globaltaxnews.ey.comSign up for tax alert emailsForwardPrintDownload | |||||||||||||||||||||||
14 January 2022 Korea enacts 2022 tax reform bill On 8 December 2021, 21 December 2021 and 28 December 2021,1 Korea enacted various measures in the 2022 Tax Reform Bill (the 2022 Tax Reform) after it was passed by Korea’s National Assembly on 2 December 2021. Unless otherwise specified, the 2022 Tax Reform will generally become effective for fiscal years beginning on or after 1 January 2022. The Enforcement Decrees, which provide more specific guidance on the laws, are expected to be enacted in February 2022. The current Korean tax law views an OIV as a deemed beneficial owner of Korean-source income if any of the following conditions are met: The OIV is liable to tax in the jurisdiction in which it resides and there is no intention to wrongfully evade Korean tax on the Korean-source income by establishing the OIV in such jurisdiction. The OIV meets qualifications for being regarded as the beneficial owner under the applicable tax treaty. The OIV is liable to tax in the jurisdiction where it is established and meets qualifications for being eligible for tax treaty benefits for the Korea-sourced income in accordance with the tax treaty. The OIV (in the case where it does not meet the requirements provided in the clarified condition (i) above) meets the qualifications for being regarded as the beneficial owner under a tax treaty and meets other qualifications for being eligible for tax treaty benefits for the Korea-sourced income under the tax treaty. Under the current Korean tax law, gains derived from the disposal of virtual assets by a foreign individual or a foreign corporation are categorized as “other income” subject to withholding tax at the lower of 11% of the transfer price or 22% of the net capital gains. The 2022 Tax Reform deferred by one year the effective date of the previously enacted legislation requiring the taxation of gains from the sale of virtual assets. Those gains will now be taxed beginning 1 January 2023. The 2022 Tax Reform added a provision in which Korean tax authorities would be allowed to conduct a partial investigation on taxpayers.4 The new provision applies to cases where they find it necessary to assess or confirm the appropriateness of a tax exemption which is claimed/availed based on the application of a tax treaty, in respect of income attributable to nonresidents. The above rule would apply to cases of tax treaty-based exemption applications filed with the tax offices on or after the date of enactment of the Enforcement Decree. The current 30% EBITDA interest limitation rule provides an ordering rule for the calculation of non-deductible interest. If interest is calculated with different interest rates, the interest deduction denial is applied starting with the highest interest rate. The 2022 Tax Reform introduced additional ordering rules for the non-deductible portion of interest: For interest where the same interest rate is applied, the most recent borrowing date takes precedence. If the interest rate and borrowing date are the same, the non-deductible portion is bifurcated based on the ratio of the borrowed amounts. In addition, the 2022 Tax Reform introduced a new rule whereby if the amount of EBITDA is negative, the deductible amount of interest is deemed to be nil. The 2022 Tax Reform introduced the following new rules to mitigate potential tax evasion through international transactions.
To rationalize TP taxation under special circumstances such as COVID-19, the 2022 Tax Reform revised the TP rules under the current Law for the Coordination of International Tax Affairs (LCITA).
The current Enforcement Decree of the Korean Corporate Income Tax Law (CITL) requires a permanent establishment (PE) of a foreign corporation to submit documents such as a statement of internal transactions, expense allocation, among others for the transactions between a PE of a foreign corporation and its overseas headquarters and other branches within the statutory deadline for the corporate income tax (CIT) return.6 The 2022 Tax Reform extended the above submission deadline from the statutory deadline of the CIT return to within six months from the last day of the month containing the fiscal year-end date. Under the current Restriction of Special Taxation Act, a foreign executive or employee (excluding workers hired daily) initially working in Korea before 31 December 2021 may elect to apply for a flat tax rate of 19% (excluding local income tax) on wage income without deductions,7 for five years from the first day of work in Korea. Kyung Tae Ko | kyung-tae.ko@kr.ey.com Jeong Hun You | jeong-hun.you@kr.ey.com Ilyoung Chung | ilyoung.chung@kr.ey.com
Chris Finnerty | chris.finnerty1@ey.com Gagan Malik | gagan.malik2@ey.com Bee-Khun Yap | bee-khun.yap@ey.com Dhara Sampat | dhara.sampat2@ey.com
Individual Income Tax Law and Value Added Tax revisions were enacted on 8 December 2021 and 28 December 2021, respectively. All other measures discussed in this Global Tax Alert were enacted on 21 December 2021. If the OIV can substantiate only a portion of its investors, then the OIV would be treated as the beneficial owner of the Korean source income to the extent of the Korean source income attributable to those investors that the OIV is unable to substantiate under the Korean domestic tax law. Virtual assets are electronic certificates (including relevant rights) of economic value that can be traded electronically (e.g., digital currency such as bitcoin). Prior to the 2022 Tax Reform, a partial investigation was allowed when the confirmation is necessary to process the refund claim of income payers or to investigate the beneficial owners who are not eligible for tax exemption/non-taxation application. Earnings before interest, taxes, depreciation, and amortization (EBITDA) equals taxable income plus depreciation expense for fixed assets and net interest expense. Document ID: 2022-5056 | |||||||||||||||||||||||
