The Ministry of Economy and Finance and the Ministry of the Interior and Safety announced proposed amendments to the national and local tax laws on July 25, 2019 and August 14, 2019, respectively.

The proposed amendments are subject to change in the process of discussions that will be held during the regular session of the National Assembly, and will likely be effective for tax years beginning on or after January 1, 2020.

Key Amendments

1.   International Tax
 

• Rationalization of the party bearing the burden of proof on diverted transactions [Article 2-2 (4) and (5) of the newly enacted International Tax Coordination Law (“ITCL”)]
  
  Purpose: Enhance the effectiveness of taxation by clarifying which party is to bear the burden of proof with respect to an international transaction under suspicion of tax avoidance. 
  
  Proposed Change: If a circuitous transaction results in a significant reduction in domestic taxes greater than a ratio to be stipulated under the ITCL-Presidential Decree (“PD”), the taxpayer will be obliged to prove that there was no intent to avoid taxes; otherwise, such transaction will be deemed to have been entered into for the purpose of exploiting the relevant tax treaty and the ITCL and, consequently, the substance-over-form principle will apply. 
  
  Application: Applicable to taxable years commencing on or after January 1, 2020.

2.   Finance Tax
 

• Reduction of securities transaction tax (“STT”) rates on non-listed shares and off-market transfers of listed shares [Article 8 of the Securities Transaction Tax Law (“STTL”)] 
  
  Purpose: Reduce share transaction costs.
  
  Proposed Change: Reduce STT rate to 0.45% for transfers of non-listed shares and off-market transfers of listed shares.
  
  Application: Applicable to share transfer on or after April 1, 2020.

3.   Corporate Income Tax and Value Added Tax
 

• Adjustment of tax deferral benefits for in-kind contributions or share exchanges made during the establishment of, or conversion to, a holding company [Article 38-2 of the Special Tax Treatment Control Law (“STTCL”)] 
  
  Purpose: Limitation on the deferral of capital gains derived from in-kind contributions or share exchanges made during the establishment of, or conversion to, a holding company. 
  
  Proposed Change: Under the current rules, a taxpayer may defer these capital gains until its disposition of shares in the holding company.  Following the amendment, deferrals will be limited to four years and the taxpayer must pay the deferred capital gains tax after the fourth year over the course of three years in installments. 
  
  Application: Applicable to capital gains arising from in-kind contributions or share exchanges executed from January 1, 2022 to December 31, 2024.
  
   
• Clarification of the scope of non-deductible input VAT amount [Article 39 (1) of the Value Added Tax Law (“VATL”)] 
  
  Purpose: Prevent disputes between taxpayers and the government and reduce taxpayers’ administrative burdens. 
  
  Proposed Change: The proposal adds a condition regarding the denial of input VAT credit when the VAT invoice includes erroneous “necessary information.”  Under the amendment, in the case where the VAT invoice contains an incorrect supply value, the amount of input VAT to be denied is limited to the difference between the incorrect supply value and the correct one. 
  
  Application: Applicable to supply of goods or services on or after January 1, 2020.

4.   National Tax Basic Law
 

• Procedural changes to accept refund requests and amend tax filings submitted after their due date [Articles 45 and 45-2 of the National Tax Basic Law (“NTBL”)]
  
  Purpose: Allow amending a tax filing even if the original tax filing is submitted after the statutory deadline.
  
  Proposed Change: Refund requests and amended tax filings will be allowed even if the original tax return is filed after the statutory due date.
  
  Application: Applicable to refund requests and amended tax filings made on or after January 1, 2020.*
  
  * Refund requests and amended tax filings are also possible on or after January 1, 2020 for tax filings submitted after the statutory deadline prior to January 1, 2020.

5.   Local Tax
 

• Mandatory administrative appeal procedure prior to filing an appeal to the Korean courts [Article 89 of the Local Tax Basic Law (“LTBL”)]
  
  Purpose: Unify the appeal system in relation to national and local taxes, and prevent unnecessary appeals to the Korean courts.
  
  Proposed Change: Implementation of a mandatory administrative appeal procedure under which taxpayers must first go through the Tax Tribunal or the Board of Audit and Inspection of Korea (BAI) appeal process before appealing to the Korean courts.  The proposed amendment also proposes to abolish the Request for Investigation system conducted by the local city or province, which is another administrative appeal route currently available to payers of local taxes.
  
  Application: Applicable to tax appeals filed on or after January 1, 2021.