Major revisions to this year’s tax laws II for Korean
Foreign-Invested Companies (Continued from last month) - March 2018
※ Introduction of limitations on tax
deductibility of multinational companies’ interest expenses (Article 15-2 of
the Adjustment of International Taxes Act, newly inserted)
□ Overview
○ Applied to:
Domestic companies (including the domestic place of business of a foreign
company) having transactions with an overseas special related party
- Finance and insurance
companies are excluded.
○ Limitation of
deductibility: If net interest expense accounts for a certain percentage (30%)
of tax-adjusted income, the excess interest expense shall not be recognized as
deductible expense.
-Calculation of adjusted
income: Depreciation expense on fixed assets and net interest expense are added
to the income of each business year.
-Interest expense applied:
Net interest expense for overseas special related parties (Interest
payment-interest received)
○Between the thin
capitalization system and the limitation of deductibility of interest expense,
the regulation that produces the larger amount of non-deductible expense shall
apply.
(Reason for revision) To
prevent multinational companies’ tax evasion through excessive deduction of
interest expense.
(Applicable period) Starting from the business
year commencing on or after Jan. 1, 2019.
□ Background of
introduction
○The OECD
recommended introducing regulations limiting the interest expense/earnings
ratio to a set percentage, in order to prevent multinational companies’ tax
evasion through excessive interest expense deduction (OECD BEPS Project Action
4).
○Korea has been
operating the thin capitalization rule since 1997, but the current rule only
applies to borrowings from overseas controlling shareholders and therefore does
not apply to borrowings from overseas subsidiaries. Also, the rule does not
directly restrict the ratio of interest expenses to earnings.
○In this regard, in
line with the OECD recommendations, regulations limiting the interest
expense/earnings ratio was introduced for overseas special related parties
including overseas subsidiaries.
- However, considering
that Action 4 is a common approach (i.e., a recommendation) and is in the early
phase of introduction, the revision was made as simple as possible to reduce
the burden on companies.
○The existing thin
capitalization rule and the new limit on interest expense/earnings ratio shall
both be applied, and the regulation that produces the larger amount of
non-deductible expense shall be applied.
* Japan, France and the
U.S. also operate both regulations.
※ Increase in dispatched workers’ withholding
tax rate and expansion of scope of withholding agents (Article 156-7 (1) of the
Income Tax Act, Article 207-10 (1) of the Enforcement Decree of the Act)
□In order to tighten
control on the tax source from foreign dispatched workers, the following revisions
will be made:
○Expansion of scope
of withholding agents:
-Current: A domestic
company whose total payment in return for labor provided paid to a foreign
company exceeds 3 billion won per year
-Revised: A domestic
company whose total payment in return for labor provided paid to a foreign
company exceeds 2 billion won per year
○ Expansion of scope of businesses subject to withholding
- Current: Air
transportation, construction and professional, science and technology services
- Revised: Vessel construction
and finance businesses added to the list
○ Increase in
withholding rate: 17% (current) → 19% (revised)
(Reason for revision) To
strengthen management of tax source from foreign employees dispatched to Korea
(Application) Applied to
payment for labor provided paid on or after Jul. 1, 2018
☞ The following tax
information is translated from Korean for foreign-invested companies, and is
not legally binding.
☞ Source: Korean
National Tax Service
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