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07 March 2018 Korea promulgates Enforcement Decree for 2018 tax reform bill On 13 February 2018, Korea promulgated the revised Enforcement Decree of Korean tax laws (the 2018 Enforcement Decree) to provide more specific guidance on the 2018 tax reform bill (the 2018 Tax Reform Bill) which was enacted on 19 December 2017.1 Among others, the 2018 Enforcement Decree specifies the corporate accumulated earnings tax computation methods. The 2018 Enforcement Decree also removes a revision to tighten the capital gains tax exemption qualification on a foreign corporation's transfer of listed shares.
The existing AET regime2 would have expired as of 31 December 2017. The 2018 Tax Reform revised the AET regime that is effective for fiscal years beginning on or after 1 January 2018 through 31 December 2020. The following chart summarizes the difference in computation methods under the existing and revised AET.
Under the current tax law, taxpayers who fail to file a Combined Report of International Transactions (CRIT)3 or file false information are subject to penalties of KRW10 million (US$9,000) per documentation. Pursuant to the 2018 Tax Reform, the penalties have been increased to KRW30 million (US$27,000) per documentation. The amended law is effective for noncompliance of transfer pricing documentation requirement from 13 February 2018. As a commitment to implement the hybrid mismatch rules recommended by the Organisation for Economic Co-operation and Development's October 2015 Report on Base Erosion and Profit Shifting Action 2 (Countering the effects of Hybrid Mismatch Arrangements, hybrid mismatch rules), the 2018 Tax Reform introduces a limitation on deductible expenses relating to hybrid mismatch arrangements. The proposed rule will apply to cross-border hybrid financial instrument transactions between a domestic corporation (including the Korean branch of a foreign corporation) and its foreign related party. If a payment associated with a hybrid financial instrument remains wholly or partially nontaxable in the counterparty jurisdiction5 until the close of the recipient's fiscal year beginning within 12 months following the close of the payor's fiscal year in which the deduction is claimed, the nontaxable portion of the payment would not be deductible for the fiscal year in which the payment is made. A claw-back provision applies when the payor deducts the nontaxable portion of the payment for the fiscal year in which the payment is made. The amended law is effective for fiscal years beginning on or after 1 January 2018. 1 See EY Global Tax Alert, Korea enacts 2018 tax reform bill, dated 5 January 2018. 2 See Global Tax Alerts, Korea enacts 2015 tax reform proposals, dated 29 December 2014 and Korea announces 2015 tax reform proposals, dated 27 August 2014. 4 A financial instrument with both debt and equity characteristics where it is treated as a debt in one jurisdiction, while treated as equity in the other jurisdiction (e.g., participating bonds). 5 Specifically, it refers to the case where, due to the characterization of the payment as dividend income in the counterparty jurisdiction, the payment is not included in the recipient's taxable income or less than 10% of the payment is included in the recipient's taxable income. Document ID: 2018-5375 | |||||||||
