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Newsletter | December 2014, Issue 4
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TAX
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Proposed Tax Law Changes for 2015
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On August 6, 2013, the Ministry of Strategy and Finance announced proposed tax law amendments for 2015, most of which would take effect on January 1, 2015 if enacted into law. The main items as currently proposed are summarized below but are subject to change during the National Assembly’s legislative review later this year.
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New Excess Retained Earnings Tax (Article 56 of the Corporate Income Tax Law)
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In the event a corporation (excluding small and medium-sized enterprises) with equity capital exceeding KRW 50 billion does not pay out its statutory ratio (20%~80%) of earnings as investments, salaries to employees or dividends, etc., a new proposed taxation scheme would impose an 11% tax on such under-used earnings. This taxation scheme, if enacted, would apply through December 31, 2017.
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New Tax Credit Provided for Certain Employee Salary Increases (Article 29-4 of the Special Tax Treatment Control Law (“STTCL”))
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The proposed tax law amendment also introduces a credit scheme whereby a corporation may claim a tax credit amounting to 5% (10% for small and medium-sized enterprises and medium-sized leading enterprises) of the difference between the salary increase rate for the year in which a credit is sought and the average salary increase rate for the immediately preceding 3-year period, so long as both of the following conditions are met.
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The average salary increase rate for the year in which a credit is sought is higher than the average salary increase rate for the immediately preceding 3-year period; and
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The number of full-time employees during the year in which a credit is sought is greater than or equal to the number of full-time employees in the immediately preceding year.
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If enacted, the new credit scheme would apply through December 31, 2017.
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Strengthened Application of Thin Capitalization Rules (Article 14 of the International Tax Coordination Law (“ITCL”))
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Under current tax law, where a corporation is not a financial institution and its borrowings from a foreign controlling shareholder exceed three times the capital invested by the same foreign controlling shareholder, interest expenses allocable to such excess borrowings are not deductible since such interest expenses are deemed dividends. The proposed tax law amendment changes the threshold debt-to-equity ratio from three times to two.
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Fines Imposed for Failure to Submit Details of International Transactions with Related Parties (Article 12 of the ITCL)
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The proposed amendments also impose a fine of up to KRW 100 million for failing to submit details of international transactions with related parties by the applicable filing due date.
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Extension of Eligibility Period for Tax Refund Claims (Article 45-2 of the National Tax Basic Law)
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Taxpayers are currently allowed to pursue tax refund claims for over-reported and over-paid tax within 3 years from the filing due date of the relevant tax return. The proposed tax law amendments extend this tax refund limitation period to 5 years.
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Extension of Flat Tax Rate for Foreign Workers (Article 18-2 of the STTCL)
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Current tax law allows for the application of a flat 18.7% personal income tax rate on income to foreign workers working in Korea. The sunset date for this provision was originally December 31, 2014. Under the proposed tax law amendments, foreign workers providing labor to a regional headquarters located in Korea would be eligible for the flat rate beginning on the date in which work in Korea commenced and ending 5 years thereafter, regardless of the sunset period. All other foreign workers would be eligible for the flat rate through December 31, 2016.
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