tax law changes announced by the Korean government in July 2020 were approved
by the National Assembly in December 2020 with several amendments and
additions. We summarized below some of the major tax law changes for 2021 to
keep you updated. Most of the tax law changes we discussed below came into
force from the fiscal year starting, or income earned, on or after January 1,
2021 unless indicated otherwise.
Income Tax Law (CITL)
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.
Under the tax law changes, to strengthen a relief for
double taxation of foreign source income, the five (5)-year carryforward period
would be extended to ten (10) years.
In addition, for foreign tax credits which are not used
during the carryforward period, taxpayers will 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. This change will 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 documents
Currently, all entertainment expenses over KRW 10,000
threshold should be substantiated by valid supporting documents to be tax
deductible for corporate income tax reporting 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 tax law changes, the threshold of KRW 10,000
shall be increased to KRW 30,000, which will apply for payments from January 1,
Income Tax Law (IITL)
l Housing fund deductions allowed to qualified
foreign resident employees
Currently, application of income deductions
and tax credit for housing funds for qualified individuals is allowed to a
resident employee who is a Korean national only. Under the tax law changes, the
application of income deductions and tax credit shall be allowed to a qualified
foreign resident employee as well.
l Increased individual income tax rate
Under the tax law changes, the top marginal
individual income tax rate bracket shall be established and the top marginal
tax rate shall be 49.5% (including 10% local (provincial) income tax assessed
on top of individual income tax liability) as given below. The revised
provision will be effective for income earned from January 1, 2021.
KRW 12 mil or less
Same as left
KRW 12 mil ~ KRW 46 mil
KRW 46 mil ~ KRW 88 mil
KRW 88 mil ~ KRW 150 mil
KRW 150 mil ~ KRW 300 mil
KRW 300 mil ~ KRW 500 mil
Exceeding KRW 500 mil
KRW 500 ~ KRW 1 bil
Exceeding KRW 1 bil
l Expansion of the scope of Overseas Specially
Related Party (“OSRP”)
Under the tax law changes, 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 considered in determining 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. The revised provision is
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 statute of limitations for tax
assessment even if an application for APA is intended to be applied
Under the tax law changes, the period of
retrospective application of bilateral APA through a mutual agreement shall be
extended from five (5) years to seven (7) years in accordance with the statute
of limitations for tax assessment on offshore transactions, and the period of
retrospective application of unilateral APA shall be extended from three (3)
years to five (5) years in accordance with the period of claim.
The revised provision is 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 tax law changes, 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 (3) months after the end of the tax year)
to six (6) months after the end of the tax year.
The revised provision is applied to the SIT
and SPLS to be submitted on or after January 1, 2021.