Strategizing Multinational Tax Risks

EY’s latest Tax Alert has summarized the effect of Korea’s new tax proposals, provided herein for reference.

Key observations:

The accumulated earnings tax will require a review of Korean entities for which equity capital exceeds the KRW 50 billion threshold, as well as recognizing the revised 2:1 debt to equity ratio and the deadline for filing the report for international transactions. 

On 2 December 2014, Korea’s National Assembly passed 2015 tax reform proposals, 1 which were enacted into law on 23 December 2014. A new proposal regarding capital gains tax on income from trading financial derivatives was introduced in a separate package and is also now enacted. This Alert summarizes key features of the new laws.

Corporate accumulated earnings tax
A new corporate accumulated earnings tax will be imposed on excess cash accumulated by large corporations whose equity capital exceeds KRW 50 billion (US$49 million) and corporations that are members of an enterprise group with restrictions on mutual investment.2

The corporation may apply one of the two methods in calculating the accumulated earnings tax. Method A computes a 10% tax on 80% of adjusted taxable income3 reduced by amounts spent on investment on tangible and intangible assets, salary increases, dividends and certain qualified capital redemptions. Method B calculates the 10% tax on 30% of adjusted taxable income reduced by amounts spent on salary, dividends and certain qualified capital redemptions.

The new law will be effective for taxable years beginning on or after 1 January 2015 and before 31 December 2017.

Increase in the debt to equity ratio
Under the new law, the debt to equity ratio is revised to 2:1. This change will become effective for fiscal years beginning on or after 1 January 2015. However, the debt to equity ratio applicable to financial institutions will remain unchanged from the current 6:1.

Capital gains tax on income from trading financial derivatives
The new law, as part of the Individual Income Tax Law, imposes a 20% tax on gross capital gain reduced by KRW 2.5 million (US$2,300). The Enforcement Decree however has reduced the rate to 10%. Financial institutions such as brokerage firms are required to report details of financial derivative transactions on a quarterly basis to a tax office. This law will be effective as of 1 January 2016.

Tax refund claim period extended from three to five years
Under the new law, the current three-year refund claim period is extended to five years from the date of the statutory filing due date.

Failure to submit data on international transactions with foreign related parties
The new law imposes a penalty not to exceed KRW 100 million (US$95,000) on the failure to timely file a report of international transactions with foreign related parties.

Extended statute of limitation period on tax evasion involving cross-border transactions
The statute of limitation period is extended to 15 years for cross-border tax evasion matters. The amendment becomes effective for the first tax assessment made after enactment of the law.

Increased penalties on tax evasion involving cross-border transactions
Under the new law, a new penalty is imposed on non-filers or the underreporting of income derived by cross-border transactions. The rate is 60% of the amount of the tax evasion and it becomes effective for taxable years beginning on or after 1 January 2015.

Endnotes
1. See EY Global Tax Alert, Korea announces 2015 tax reform proposals, dated 28 August 2014.

2. A Korean conglomerate with assets of more than KRW 5 trillion (US$5 billion).

3. Adjusted taxable income means taxable income plus additions such as dividend received deduction, interest on tax refund, depreciation expense on current year fixed asset acquisition minus corporate income tax, reserves, net operating loss, excess donation expense over a deduction limitation.