Providing Excellence In Client Services
May 2012
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
NTS Taxation Trend
Disclosure of a calculation
model for the arm’s length
price of the fee for
payment guarantee
provided to a foreign (nonKorean) subsidiary
2012 Tax Law Changes
Special procedures for
withholding taxes from
foreign (non-Korean)
corporations in order to
apply lower tax rates per
tax treaties
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: G.S. Sim or H.S. Kim 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)
Provisional Amendment of
Korea-Poland Tax Treaty Tax rate cut on royalty
Supreme Court Decision
on Labor Issue
Regular bonus falls under
ordinary wages
Audit l Tax l Advisory
www.crowehorwath.co.kr
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May 2012
NTS Taxation
Trend
1. Disclosure of a calculation model for the arm’s length price of the fee for
payment guarantee provided to a foreign (non-Korean) subsidiary
When a foreign subsidiary of a Korean company borrows money from the financial institutions
in the foreign country, usually the foreign subsidiary receives payment guarantee from the
Korean parent company and pays a fee for payment guarantee to the Korean parent
company. Under the Korean tax law, fee for payment guarantee received from the foreign
subsidiary is treated as taxable income and subject to the Korean transfer pricing rules.
However, as it is not clear how to determine the arm’s length price of the fee for payment
guarantee, unfairness on taxation practice existed among Korean companies. Accordingly,
National Tax Service (“NTS”) has developed a calculation model for the arm’s length price of
the fee for payment guarantee and announced it recently.
Detailed contents of a calculation model for the arm’s length price of the fee for
payment guarantee
The calculation model for the arm’s length price of the fee for payment guarantee is a credit
evaluation model and according to the formula of the model, the arm's length price of the fee
for payment guarantee is determined by the spread difference for the Korean parent company
and the foreign subsidiary based on their standardized credit rating.
- Calculation model for the determination of arm’s length price of the fee for payment
guarantee :
Selection of
value index
Determination
of a company’s
credit rating
Calculation
of spread
Calculation
of arm's
length price
a. Selection of suitable financial ratios as value index ;
NTS selected 63,000 companies as samples and divided those companies by normal
companies and bankrupt companies, and verified the objectiveness by selecting suitable
financial ratios as value index, which makes it easy to determine symptoms of corporate
bankruptcy.
b. Determination of a company’s credit rating ;
NTS calculated scores of the model by putting statistical weights on the financial ratios
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May 2012
computed based on the financial data for the recent two years and determined a company’s
credit rating by comparing with the scores of the model with the standardized 13 grades.
c. Calculation of spread ;
NTS calculated a company’s spread based on the 'probability of default' of the Korean parent
company and the foreign subsidiary calculated by the NTS credit evaluation model.
d. Calculation of the arm's length price of the fee for payment guarantee ;
The arm's length price of the fee for payment guarantee is determined by the spread
difference for the Korean parent company and the foreign subsidiary based on their credit
rating.
- Considerations given to complement limitations of NTS' model
Upgrading the credit rating of the Korean parent company and the foreign subsidiary by 1
grade each to reflect measurable non-financial factors (brand value, country risk, etc.)
from the conservative point of view.
Putting a ceiling on the arm’s length price by applying the 9th grade as the lowest credit
rating.
Producing the arm’s length price as certain ranges of average price.
If a company’s actual spread is reported based on the company’s credit rating confirmed
by the main bank, it will be deemed as the arm’s length price of the fee for payment
guarantee.
2012 Tax Law
Changes
2. Special procedures for withholding taxes from foreign (non-Korean)
corporations in order to apply lower tax rates per tax treaties(effective from
July 1, 2012)
When a foreign corporation or non-resident receives Korean source income (interest, dividend,
royalty, etc.), they should file an application for lower tax rates in advance pursuant to tax
treaties to the relevant withholding agent.
When the above-mentioned income is paid through an offshore investment organization
(e.g., offshore fund), the organization should submit an offshore investment organization
report to the relevant withholding agent along with an application for lower tax rates and
detailed information of beneficial owners.
Audit l Tax l Advisory
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May 2012
If the relevant withholding agent or an offshore investment organization can not identify the
beneficial owners, the withholding tax rate pursuant to domestic tax law would apply. In a
case where a beneficial owner later intends to apply for the lower tax rates pursuant to a tax
treaty, it may claim refund of overpaid taxes to the district tax office having jurisdiction over the
place of tax payment of the relevant withholding agent within three years from the last day of
the month in which the tax amount is withheld. This new regulation will be effective on the tax
withholdings to be made on or after July 1, 2012.
3. Provisional Amendment of Korea-Poland Tax Treaty - Tax rate cut on
royalty
The Ministry of Strategy and Finance announced on May 11, 2012 that the governments of
Korea and Poland provisionally agreed to amend the Korea - Poland tax treaty. The
provisional amendment includes the withholding tax rate cut on royalty payment from 10% to
5%.
To avoid tax evasion, both countries also agreed to exchange information that financial
institutions hold. The taxation on capital gains derived from alienation of stocks with underlying
real estate would be implemented in the country the capital gains were sourced from.
There are exceptional cases in applying tax withholding procedures. Zero tax rate would be
applied for interest income received by Korea Finance Corporation, Korea Trade Insurance
Corporation, and Korea Investment Corporation for the corporations’ investment in Poland.
The assignees of the corporations to Poland would also not pay taxes on their wages and
salaries in Poland.
The foregoing provisional amendment will become fully effective after the formal agreement
and necessary sanctioning procedures.
Supreme
Court
Decision
4. Supreme Court Decision on Labor Issue – Regular bonus falls under
ordinary wages
19 employees had sued a bus company for salary claim (case number 2010da91046) and the
supreme court judged that regular bonus paid by the company falls under ordinary wages.
The supreme court interpreted that as the quarterly paid bonus is fixed by predetermined rate
Audit l Tax l Advisory
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May 2012
based on continuous service year and ordinary wages include any fixed payments made
regularly and uniformly, such bonus falls under ordinary wages. They added that long-service
allowance is likely to be under ordinary wages because the monthly paid long-service
allowance is based on the employees’ service period, not based on their performance.
Ordinary wages, which are computed and paid for employees’ service regularly and uniformly,
are used to calculate allowances for overtime/night/holiday work, annual leave, maternity leave
etc. The above-mentioned case will likely impact on computation of various allowances,
average wages and pay negotiations.
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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.
Audit l Tax l Advisory
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