In December 2021, South Korea has enacted a tax revision bill for 2022 which was passed by Korea’s National Assembly on 2 December 2021. The tax revision bill is generally effective from fiscal years beginning on or after 1 January 2022. The Enforcement Decree of the Tax Law will be finalized and enacted in February after the cabinet council meeting and other related procedures. The main changes of the 2022 tax revision bill are:
Interest limitation rule
For the calculation of non-deductible interest current 30% EBITDA interest limitation rule provides an order that denies the deduction of the higher rate interest first when the restriction applies. The Bill introduces ordering rules for the non-deductible part of interest:
- the most recent borrowing date takes precedence when the same interest rate is applied; and
- the non-deductible portion is bifurcated based on the ratio of the borrowed amounts if the interest rate and borrowing date are the same.
Moreover, the Tax Revision Bill introduces a new rule that the deductible amount of interest is deemed to be nil if the amount of EBITDA is negative.
Penalties for documentation failure
The Bill introduces a reduction in penalties by 30% to 90% in case of submission of revised or late transfer pricing documentation before the penalty is imposed applicable from 15 February 2022.
CFC rules
The Bill reduces tax evasion via controlled foreign companies (CFC) by raising tax rates from 15% to 17.5% and taxing the amount transferred to trust funds.
Changes in comparable transactions
The Bill allowed loss-making businesses in comparable transactions depending on the current economic circumstances of the COVID-19 pandemic.
Cost contribution arrangements
The Bill states that where the cost is not shared as agreed upon due to force majeure, the authority can make an exception to the decision and correction of the amount of allocated cost effective from tax filings submitted on or after 1 January 2022.
Other Changes
The late payments tax rate is reduced from 0.025% to 0.022% per day which is 8.030% per annum. The Bill also extends the deadline for submitting documents for permanent establishments from the statutory deadline of the CIT return to within six months from the last day of the month in which the fiscal year ends on transactions with foreign companies or its head office and other branches.
