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Newsletter | November 2015, Issue 3
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TAX
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MOSF Submits Proposed Tax Law Amendments for 2016 to the National Assembly
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On August 6, 2015, the Ministry of Strategy and Finance (“MOSF”) announced the proposed tax law amendments for 2016, and on September 11, 2015, MOSF submitted the proposal to the National Assembly. If enacted, most of the proposed amendments would become law and take effect on January 1, 2016. The proposed amendments are subject to further change during the course of the legislative process, which is expected to end on or before December 31, 2015.
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The main items, as currently proposed, are summarized below:
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1. New limit on the utilization of net operating loss (“NOL”) carryforwards1
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| A. |
Under the current Corporate Income Tax Law, NOL may be carried forward for 10 years, and may be fully deducted against taxable income in subsequent years.
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| B. |
Under the proposal, NOL carryforwards can be deducted in a subsequent fiscal year, but only up to 80% of the taxable income for that year.
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The new limit will apply to all companies, except:
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Small and medium-sized enterprises; and
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Certain troubled companies undergoing court rehabilitation procedures, management normalization plans under the relevant law, or agreements with financial institutions.
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2. New deductibility criteria for deducting automobile expenses2
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| A. |
Under the current Corporate Income Tax Law, there is no stipulated restriction on expense deductions related to cars purchased by business taxpayers.
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| B. |
Under the proposal, a prescribed percentage of automobile-related expenses (e.g., depreciation, lease payments, fuel, insurance, repairs, taxes, and toll fees for passenger vehicles3) will be tax deductible, but only if certain requirements are met.
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Corporate taxpayers failing to meet such requirements will face a full disallowance of the expenses.
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| C. |
If a taxpayer desires to deduct more than the prescribed percentage, the taxpayer must maintain detailed records substantiating the business use of the vehicle (e.g., travel logs)
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However, expenses from using vehicles with a non-removable corporate/business logo will be 100% deductible, regardless of the business-use ratio.
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| D. |
The requirements and prescribed deductible percentage will be defined in the Presidential Decree and Ministerial Decree of the Corporate Income Tax Law.
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Disallowed expenses for tax purpose will be classified as income for the individual users of such passenger vehicles.
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Thus, if the individuals are company executives or employees, they will be subject to withholding tax on such deemed income.
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3. Reciprocity required for zero rate VAT on professional and business support services4
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| A. |
Under the current Value Added Tax Law, zero-rate VAT applies to certain goods and services provided to non-residents in return for payment in foreign currency.
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Professional services and business support services are among the services which may qualify for zero rate under the current law.
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| B. |
Under the proposal, zero-rate VAT will only apply to professional services and business support services provided to non-residents residing in countries that allow similar reciprocal zero-rate VAT treatment.
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4. New withholding tax obligation introduced for high income secondees5
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| A. |
Under the current Personal Income Tax Law, employees of a foreign company seconded to a Korean company are responsible to pay tax on income received from the foreign company. The Korean host company is not required to withhold tax from such income.
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Under the proposal, Korean host companies will be required to deduct 17% (18.7% inclusive of local income tax) withholding tax from any payment made to the foreign company seconding the expatriate for the secondee’s services.
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The Presidential Decree will provide further details of the proposed new withholding tax system.
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5. B2B digital service transactions not subject to VAT6
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| A. |
Under the current Value Added Tax Law, digital services (applications and content) supplied in Korea by a non-resident via computer or mobile devices are subject to Korean VAT under the simplified VAT reporting and payment system.
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However, a business taxpayer obtaining digital services from a non-resident is not able to claim an input VAT deduction.
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Under the simplified VAT reporting and payment system, no tax invoice is issued.
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| B. |
To prevent the unintended VAT burdens, under the proposal, the scope of taxable digital services supplied by a non-resident excludes digital services provided to a domestic business taxpayer.
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| 1 |
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Article 13 of the Corporate Income Tax Law
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Article 50 of the Presidential Decree of the Corporate Income Tax Law
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Excluding small cars, vans, and taxis
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Article 33 of the Presidential Decree of the Value Added Tax Lax
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Article 156-7 of the Personal Income Tax Law
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| 6 |
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Article 53-2 of the Value Added Tax Law
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