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 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:
(1) Stocks listed in KOSPI market
- Share ownership ratio of3% or more OR total stock market value of Won10billion or more
(2) Stocks listed in KOSDAQ market
- Share ownership ratio of5% or more OR total stock market value of Won5billion or more
- Share ownership ratio of2% or more OR total stock market value of Won5billion or more
- Share ownership ratio of4% or more OR total stock market value of Won4billion 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 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.
□ It was uncertain whether the Korean branch office (or the PE) should recognize income from intercompany transactions and apply the arm’s length principle on them.
□ Whether to deduct expenses incurred from intercompany transaction?
-Interest expense on intercompany loans : allowed and tax deductible only for a Korean branch office of a foreign bank
□ Arm’s length principle shall be applied to compute Korean source income from intercompany transactions (and transfer pricing rules in the International Tax Coordination Law shall be referred to)
□Expenses from intercompany transactions shall be tax-deductible within the range of arm’s length prices when those are actually paid.
-Exceptions: expenses below are not tax-deductible
①Interest expenses on intercompany loans (except for a Korean branch office of a foreign bank)
The revision will be effective from fiscal years commencing on or after January 1, 2014.
■ Arm’s length calculation method for intercompany guarantee fee is clarified
(Article 4③ and 6-2③~⑤of 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:
The following prices used by the taxpayers may also be deemed as arm’s length prices for the guarantee fees: