Corporate Tax 2010 - BMR Advisors

Yulchon, Attorneys at Law
Korea
foreign controlling shareholder (“FCS”) that exceed three times the
equity capital attributable thereto.
A foreign party can qualify as an FSC based on an equity test or a
control test and the FCS can be a shareholder, direct or indirect, or
a non-shareholder affiliated entity, such as a sister company.
For purposes of thin-capitalisation rules, borrowings from an FCS
include amounts borrowed from an unrelated third party based upon
the FCS’s guarantee.
3.5 If so, is there a “safe harbour” by reference to which tax
relief is assured
A “safe harbour” is granted under the LCITA up to the ratio of debt
owned to an FCS to equity of 3:1 or less (6:1 or less for financial
service industry).
Further, if the conditions and the amount of debt owed to the FCS
are reasonable compared to the debt from an independent third
party, such debt from the FCS may be excluded from the scope of
the debt subject to thin-capitalisation rules, in which case the
interest thereon would be deductible.
3.6 Would any such “thin capitalisation” rules extend to debt
advanced by a third party but guaranteed by a parent
company
The Korean transfer pricing regulations also include a concept of
secondary adjustments. Specifically, secondary adjustments are
additional tax treatments that occur if a transfer pricing adjustment
is not repatriated back to Korea. Most secondary adjustments are
treated as deemed dividends subject to withholding taxes at
domestic rates or any applicable tax treaty. The secondary effect
can be avoided by having the foreign transactional party pay the
amount of adjusted income back to the Korean party.
In recent years, the Korean National Tax Service (“NTS”) has made
the enforcement of transfer pricing compliance a high priority, and
the transfer pricing has become a routine part of a tax audit.
A recent change to Korea’s transfer pricing rules may allow relief
from penalties with respect to transfer pricing adjustments for
taxpayers that have maintained contemporaneous documentation of
their transfer prices. The amendment applies to adjustments made
to taxable income and to tax levied after the amendment’s effective
date of January 1, 2009. Under the new measures, relief from the
penalty with respect to a transfer pricing adjustment can be allowed
if: (1) the taxpayer can show it properly prepared and maintained
documentation demonstrating an arm’s length price at the time of
the preparation of the tax return; and (2) the tax authorities
determine that the method used was reasonable.
4 Tax on Business Operations: General
Korea
Borrowings from a third party under a guarantee extended by an
FCS are also covered by the thin-capitalisation rule. A “guarantee”
includes a “guarantee in substance such as a pledge of assets” and
all types of guarantee arrangements under which an FCS is required
to effectively pay off a loan extended to a Korean subsidiary,
regardless of the existence of any guarantee letter or the method of
ay guarantee. In this respect, the Korean tax authorities held on
many occasions that a comfort letter or a letter of intent issued by
an FCS could fall within the scope of a “guarantee”, despite the lack
of legal binding effect.
3.7 Are there any restrictions on tax relief for interest
payments by a local company to a non-resident in addition
to any thin capitalisation rules mentioned in questions
3.4-3.6 above
In addition to the thin-capitalisation rules, the inter-company
borrowing arrangements between a Korean company and its foreign
affiliate must comply with the arm’s length principle under the
Korean transfer pricing rules for the interest payments by the
Korean company to be fully deductible.
3.8 Does Korea have transfer pricing rules
4.1 What is the headline rate of tax on corporate profits
For fiscal years commencing during the period between January 1,
2009 and December 31, 2009, the effective corporate tax rates are
11% on income under KRW 200 million and 22% for income
exceeding KRW 200 million. The rate will be further reduced in
2010 to 10% on the first KRW 200 million and 20% on the excess.
Corporations (both domestic and foreign) are also subject to a
resident surtax at the rate of 10% of the corporate income tax
liability, which makes the current effective tax rate 24.2% (22%
from 2010 onwards) for income in the higher tax bracket.
4.2 When is that tax generally payable
Corporate income tax returns must be filed annually within three
months from the last day of each fiscal year, together with any
corporate tax payment due. Also, semi-annual returns, together
with the tax payment due, must be filed within two months from the
end of the first six-months of the fiscal year.
4.3 What is the tax base for that tax (profits pursuant to
commercial accounts subject to adjustments; other tax
base)
A comprehensive cross-border transfer pricing regime was introduced
in 1996 with the enactment of the LCITA. The LCITA stipulates that
transfer prices should be consistent with arm’s length prices. The
transfer pricing methods specified in the LCITA and underlying
Presidential Decree are listed in the order of priority below:
comparable uncontrolled price method, resale price method
or cost plus method;
profit split method, transactional net margin method or Berry
ratio method; and
other unspecified methods.
Transfer prices should be supported by the most reasonable transfer
pricing method while giving consideration to the order of method
priority.
ICLG TO: CORPORATE TAX 2010
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The tax base for the corporate income tax is the income for each
business year remaining after deductions of certain nontaxable
items, which generally correspond to the profits pursuant to
commercial accounts subject to certain adjustments as prescribed
by the CITA and its enforcement decrees. Companies may carry
forward losses for 10 years.
4.4 If it otherwise differs from the profit shown in commercial
accounts, what are the main other differences
The main differences between commercial and tax accountings are
the timing of income and expense recognition, and permanent
differences include the treatment of non-deductible entertainment
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