news

Proposed South Korean Tax Law Changes in 2021

9/25/2020
news

On July 22, 2020, the Ministry of Economy and Finance (MOEF) of Korea announced the government tax reform proposals to be implemented from 2021. The proposed tax law changes will be finalized after the National Assembly passes the bill. We summarized the major proposed tax law changes in 2021 to keep you updated as follows.

l Expansion of the scope of Overseas Specially Related Party (“OSRP”)

Under the proposal, when determining whether a third party is in an overseas special relationship by directly or indirectly owning at least 50% of the voting shares of both transaction parties, the calculation of the shareholding ratio of the third party also includes shares directly or indirectly owned by a relative under the International Tax Coordination Law of Korea (“ITCL”).

As the shares directly or indirectly owned by the relatives shall be included in the overseas special relationship, the transactions subject to the transfer pricing taxation may also be expanded, so care must be taken to ensure that the transactions are not omitted from the list of the OSRP transactions when preparing the Master File and Local File to meet the BEPS requirements. It shall be effective from the tax year beginning on or after January 1, 2021.

l Extension of retrospective application period of Advance Pricing Agreement (“APA”)

Currently, it shall not be possible to apply APA for some of the tax years within the limitation period for tax assessment even if an application for APA is intended to be applied retrospectively.

Under the proposal, the period of retrospective application of bilateral APA through a mutual agreement shall be extended from five years to seven years in accordance with the limitation period for tax assessment on offshore transactions, and the period of retrospective application of unilateral APA shall be extended from three years to five years in accordance with the period of claim.

It shall be applied to the APA applied for the first time on or after January 1, 2021. This amendment is expected to increase the protection of the rights of taxpayers applying for retrospective APA application.

l Extension of deadline for submitting the Schedule of International Transactions (“SIT”)

Under the proposal, the deadline for submitting the SIT and the Summarized Profit and Loss Statement of OSRP (“SPLS”) is extended from the reporting due date of the tax base under the Corporate Income Tax Law (i.e., three months after the end of the tax year) to six months after the end of the tax year.

It shall be applied to the SIT and SPLS submitted on or after January 1, 2021.

l Extension of foreign tax credit carryforward and deduction for unused foreign tax credit

Currently, a company can claim a foreign tax credit for foreign taxes paid or to be paid in relation to its foreign source income for five years if the claimed foreign tax credit is in excess of tax limit.

To strengthen a relief for double taxation of foreign source income, under the proposal, the five-year carryforward period would be extended to ten years.

In addition, for foreign tax credits which are not used during the carryforward period, taxpayers would be allowed to deduct the unused tax credit amount from taxable income for the year immediately following the year in which the carryforward period ends. The proposed change would apply to the unused foreign tax credit whose existing carryforward period (i.e., five years) would not lapse upon income tax return filing on or after January 1, 2021.

l Increased threshold for deductible small entertainment expenses without qualified supporting document

Currently, all entertainment expenses over KRW 10,000 threshold should be substantiated by valid supporting documents to be tax deductible for corporate tax purposes within tax limit allowed (an exception applies for cash gifts for congratulation/condolence to business partners/customers, which do not need to be supported by valid supporting receipts if the amount is KRW 200,000 or less).

Under the proposal, the threshold of KRW 10,000 shall be raised to KRW 30,000, which would apply for payment from January 1, 2021.

l Clarification of place of supply for electronic services

Currently, the place of supply of service is generally the place where the service is performed or where the rights, facilities or other goods, etc. are used. For the international transportation services supplied by a Korean nonresident or foreign (non-Korean) corporation, the place where passengers are on board or freights are loaded would constitute the place of supply.

However, there is no specific provision concerning the place of supply of electronic services. To clarify the place of supply for electronic services, the proposal stipulates that the place of supply of electronic services would be the premise or business place, the address or the place of residence of a person who is supplied with electronic services. It would apply to electronic services supplied on or after January 1, 2021.

l Increased individual income tax rate

Under the proposal, the highest individual income tax rate bracket shall be established and the highest tax rate shall be 49.5% (including 10% local surtax). The proposed change would be effective for income earned from January 1, 2021 (in millions or billions of Korean Won).

Current

Proposed Changes

Taxable income

Tax rate

Taxable income

Tax rate

KRW 12 mil or less

6.6%

Same as left

Same as left

KRW 12 mil ~ KRW 46 mil

16.5%

Same as left

Same as left

KRW 46 mil ~ KRW 88 mil

26.4%

Same as left

Same as left

KRW 88 mil ~ KRW 150 mil

38.5%

Same as left

Same as left

KRW 150 mil ~ KRW 300 mil

41.8%

Same as left

Same as left

KRW 300 mil ~ KRW 500 mil

44%

Same as left

Same as left

Exceeding KRW 500 mil

46.2%

KRW 500 ~ KRW 1 bil

46.2%

Exceeding KRW 1 bil

49.5%