On July 26, 2021, the Ministry of Economy and Finance (the “MOEF”) released its 2021 proposed tax law amendments (collectively the “Proposed Amendments” and the “Proposed Amendment” singularly), which would generally be effective from 2022 if finalized and ratified by the legislature.  Below we have outlined the key parts of the Proposed Amendments that may be of your interest.

1.   Corporate Income Tax

• Increased tax benefits for R&D costs and investment in facilities related to National Strategic Technology (Article 10 and 24 of the Tax Incentive Limitation Law (“TILL”))
  
  R&D costs incurred from any National Strategic Technology (i.e., semiconductor, secondary batteries and vaccine) will be granted a 10% higher “research/engineer/development cost tax credit” (credit rate: 30-50%) compared to R&D costs incurred from new growth industry or source technology.  Further, investment in facilities relating to National Strategic Technology will be granted a 3-4% higher tax credit (basic credit rate: 6-16%, additional deduction rate: 4%) compared to investment in facilities relating to new growth industry or source technology.  This Proposed Amendment is expected to apply to R&D costs incurred and investment in facilities made between July 1, 2021 and December 31, 2024.

• Deduction of loss carryforward upon business transfer (Article 50-2 and 113 of the Corporate Income Tax Law (“CITL”))
  
  In an effort to prevent tax avoidance through a business transfer, the Proposed Amendment stipulates the loss carryforward of the transferee can only be deducted from income generated from the existing business of the transferee if (i) the business transfer is between related parties and (ii) the transferred business constitutes “70% or more of assets and 90% or more of net assets” of the transferor.  Provided conditions (i) and (ii) are met, the transferee will not be able to deduct the loss carryforward of its existing business from the income generated from the newly acquired business.  This Proposed Amendment is expected to apply to business transfers made on or after January 1, 2022.

• Supplementation of the tax regime for promotion of investment/co-existence (Article 100-32 of the Presidential Decree (“PD”) to the TILL)
  
  Under the tax regime for promotion of investment/co-existence (which was called previously as excess retained earnings tax or accumulated corporate earning tax), if income earned by an enterprise (“corporate income”) is held “excessively” in cash rather than being spent for investment, wages, etc., such “excessive” retained income calculated under the relevant tax law provisions shall be additionally imposed a special tax at a 20% rate.  Corporate income is calculated by reflecting statutory additions/deductions, and the scope of deductible items will be clarified or adjusted from the Proposed Amendment.  For example, the 60% limit applicable to loss carryforward will be expanded such that the entire balance of loss carryforward can be included as a deductible item.  This Proposed Amendment is expected to apply to fiscal years beginning on or after January 1, 2022.

• New penalty imposed on non-submission of expense details related to business vehicles (Article 81-14 of the Personal Income Tax Law, Article 74-2 of the CITL)
  
  If a taxpayer claimed a tax deduction on expenses incurred from its business vehicle, but failed to submit (or inaccurately submitted) the relevant expense details, the Proposed Amendment will impose a 1% penalty on the non-reported or inaccurately reported amount.  This Proposed Amendment is expected to apply to fiscal years beginning on or after January 1, 2022.

2.   Value Added Tax (“VAT”)

• Extension of time for issuing amended VAT invoice (Article 70 of the PD-VATL)
  
  The current law only allows an amended VAT invoice to be issued no later than the VAT return due date.  The Proposed Amendment extends this due date to one year after the VAT return due date for those VAT invoices that need correction on basic information (e.g., supplier, buyer, supply value and date).  This Proposed Amendment is expected to apply to goods or services provided on or after the effective date of the relevant presidential decree.

• Extension of time for receiving VAT credit (Article 75 of the PD-VATL)
  
  If a VAT invoice was issued after the supply date, the current law allows a VAT credit to the extent such VAT invoice was issued within six months from the VAT return due date.  In an effort to protect self-employed individuals, the Proposed Amendment extends this period to one year from the VAT return due date.  This Proposed Amendment is expected to apply to goods or services provided on or after the effective date of the relevant Presidential Decree.

• Ease of conditions for issuing amended import VAT invoice (Article 35 (2) of the VATL) 
  
  Under the current law, the issuance of amended import VAT invoices to importers based on the Customs Office’s amendment/correction notice is allowed only in limited cases, i.e., when the amendment/correction is a result of “the importer’s mistake or minor negligence” or “a fault not attributable to the importer.”  The Proposed Amendment gives the taxpayer more room to issue an amended import VAT invoice, such as if there is no finding of “the importer committing a customs crime or manipulation of price” or “an existence of a gross negligence of the importer as provided under the relevant presidential decree.”  This Proposed Amendment is expected to apply to amended VAT return filings or amendment/correction notice made on or after January 1, 2022.

• New obligation imposed on foreign business owners providing electronic services (Article 53-2 of the VATL)
  
  For foreign business owners that are registered as simplified VAT businesses and provide e-services, the Proposed Amendment mandates such owners to keep transaction documents related to its e-services for up to five years after its VAT return due date, and also imposes an obligation to submit those documents upon request by the tax authorities.  This Proposed Amendment is expected to apply to electronic services provided on or after July 1, 2022.

3.   International Tax

• Reduction of penalty relating to international transaction data (Article 100 of the PD to the International Tax Coordination Law (“ITCL”))
  
  The Proposed Amendment reduces the penalty (30%-90% depending on the submission date) for after-the-due date filing or supplementary submission of international transaction data, e.g., Master File, Local File, Country-by-Country report, and schedule of international transactions.  This Proposed Amendment is expected to apply to submissions made on or after the effective date of the relevant presidential decree. 

• Strengthened control over controlled foreign corporations (“CFC”) (Article 27 of the ITCL)
  
  In order to prevent tax avoidance through CFCs, (i) the effective tax rate threshold triggering the application of the CFC rules will change from the current 15% to a rate “equal to 70% of the highest domestic corporate tax rate (currently 25%)” and (ii) the scope of CFC will be expanded to cover certain types of trust.  This Proposed Amendment is expected to apply to fiscal years beginning on or after January 1, 2022.

4.   Others

• Reduction of delayed payment penalty tax rate (Article 27-4 of the National Tax Basic Law (“NTBL”)
  
  Currently, the delayed payment penalty tax rate is 0.025% per day.  When the Presidential Decree is amended, the delayed payment penalty tax rate will be determined within the range of 0.019-0.022%, which is lower than the current delayed payment penalty tax rate.  This Proposed Amendment is expected to apply to taxes imposed after the effective date of the relevant Presidential Decree.

• Extend sunset date for foreign employees to elect to apply the flat tax rate (Article 18-2 of the TILL)
  
  The Proposed Amendment extends the election sunset period from December 31, 2021 to December 31, 2023 for certain foreign employees to apply a 20.9% flat rate (inclusive of local income surtax) for the first five years of employment.

• Clarify gift tax scope for low purchase price or high sales price (Article 35 of the Inheritance and Gift Tax Law (“IGTL”))
  
  If the sales price between individuals is equivalent to the fair market value under the Personal Income Tax Law and thus the Denial of Unfair Transaction Rule on the capital gains tax does not apply, any benefits derived from the low purchase price or high sales price will not be subject to gift tax.  This Proposed Amendment is expected to apply to transactions made on or after January 1, 2022.

• Clarify gift tax scope on dividends in excess of investment yield (Article 41-2 of the IGTL)
  
  In case dividends are provided in excess of the investment yield, the Proposed Amendment stipulates such excessive amount (which is treated as a gift) is deemed to have been provided on the date the dividend was actually paid.  Such gift amount should be reported to the tax authorities until the individual’s personal income tax return due date in the following year.  This Proposed Amendment is expected to apply to tax returns filed on or after January 1, 2022.