2019 Korean Government’s tax reform proposal on international tax issues

In July 2019, the Korean Ministry of Economy and Finance (MOFE) announced the 2019 tax reform proposal, which includes important changes on international tax matters. In this proposal, the MOFE is focusing on the effectiveness of information exchange and collection, and increasing the taxation base not only by clearly establishing the legal ground but also by laying responsibility for verification of unclear points on the taxpayer. The proposal will be effective from 1 January 2020, as long as there is no change before then.

In the near future, the Korean tax authority is likely to use the amendments to be introduced by this proposal (detailed below), because a significant fall in tax revenue is expected in Korea due to the current recession in the economy. Hence, a reminder of the relevant items should help taxpayers mitigate potential tax exposures.

Increase of penalties for failure to comply with  submission of BEPS documents, etc.

In order to reinforce the effectiveness of submission of international transaction data, the MOFE proposed the additional penalties for failing to comply with the requirements. Currently, if the taxpayer fails to submit international transaction data (including BEPS documents), or if the taxpayer submits false data in relation to international transactions, the tax authority can impose a one-time penalty of up to KRW 100 million. However, under the proposal, in the same situation from next year the Korean tax authority can impose a penalty of up to KRW 300 million every 30 days.

Establishment of legal ground on tax assessment based on transfer pricing estimation without taxpayer data

In order to mitigate the Korean tax authority’s responsibility of tax assessments based on transfer pricing (TP) data collection from taxpayers, the proposal allows the tax authority to adjust the taxpayer’s TP assessment based on the reasonable estimation of the arm’s length price with the appropriate comparables, where the taxpayer does not submit the mater file, local file and other requested data.

Establishment of the taxpayer’s legal burden of proof of reasonable business purposes, etc. in connection with suspicious international transactions

In order to reinforce the effectiveness of the tax authority’s tax assessments on international tax issues by applying the substance-over-form rule[1], the MOFE proposed to establish the taxpayer’s legal burden on suspicious international transactions.

Where a Korean income tax payment is decreased up to the threshold percentage (or amount) or less[2] through a suspicious international transaction, the tax authority can deny the treaty benefit or the Korean tax benefit by applying the substance-over-form rule as long as the taxpayer does not verify that it has a reasonable business purpose, etc. and has no tax avoidance purpose.

Establishment of principal on the interpretation and application of tax treaty

In order to remove confusion over the interpretation and application of tax treaties, the MOFE proposed that taxpayers should interpret and apply a tax treaty in accordance with definitions or meanings used under the Korean tax law, where a treaty does not define a certain term or phrase used on international tax matters. 

Improvement of legal effectiveness of mutual agreement results

In order to prevent unnecessary lawsuits and improve the legal effectiveness of mutual agreement results, the MOFE proposed removing the tax law stating that a mutual agreement result is invalid when a court make an opposite final judgment against the result after the mutual agreement is closed. The proposal allows the taxpayer to submit an opinion letter on the draft mutual agreement result before the mutual agreement is closed.

Establishment of legal ground for collection and exchange of information on beneficial owner

In order to meet the core requirements of the standard for automatic exchange of information by the OECD, the MOFE proposed to add information on the beneficial owner of a nominal taxpayer to the tax information to be exchanged with contracting parties. The proposal allows the tax authority to request the taxpayer to submit the information on its beneficial owner for the exchange of tax information.

Increase of penalty limit for non-compliance with tax authority information requests for the exchange of tax information

The MOFE proposed increasing penalty limit on parties not complying with tax authority information requests on the exchange of tax information, from KRW 20 million to KRW 30 million.