Proposed South Korean Tax Law Changes in 2021

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 Extension of the carryforward period for tax losses

Currently, tax losses incurred in a current year can be carried forward for the next 10 years. Under the proposal, the period for tax loss carryforward would be extended from the current 10 years to 15 years in order to relieve the tax burden of taxpayers including foreign-invested companies and support businesses that suffered from COVID 19 pandemics.

The proposed change would apply to tax losses reported on or after January 1, 2021.

l Elimination of the expense deduction method for indirect foreign tax

Currently, a domestic company including a foreign-invested company is entitled to choose either the tax credit method or the expense deduction method for the foreign taxes paid indirectly by its foreign subsidiary.

Under the proposal, the expense deduction method will not be allowed and only the tax credit method can be chosen.

The proposed change would be effective from the year beginning on or after January 1, 2021.

l Expansion of the circumstances under which an amended import VAT invoice can be issued

Currently, an amended import VAT invoice cannot be issued in the case where an importer files an amended import declaration knowing in advance that the tax base or the amount of customs duty will be determined or rectified by the head of a customs office.

Under the proposal, an amended VAT invoice can be issued even though an importer files an amended import declaration knowing that there will be determination and rectification of tax base or the amount of customs duty.

This proposal will be effective for the amended tax returns to be filed on or after January 1, 2021.

l Expansion of the scope of supply of goods that are exempted from VAT

Currently, the gifts provided to employees were exempted from VAT up to a value of KRW 100,000 per year. Under the amendment, the KRW 100,000 limitation applies per event (i.e., New Year’s Day (“Seol-Nal”), Thanksgiving Day (“Chuseok”) and other personal events).

The proposed change would be effective from the year beginning on or after January 1, 2021.

l Changes in the individual income tax exemption for foreign engineers

Currently, qualified foreign engineers are entitled to 50% exemption in income tax on the employment income for 5 years (in the case where the engineers work in companies in materials, parts and equipment sectors, 70% exemption for the first 3 years and 50% exemption for the next 2 years). Under the proposal, while the qualification of foreign engineers will be strengthened, the scope of qualified R&D facilities will be expanded.

Under the proposal, qualified foreign engineers should have 1) a bachelor’s degree in science or engineering with R&D work experience of at least 5 years or 2) a Ph.D. degree in science or engineering with R&D work experience of at least 2 years. Meanwhile, under the proposal, the scope of qualified R&D facilities will be expanded to include corporate research institutes or R&D department and government-funded R&D facilities or university-affiliated research institutes.

The proposed change shall apply to the employment agreements executed from the year beginning on or after January 1, 2021.