Korea: Tax Update
Korea Ranked 5th in the World Bank’s Business Environment Assessment.
In 2019, Korea ranked fifth among 190 countries in the World Bank’s business environment assessment. This is the third best business environment among countries in the Organisation for Economic Co-operation and Development (OECD).. According to the 2020 Doing Business report, Korea is ranked highly in Legal Dispute Resolution (2nd) and Electricity Supply (2nd), and relatively low in Entrepreneurship (33th) and Financing (67th). In a tax environment, ranking rose from 24th to 21st, which is considered to be the result of increased tax convenience, such as the self-verification service with e-VAT invoice when paying corporate income tax and VAT. (Oct. 2019)
EU Removed Korea from List of Non-cooperative Tax Countries
The European Economic and Financial Affairs Council (ECOFIN) chose to exclude Korea from non-cooperative tax jurisdiction in March 2019.
In 2017, the EU designated Korea as a non-cooperative tax country. It ruled that the principle of fair taxation was violated since the corporate income tax exemption system for a foreign-invested company only applied to non-residents. In response, the Korean government abolished the relevant regulations and established a support system to promote foreign investments to be in line with global standards. The Korean government also announced it would continue its efforts to improve tax equality between domestic and foreign investments, and comply with international standards. (Mar. 2019)
Revision of Korea-Singapore Tax Treaty
The Korea-Singapore Income Tax Treaty, which came into force in 1981, was amended in May 2019. It is anticipated that this revision will ease the local tax burden of companies entering two countries. As well as this, the Treaty prepared means to prevent tax avoidance, reflecting the latest discussions of the OECD. Major revisions are as follows (May 2019):
- Permanent Establishment (PE): Threshold of PE for construction companies will increase to 12 months from the current 6 months.
- Royalty: The tax rate on royalties will reduce from 15% to 5%.
- Capital gains from transferring shares: The standard will be changed from taxation in the country of origin to taxation in the country of residence. However, transfer gains of real estate stock and major stockholder’s stock will still be taxed in the country of origin.
- Independent personal services: this will only be taxable in the country of origin if the resident has permanent residency. Previously, taxation was possible even when a person resided in a country for more than 183 days.
Free Trade Agreements (FTAs) with five South American countries was in place from 1st of October. The five South American countries this relates to are Nicaragua, Honduras, Costa Rica, El Salvador, and Panama. FTAs with Costa Rica, El Salvador, and Panama will be in place once their domestic process is completed. (Oct. 2019)
Tax Reform Proposals for 2019
In August 2019, the Ministry of Economy and Finance (MOEF) submitted revised tax reform proposals for 2019 to the National Assembly. The amendments of the tax law focused on the recovery of economic vitality and innovation growth, strengthening inclusiveness, fairness of the economic society, rationalisation of the tax system, and expansion of revenue base.
Major revisions are as follows:
Tax incentives for investment in certain facilities
Currently, the investment tax deduction rate for certified productivity improvement facilities is 1% in large corporations (3% for midsize companies and 7% for small companies). The rates will increase to 2%, 5% and 7% respectively.
Reduction of securities transaction tax rate on unlisted shares
The securities transaction tax rate on unlisted or listed shares traded over- the-counter is reduced from the current 0.5% to 0.45%. On the other hand, the tax rate reduction on listed shares traded on the stock exchange is already in effect.
Totalisation of capital gain and loss from foreign stocks
Gains and losses were separately calculated for domestic and foreign stocks. The amendment, however, allows the taxpayer to combine the gain and loss from transfer of domestic and foreign stocks. Basic income deduction is KRW2.5 million in total.
Adding foreign corporations to Research & Development (R & D) tax credits
Foreign corporations controlled directly or indirectly by domestic corporations were added to the R & D expenditure tax credit for new growth technology. Foreign corporations should focus on research and development, and the specifics on ownerships of domestic corporations are prescribed in the Enforcement Rules. This is based on needs for consignment and joint R&D with foreign companies when domestic research conditions for new technologies are not secured.
Establishment of Principles for Interpretation and Application of Tax Treaties
In order to increase the certainty of the interpretation and application of tax treaties, regulations on the interpretation and application of tax treaties have been newly added to the Act for the Coordination of international Tax Affairs (ACITA). When terms and phrases are not defined in a tax treaty, the part shall be interpreted and applied in accordance with the meaning defined or used in accordance with domestic tax law.