At the end of 2006 the National Assembly approved a package of tax law amendments for 2007. Among other changes, the amendments reduced the withholding tax rate applicable to interest paid to foreign investors. In addition, the Ministry of Finance and Economy has proposed further amendments that may affect foreign investors investing in Korea.
The government has named Labuan, Malaysia as the first country to be placed on the blacklist of countries presumed to be a jurisdiction used for tax-avoidance purposes. The publication of the blacklist is the culmination of action begun by the ministry in 2005 to amend various aspects of the tax laws to combat perceived abusive tax-avoidance structures used to channel investments into Korea.
To date, Korea has entered into income tax treaties with more than 65 countries. In 2006 three new income tax treaties have come into effect between Korea and Laos, Oman and Slovenia. The treaties set out withholding tax provisions and lay down rules establishing in which country capital gains should be taxed.
The National Tax Service has expressed concern over the adverse impact of aggressive tax planning and proposed defensive measures. Aggressive tax planning refers to tax-planning techniques that undermine the government's tax policy and erode confidence in the fairness and equity of the taxation system.
The National Tax Service has made public its internal guidelines on tax audit procedures for the first time in its history. The disclosure comes in response to public criticism of the lack of transparency during tax audits, and is expected to enhance transparency in tax audit practices.
Following the revision of major Korean tax laws relating to domestic transactions at the end of 2005, the Ministry of Finance and Economy issued revised enforcement decrees to be incorporated into the Korean tax legislation for 2006. Enforcement decrees provide a more detailed description and explanation of how the relevant provisions of the law are to be interpreted and enforced.
After months of conducting tax audits of foreign investment funds, the National Tax Service has published a press release disclosing the interim result of five tax audits (the National Tax Service is currently conducting another tax audit of a foreign investment fund). So far a total of W214.8 billion has been assessed.
In September 2005 the Independent Commission against Corruption provided the tax authorities with its recommendations to improve the tax audit procedure and make tax audits more transparent and accountable. They include the codification of internal tax authority guidelines into law and the formal adoption of an auditor pool system by the end of 2005.
The Ministry of Finance and Economy has announced plans to revise certain provisions in the tax legislation, including the Law for the Coordination of International Tax Affairs, which sets out rules relating to the taxation of international tax transactions.
In order to increase foreign direct investment into Korea and facilitate international capital transactions, the Korean government has implemented various tax benefits, including tax exemptions for commissions paid relating to certain capital transactions involving foreign currency bonds, notes and certificates of deposit.
The Korean Ministry of Finance and Economy recently issued a ruling that shocked the offshore depositary receipts market. In the ruling, the ministry held that transfers of overseas depositary receipts (other than those transferred on the New York Stock Exchange or NASDAQ) are subject to the Korean securities transaction tax.
The Ministry of Economy and Finance recently issued a ruling concerning the Korean tax treatment of a manufactured (or substitute) payment in a stock lending transaction. However, it is unclear whether the conclusion drawn will apply only when there is a subsequent sale of the stock to a foreign buyer.
The government recently amended the Law for the Coordination of International Tax Affairs. Previously, controversy surrounded the issue of whether the transfer pricing rules under the Korean Corporate Income Tax Act applicable to domestic transactions should also apply to international transactions. This update outlines the key revisions.
Previously, the Korean National Tax Service treated a US limited liability company as a taxable entity notwithstanding the fact that it was treated as a partnership for US tax purposes. The Korean Ministry of Finance and Economy has since reviewed the matter and clarified its stance in two recent rulings.
The Korean government has proposed to the Malaysian government to exclude Labuan from the Malaysia-Korea Tax Treaty. This proposal seems to be part of a broader trend to eliminate or reduce particularly favourable tax benefits given under tax treaties with various countries.
Among other things, the revised Korean International Tax Coordination Act now provides that loans extended by sister companies which are controlled by the controlling foreign shareholder of the Korean entity are subject to the thin capitalization rule.
The tribunal's landmark decision is the first to examine the taxation of income earned by an employee through exercising stock options granted by a foreign parent company. The employees have appealed to the Administrative Court and a decision is pending.
Many asset-backed securitization (ABS) transactions involve the securitization of real estate. Where an ABS company purchases real estate with the intention of securitizing it, the potential tax implications regarding real estate dispositions must be noted.
An advanced pricing agreement (APA) is an agreement between a taxpayer and the National Tax Service which confirms that the latter has acknowledged in advance the transfer pricing method adopted by the corporate taxpayer. By having an APA, the taxpayer can prevent potential disputes over the appropriateness of the transfer pricing method used.
Recent proposals by the Ministry of Finance and Economy include the abolition of special capital gains tax and taxation of excessive retained earnings. If approved by the National Assembly, most of the changes will take effect in 2002.