In December 2021, the National Assembly finalized and ratified the proposed tax law amendments submitted by the Ministry of Economy and Finance (the “MOEF”). The Presidential Decree (the “PD”) was released soon thereafter and has gone into in effect as of February 15, 2022.
Below are the key tax law amendments, and most of them are in effect as of January 1, 2022.
1. International Tax
Allow limited-scope tax audit for the purposes of verifying tax exemption applications (Article 63-12 of the PD to the National Tax Basic Law (the “NTBL”))
To enhance the efficiency of tax audit administration, a limited-scope tax audit is now allowed when submitted tax exemption applications need to be verified. This amendment applies to tax exemption applications submitted on or after February 15, 2022.
Clarify substantive ownership requirements of an overseas investment vehicle (“OIV”) by reflecting relevant tax treaty requirements (Article 119-2(1) of the Individual Income Tax Law, Article 93-2(1) of the Corporate Income Tax Law (the “CITL”))
In order to clarify the requirements of treating an OIV as a substantive owner, conditions (A) and (B) have been revised as follows:
(A) The OIV (i) qualifies as a tax resident (individual or corporation liable to tax) in the country of establishment under a tax treaty, and (ii) is entitled to tax treaty benefits with respect to the Korean-sourced income under the relevant tax treaty;
(B) An OIV not falling under (A) above is (i) recognized as a beneficial owner under the relevant tax treaty and (ii) entitled to tax treaty benefits with respect to the Korean-sourced income under the relevant tax treaty.
This amendment applies to Korean-sourced income paid on or after January 1, 2022.
Clarify the scope of income actually earned by a foreign corporation in determining deemed dividends under the controlled foreign corporation (“CFC”) regime (Article 61 of the PD to the International Tax Coordination Law)
In order to clarify the scope of income actually earned by a foreign corporation for the purposes of determining deemed dividends under the CFC rule, the provision has been amended as follows (in bold):
“Income actually earned shall be the average amount of income actually earned during the most recent three taxable years, which is calculated in accordance with the Generally Accepted Accounting Principles when preparing financial statements in the country or region where the head office, principal place of business, or place of effective management is located, and the income actually earned in each taxable year shall be the adjusted net income before corporate income taxes.”
This amendment is applicable to taxable years commencing on or after January 1, 2022.
2. Corporate Income Tax
Expand the scope of tax deduction with respect to gains generated from stock options (Article 19 of the CITL-PD)
A tax deduction is now available for gains generated from stock options granted under the Framework Act on Worker’s Welfare. This amendment is applicable to stock options exercised on or after the enforcement date of the PD.
Treat the transfer of grantor’s position as a provision of goods (Article 21-2 of the PD to the VAT Law (the “VATL”)
With respect to the grantor of trust assets, the transfer of grantor’s position is now deemed as a provision of goods for VAT purposes. This amendment applies to transfers made on or after January 1, 2022.
Extend the time for receiving VAT credit with respect to VAT invoices issued after the time of supply (Article 75 of the VATL-PD)
Previously, one of the requirements to qualify for input VAT credits for late-issued VAT invoices was to issue a VAT invoice within six months of the VAT return due date. However, in order to reinforce protections of taxpayer rights, the six month period has been extended to one year. This amendment applies to goods or services provided on or after the effective date of the amended VATL-PD.
Extend the time to issue amended VAT invoices (Article 70(1) of the VATL-PD)
Previously, taxpayers were only allowed to issue an amended VAT invoice on or before the VAT return due date of the tax period in which the relevant goods or services have been provided. However, in an effort to encourage taxpayers to self-correct errors relating to VAT invoices, the amendment extended such period to “within one year after the VAT tax return due date.”
Please note that as with the previous law, amended VAT invoices are not allowed when the relevant tax office has made an amendment/correction or the taxpayer has prior knowledge that such amendment or correction will take place, including cases where a notice of tax audit has been issued by the tax office.
This amendment is applicable to goods or services provided on or after the effective date of the amended VATL-PD.
Reduce the penalty rate for late tax payments (Article 27-4 of the NTBL-PD)
Previously, the penalty tax rate for late payment was 0.025% per day (= 9.125% per annum). However, to relieve the burden of taxpayers, such rate will be reduced to 0.022% per day (= 8.030% per annum) for penalty taxes imposed after the enforcement date of the PD. With respect to penalty taxes for which the payment deadline of the underlying tax has already passed prior to the enforcement of the PD, the previous regulation shall apply.
Clarify when the Tax Tribunal Commissioner may request re-investigation (Article 62-2 of the NTBL-PD)
The amendment stipulates that the Tax Tribunal (the “TT”) Commissioner may make a request for a re-investigation to the Chief TT Judge if the decision made at the TT hearing is contrary to (i) the decisions made by the Constitutional Court and Supreme Court, (ii) the tax rulings issued by MOEF, or (iii) the full-bench decisions made at the Adjudicators' Joint Meeting. This amendment is applicable to re-investigation requests made on or after the enforcement date of the PD.