Providing Excellence In Client Services
March 2013
Newsletter
Bi-monthly Newsletter of Horwath Choongjung LLC
Contents
This newsletter is prepared and issued by Horwath Choongjung LLC
(Choongjung Accounting Corp.) on a bi-monthly basis and intended to
2013 Tax Law Changes
- Update
provide foreign investors with an update on tax law changes in Korea
and other related subjects of special interests to foreign investors.
The information provided herein should not form a basis of any
decision as to a particular course of action, nor should it be relied upon
as a substitute for a detailed advice in individual cases.
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Please contact any of the following individuals with any inquiries or
comments.
Contacts: H.S. Kim, S.Y. Kim or G.S. Sim at Tax&BPO Services of
Horwath Choongjung [Tel: (82)(2) 316-6600, Fax: (82)(2) 775-5885,
E-mail: post@crowehorwath.co.kr]
(You may find this newsletter and other items of interest at
http://www.crowehorwath.co.kr)
Audit l Tax l Advisory
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March 2013
2013 Tax Law
Changes
- Update
We summarized below some of the additional tax law changes to keep you updated.
Expanded scope of tax-deductible welfare expenses for employees
(Article 45 of the Presidential Decree of the Corporate Tax Law (“PD-CTL”))
Before the revision of Article 45 of the PD-CTL, welfare expenses for the
dispatched employees being hired out by human-resource companies were
treated as entertainment expenses which were tax-deductible only up to certain
tax limit.
However, under the revised provision of the PD-CTL, such welfare expenses shall
be treated as fully tax-deductible against corporate taxable income. Through this
change, the Korean government intends to improve employee welfare benefits and
also encourage domestic consumption. Further, it became clear that corporate
dining expenses for employees shall also be treated as fully tax-deductible welfare
expenses.
The above amendments will be applied for the fiscal year subject to corporate
income tax filing on or after February 15, 2013.
Addition of standard useful life for depreciation of assets by business type
(Table 6 of the Enforcement Decree of the Corporate Tax Law (“ED-CTL”))
The Ministry of Strategy and Finance (“MOSF”) has added four (4) new standard
useful lives (4, 6, 14, 16 years) to current five (5) standard useful lives (5, 8, 10,
12, 20 years) for the tax depreciation.
As a result, nine (9) standard useful lives
shall be used for depreciation of fixed assets based on relevant industry types.
The revision is to reflect changes in economic conditions, according to the MOSF.
The amendment shall be effective for the fixed assets purchased on or after
January 1, 2014.
Adjustment of scope of retirement income and earned income
(Article 38① of the Presidential Decree of the Individual Income Tax Law
(“PD-IITL”))
Under the revised provision of the PD-IITL, early retirement payments other than
statutory severance payments given to retired/resigned employees shall not be
classified as earned income, but classified as retirement income regardless of the
title used for such payments. In general retirement income is subject to lower
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March 2013
2013 Tax Law
Changes
- Update
effective income tax rates than the earned income is.
However, the revised tax law made it clear that severance payments for
executives/officers, which are non tax-deductible for exceeding certain tax limits
under Article 44④ of the PD-CTL, shall not be classified as retirement income, but
classified as earned income.
The amendments are effective for the income earned on or after January 1, 2013.
Expanded scope of majority shareholders subject to capital gains tax on
share transfers (Article 157④ of the PD-IITL)
Scope of majority shareholders subject to capital gains tax on share transfers is
expanded. According to the tax authorities, the amendment is to enhance the
effectiveness of taxation on capital gains arising from majority shareholders’ share
transfers.
Scope of majority shareholders:
Old provision
Amended provision
(1) Stocks listed in KOSPI market
(1) Stocks listed in KOSPI market
- Share ownership ratio of 3% or more
- Share ownership ratio of 2% or more
OR total stock market value of Won 10
OR total stock market value of Won 5
billion or more
billion or more
(2) Stocks listed in KOSDAQ market
(2) Stocks listed in KOSDAQ market
- Share ownership ratio of 5% or more
- Share ownership ratio of 4% or more
OR total stock market value of Won 5
OR total stock market value of Won 4
billion or more
billion or more
The above revision will be applied to the shares transferred after the end of fiscal
years to which July 1, 2013 belongs.
Reduced interest rate for computing deemed interest on rental deposit
(Article 6 of the ED-CTL, Article 23 of the Enforcement Decree of the IITL)
A landlord of real property leased or otherwise rented to a tenant shall calculate
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March 2013
2013 Tax Law
Changes
- Update
deemed interest income on rental deposit at the interest rate stipulated in the tax
law and report it as taxable income. The interest rate was 4.0% until 2012 and this
year, the MOSF lowered the rate to 3.4% in line with the market interest rate in an
effort to reduce taxpayers’ burden.
The revision is effective from the fiscal year commencing on or after January 1,
2013.
Clarified: Arms’ length principle shall be applied to transactions between
foreign (Non-Korean) company’s domestic place of business with its
overseas head office or branches (“intercompany transaction”)
(Article 130 of the PD-CTL, Article 181-2 of the PD-IITL)
The MOSF made it clear that arm’s length principle shall be applied to
intercompany transactions between foreign (Non-Korean) company’s domestic
place of business (i.e., a Korean branch office or permanent establishment (“PE”)
of such foreign company) and its overseas head office or branch offices.
Old provision
Amended provision
□ It was uncertain whether the Korean
□ Arm’s length principle shall be applied
branch
should
to compute Korean source income from
recognize income from intercompany
intercompany transactions (and transfer
transactions and apply the arm’s length
pricing rules in the International Tax
principle on them.
Coordination Law shall be referred to)
□ Whether to deduct expenses incurred
□
from intercompany transaction?
transactions
office
(or
the
PE)
Expenses
from
shall
be
intercompany
tax-deductible
within the range of arm’s length prices
- Interest expense on intercompany
when those are actually paid.
loans : allowed and tax deductible only
for a Korean branch office of a foreign
- Exceptions: expenses below are not
bank
tax-deductible
① Interest expenses on intercompany
loans (except for a Korean branch office
of a foreign bank)
② Guarantee fees
The revision will be effective from fiscal years commencing on or after January 1,
2014.
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March 2013
2013 Tax Law
Changes
- Update
Arm’s length calculation method for intercompany guarantee fee is
clarified
(Article 4③ and 6-2③~⑤ of the Presidential Decree of the International Tax
Coordination Law (“ITCL”), Article 2-3 of the Enforcement Decree of the
ITCL)
The MOSF has established new standards for the Korean companies to calculate
arm’s length price for the intercompany guarantee transactions with their overseas
subsidiaries.
This is to provide official guidelines for the price calculation as the
disputes over the calculation of intercompany guarantee transaction fees are
growing.
The arm’s length price for the guarantee transaction may be calculated by one of
the following methods:
A.
Cost approach: under this method, the arm’s length price is calculated as a sum
of the guarantor’s expected risks from the guarantee provided and the related
costs incurred.
B.
Benefit approach: the arm’s length price is based on the benefit that a company
is expected to receive from a guarantor’s guarantee.
C.
Cost-benefit approach: the arm’s length price is derived from adjusting the cost
approach and the benefit approach considering the guarantor’s expected risks
and costs and the company’s expected returns.
The following prices used by the taxpayers may also be deemed as arm’s length
prices for the guarantee fees:
A.
A guarantee fee calculated based on the difference between borrowing rates,
quoted by a lending financial institution, with and without a guarantee
B.
A guarantee fee calculated based on the benefit approach method, specified by
the Head of the National Tax Service
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Horwath Choongjung LLC
Member Crowe Horwath International
PMAA Jaram Building, 16th Floor, 566 Dohwa-dong,
Mapo-gu, Seoul 121-815, Korea
TEL: (82)(2) 316-6600 FAX: (82)(2) 775-5885 E-mail: post@crowehorwath.co.kr
Website: http://www.crowehorwath.co.kr
Horwath Choongjung LLC is a member of Crowe Horwath International, a Swiss association. Each member firm of Crowe Horwath International is a
separate and independent legal entity. Horwath Choongjung LLC and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath
International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of
Crowe Horwath International or any other Crowe Horwath International member.
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