Introduction of New Tax Incentives to Encourage Domestic Spending and Small and Medium-Sized Enterprises

■ Introduction of New Tax Incentives to Encourage Domestic Spending and Small and Medium-Sized Enterprises

The Korean National Assembly passed amendments to the Special Tax Treatment and Control Law (STTCL) on April 29, 2020 and the State Council of Korea passed the relevant presidential decree of the STTCL on May 26, 2020, in a follow-up procedure to encourage domestic spending by introducing a new corporate income tax credit for certain prepayments of goods and services. The amendments also would allow early provisional tax refunds for small and medium-sized enterprises (SMEs).

The major changes are summarized below.

l Tax credit for corporations making prepayments for goods and services to be purchased

The requirements to qualify for the new credit would include the following:

- goods or services for which the prepayment is made have to be purchased for business purposes;

- goods or services have to be purchased from small business owners;

- the prepayments should exceed KRW 1 million per transaction; and

- the prepayment shall be made during the period of April 1 through July 31, 2020 ahead of its original payment term agreed upon under the contract for at least 3 months or more for goods or services that are to be provided by December 31, 2020.

The tax credit will be equal to 1 % of the qualified prepaid amount. It is possible to claim the credit at the same time as other tax credits and exemptions, and the credit is not limited. However, even if the taxpayer has no corporate income tax liability for the year, the minimum tax and the special fishery and agriculture tax still would be levied.

Taxpayers may apply for the tax credit when filing their annual income tax returns for the fiscal year (FY) including December 31, 2020, and supplemental documents should be submitted to substantiate that they made eligible prepayments.

l Granting of early tax refunds for small and medium-sized enterprises

SMEs and sole proprietors that filed individual or corporate income tax returns for FY2019 will be eligible for early provisional tax refunds. Early provisional tax refunds can be made to taxpayers incurring tax losses during the first half year (six months) of FY2020.

The early provisional tax refunds will be calculated based on the formula (A – B), where:

A = 50% of FY2019 tax liability

B = [(FY2019 taxable income – (tax loss for the first half year of FY2020 x 2)) x FY 2019 tax rate] x 50%

The early provisional tax refund shall be limited to 50% of the previous year’s individual or corporate income tax liability. The final tax refund settlement will be made by comparing the provisional tax refund with the final tax refund calculated for FY2020. Applications for early provisional tax refunds should be submitted within two months after the end of the first half year of FY2020 (i.e., by the end of August 2020 for calendar year-end taxpayers).