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Korea Enacts Legislation for 2016 Tax Reform including New Transfer Pricing Reporting Requirements

On 15 December 2015, Korea reportedly enacted the 2015 Tax Revision Bill, which includes tax reform measures for 2016. Some of the main measures are summarized as follows.

New Master File and Local File Requirements

New transfer pricing reporting requirements are introduced for multinational enterprises, including domestic Korean companies and permanent establishments in Korea of foreign companies. Under the new requirements, a report must filed by the due date for the annual tax return that includes transfer pricing information on the taxpayer and its group that is in line with the Master File and Local File guidelines developed as part of Action 13 of the OECD BEPS Project.

The requirement will apply for tax years beginning on or after 1 January 2016 based on certain thresholds, which have not yet been issued (first report due in 2017). Failure to comply will result in a penalty of KRW 10 million (~USD 8,490).

The Country-by-Country reporting requirement developed under Action 13 is not implemented, but is expected to be in the future.

Loss Utilization Limitation

Under current rules, net operating losses may be carried forward up to 10 years without limitation. Under the reform, the utilization of carried forward losses is limited to 80% of taxable income per year. However, this limit does not apply for small and medium-sized companies and companies under court receivership.

The loss limitation applies for tax years beginning on or after 1 January 2016.

VAT Changes for Foreign Supplies of E-Services

The scope of VAT on e-service supplies from foreign suppliers has been limited to B2C supplies only, and will no longer apply for B2B supplies as long as the Korean business is registered for VAT. Under the VAT Law, which applies from 1 July 2015, foreign suppliers of e-services to Korean customers must register for and charge VAT (10%) on their supplies, including games, music, video, electronic documents, software, etc.

R&D and Energy Savings Investment Credit Reduction

The reform extends the sunset clause for granting research and development (R&D) investment tax credits by three years, but reduces the available credit amount as follows:

  • Large companies - reduced from 3% to 1%;
  • Medium-sized companies - reduced from 5% to 3%; and
  • Small-size companies - reduced from 10% to 6%

The reduced rates apply for tax years beginning on or after 1 January 2016. The same rate reductions also apply for investments in energy saving facilities, but only for investment made in 2016 without affecting the sunset clause.

Enforcement Decrees

Enforcement decrees will be issued in the near future that will provide additional details on the changes and their implementation. Such details will be published once available.

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