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August 2, 2023
2023-1351

Korea's 2023 tax reform proposals include proposed 12-month delay on Undertaxed Profit Rule

  • Korea's 2023 tax reform proposals were announced on 27 July 2023, including additional global minimum tax rules to reflect the OECD BEPS 2.0 Pillar Two.
  • These rules, outlined in this Alert, will be effective for fiscal years beginning on or after 1 January 2024, unless otherwise specified.
  • One proposal would delay the effective date of the Undertaxed Profit Rule for 12 months, until 1 January 2025.
  • Taxpayers should review the rules to determine their impact on Korean operations.

Executive summary

On 27 July 2023, Korea's Ministry of Economy and Finance announced the 2023 tax reform proposals (the 2023 Proposals). Unless otherwise specified, the 2023 Proposals will generally become effective for fiscal years beginning on or after 1 January 2024. Significantly, the supplementary rules for income inclusion (known as Undertaxed Profit Rule (UTPR)) are proposed to have a 12-month delay, extending the effective date to 1 January 2025.

This Alert summarizes the key proposals.

Detailed discussion

Revision of the global minimum tax rule (GloBE)

The 2023 Proposals include new and additional GloBE rules on top of Korean GloBE regulations under the current Adjustment of International Taxes Act (AITA) to reflect the Organisation for Economic Co-operation and Development's (OECD's) Pillar Two GloBE rules, including the relevant administrative guidance, as well as other member countries' Pillar Two legislation activities.

Details regarding the GloBE rules in the 2023 Proposals are outlined below.

AITA

The 2023 Proposals

Effective date

UTPR is effective for fiscal years beginning on or after 1 January 2024

UTPR is proposed to have a 12-month delay

Effective starting from the fiscal year beginning on or after 1 January 2025

Provides special rules for additional statutes of limitations for certain circumstances (e.g., mutual agreement, refund claim)

In addition to current AITA rules, extends the statutes of limitations to one year from the date the tax authority becomes aware of the change if the effective tax rate (ETR) of the GloBE is changed

Effective starting from the fiscal year beginning on or after 1 January 2024

Defines "Entities" as (i) Corporations or (ii) arrangements such as partnerships or trusts with separate accounting

Excludes the government from the definition of Corporations

Defines "Group" as (i) a group of companies connected to each other through ownership or control, or (ii) a company that has one or more permanent establishments in a country other than the country in which the company is located

Excludes from the definition of "Group" a company with only a stateless permanent establishment (PE)

Defines a PE as (i) a domestic place of business defined under the Korean Corporate Income Tax Law (CITL), or (ii) a place of business similar to a domestic place of business located in a foreign country

Clarifies the definition of a PE in accordance with the OECD Model Rule

Defines an Ultimate Parent Entity (UPE) as (i) directly or indirectly owning a controlling interest in another entity, and (ii) not being owned by another entity

Adds the head office of the Group to the definition of UPE, while excluding the sovereign wealth fund from the definition of UPE

None

Introduces applicable foreign exchange rate for conversion into local KRW currency from the euro-based consolidated revenue test amount (i.e., €750 million) in accordance with the OECD/G20 Administrative Guidance

Permits all excluded entities to be selected as constituent entities

Permits only arbitrarily excluded entities to be selected as constituent entities

Excludes the net profit or loss of the PE when calculating the GloBE income or loss of the head office

In addition to current AITA rules, provides that if the head office's domestic taxation includes the loss of the PE, the head office's GloBE income or loss calculation also includes the loss of the PE

Introduces adjustment method for GloBE income or loss amount when a decision or rectification is made after GloBE reporting

Adds adjustment methods for GloBE income or loss due to increases or decreases of adjusted covered tax

Introduces a top-up tax calculation method in the area where ETR exceeds 15%

Adds top-up tax calculation method under new scenarios where the top-up tax percentage exceeds 15%

None

Introduces new requirements for recognition of qualified domestic minimum top-up tax (QDMTT) where the top-up tax of the GloBE is exempted for a parent entity in accordance with the OECD/G20 Administrative Guidance

A UTPR top-up tax allocation method is introduced

Introduces supplemental rules on the allocation method according to the UTPR top-up tax for each constituent entity

Effective starting from the fiscal year beginning on or after 1 January 2025

Introduces allocation method per country for the top-up tax amount under the UTPR

Requires allocation to other jurisdictions if certain constituent entities do not bear additional top-up tax amounts under UTPR

Introduces special rules for restructuring

Adds special rules for restructuring if the country where the constituent entity is located allows adjustments to the tax book value as FMV

Effective starting from the fiscal year beginning on or after 1 January 2024

Introduces special rules for investment constituent entities

Excludes tax-transparent entities from the application of special rules for investment constituent entities

Introduces rules on allocation amount when applying the tax allocation method of investment constituent entities

Introduces supplemental rule indicating that the amount of allocation includes both actual and deemed allocation amount

Excludes Groups in the early stages of overseas expansion from UTPR for five years

Provides a five-year application period for Groups in the early stages of overseas expansion, running from the time UTPR is first applied (i.e., 1 January 2025)

Effective starting from the fiscal year beginning on or after 1 January 2025

Introduces rules on GloBE information reporting and payment

Introduces a penalty tax exemption and reduction provisions related to GloBE top-up tax filing and payment obligation GloBE during the transitional period:

  1. Penalty exemptions on non-filing or filing for understated tax or overclaimed tax refunds
  2. 50% reduction of interest for the delayed/underpaid tax payment

Introduces penalty exemption provisions for errors in the submission of the GloBE information report during the transitional period, subject to conditions

Effective starting from the fiscal year beginning on or after 1 January 2024

Introduction of filing obligation for overseas stock-based compensation

The 2023 Proposals introduce a filing obligation for domestic corporations (including the PE of foreign corporations) on transactions in which its executives or employees receive share-based compensation from foreign controlling shareholders.

Domestic corporations must submit the transaction details (e.g., details of grant, exercise, and payment of share-based compensation) by the 10th of March of the year following the taxable period to which the date of exercise or payment of stock-based compensation belongs. This rule will be applied to stock-based compensation exercised (or paid) on or after 1 January 2024.

Changes to when the statute of limitation starts to run for treaty rectification

Under the current Korean CITL, if a beneficial owner (foreign individual or foreign corporation) seeks to apply a tax-treaty exemption in respect of its Korean-sourced income, either the beneficial owner or income payer may request the refund claim within five years from the last day of the month in which the tax is withheld.

The 2023 Proposals provide that, effective 1 January 2024, the statute of limitations for the treaty rectification is within five years after the 10th day of the month following the month to which the withholding date belongs.

Introduction of special tax rules for omnibus accounts for foreigners

Under the 2023 Proposals, when foreign individuals or corporations invest through an omnibus account, the income payer must withhold tax from the payment. Reduced or exempted withholding tax rates under the treaties do not apply. However, either beneficial owners or income payers who wish to receive an exemption or reduced tax rate under tax treaties may apply for its rectification after the withholding taxes have been deducted. The new rule will be effective for income paid on or after 1 January 2024.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Han Young, Seoul

Ernst & Young LLP (United States), Korean Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

 
 

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