ownership issues arising from tax migration.
One client gave a glowing review of the firm, saying: "I had a very positive experience with Yulchon Korea. My company has hired Yulchon Korea for the tax services and I have been 100% satisfied with their services. Simply Yulchon Korea is the best in tax services. Once you work with Yulchon Korea, you will never work with other tax advisers."