Korea Takes Steps to Avoid Tax Evasion

Korea’s National Tax Service recently shared an investigation in which it discovered several foreign companies were evading tens of billions of dollars in taxes to be reported in Korea using international transactions.

A few examples of the tactics used by these companies included stealing sales through offshore companies located in tax havens, and unfairly transferring domestic income abroad through insider transactions with their overseas headquarters.

As a result, Korea’s Ministry of Finance has included new proposed provisions in the 2021 Tax Revision Bill aimed at preventing tax evasion via international transactions in the future.

The Tax Revision Bill, 2021 Revision

With the proposal of Korea’s 2021 Tax Revision Bill, 2021 Revision to Support New Industries and Employment, Korea aims to improve the tax base. Specifically, Korea hopes to avoid tax evasion, much of which takes place during international transactions.

Proposed revisions are:

• A new requirement for foreign corporations to submit data on the status of liaison offices such as basic information of the liaison office and the status of foreign headquarters and other domestic branches.

  Obligation effective: for submissions of the status information relevant to taxable years beginning 1 January 2022.

• A new requirement to keep and submit transaction details for foreign companies supplying electronic services. This would require the registrant to maintain electronic service transaction details for five years after the due date of the final VAT return

  Obligation effective: for supply of electronic services on or after 1 July 2022.

• New rules for reducing penalties for negligence for submitting revised or late transfer pricing documentation. The current rules apply a maximum penalty of KRW100 million for such a violation, while the proposed rules are projected to result in a 30%-90% reduction in fines.

  This proposed rule would take effect upon enactment of the Enforcement Decree.

• Establishment of grounds for the National Tax Service Commissioner to do an ex officio cancellation of a simplified VAT registration if the registrant closes its business.
  >Obligation effective: on or after 1 January 2022.
• New tax evasion prevention rules for controlled foreign companies (CFCs) would involve raising the standard of the tax burden ratio and taxing the amount transferred to trust funds.

Key points to note:

• To prevent CFCs from evading taxes by withholding income such as interest, dividends, and royalties to be paid to investors, the standard of the tax burden ratio is projected to increase to 70% of the maximum domestic corporate tax rate to align with other major countries more closely.
• The scope of CFCs would be expanded to include trusts, whereas currently only corporations have been included.
• These changes would become effective on or after 1 January 2022.

It should be noted that these are proposals, and the 2021 Tax Revision Bill must be reviewed and approved by the Korean National Assembly before any changes take effect.

An ever-changing tax compliance landscape

These new proposals are just another example of the global, ever-changing tax compliance landscape that organisations must navigate, especially when dealing cross-border.