On 27 July 2023, South Korea’s Ministry of Economy and Finance (MOEF) announced the tax reform proposal for 2023. The tax reform proposal includes changes in the Korean Pillar two global minimum tax rules and transfer pricing compliance obligations. The proposal is pending approval by the National Assembly before becoming legally established. The main measures of the tax reform proposal are as follows:

Pillar two global minimum tax rules

South Korea enacted global minimum tax rules in December 2022. The global minimum tax rules are in line with the OECD Pillar Two Model Rules and encompass the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). As per the presently enacted tax legislation, both rules are set to take effect for fiscal years commencing on or after 1 January 2024. The effective date for the UTPR would be delayed by one year, shifting from 1 January 2024 to 1 January 2025.

Transfer pricing compliance

Currently, the local file, master file, and country-by-country (CbC) report must be filed within 12 months from the fiscal year-end. Also, a large corporation submitting a Local file is not obligated to submit the Statement of International Transaction.

The tax reform proposal reduces the deadline for submitting the Local file and Master file to six months, and additionally, large companies submitting a Local file would also be obliged to submit the Statement of International Transaction.

The changes will be effective from 1 January 2024.

Revised timeline for initiating treaty rectification’s statute of limitations

As per the proposed change, the statute of limitations period, set at five years, would commence starting from the 10th day of the month following the one in which the withholding tax was deducted. This is a change from the current deadline of five years beginning from the last day of the month in which tax was withheld. The changes will be effective from 1 January 2024.

Deduction for doubtful debt allowance on overseas construction subsidiary loans

The proposed revision enables a domestic construction parent company, owning at least 90% of overseas construction subsidiaries, to claim a tax deduction for bad debt allowances on loans extended to these subsidiaries. To qualify, the loan must have remained unpaid for at least five years, been utilized for subsidiary business purposes, and the subsidiary must face significant repayment challenges, potentially leading to a loss of its net assets. The deductible amount is capped at a percentage, which increases yearly, calculated from the difference between eligible loan balances and the overseas subsidiary’s net asset value, excluding associated debts. The changes will be effective from 1 January 2024.

Tax credit for investment in overseas natural resource development

The tax reform proposal introduces a 3% tax credit for investments in international natural resource development, which covers acquiring mining rights, investing in foreign companies to obtain mining rights, or direct overseas investments in foreign subsidiaries by domestic residents. This tax credit would be in effect until 31 December 2026.

Extended tax incentives for SMEs in technology transfer and licensing income

Small and medium-sized enterprises are eligible for a 50% tax reduction on income generated from technology transfer, such as patent rights, and a 25% tax reduction on income from technology licensing. This benefit will be extended from 31 December 2023 to 31 December 2026.

Extension of special flat tax rate period for foreign workers in Korea

The special flat tax rate, which is a fixed 19% tax applied to the income of foreign workers (while comprehensive income tax rates vary from 6% to 45%), does not grant eligibility for tax exemptions, reduced tax rates, income deductions, or tax credits. However, income earned during the initial 20 years of employment in Korea is eligible for this flat tax rate. The period during which the flat tax rate applies will be extended from 31 December 2023 to 31 December 2028.

Value-added-tax (VAT)

The current VAT law requires electronic service providers to register their businesses with a district tax office but does not specify any penalties for failing to do so. A proposed revision aims to explicitly state that not registering under the simplified business registration scheme will result in a penalty. This revision is expected to become effective on or after 1 January 2024.

Moreover, under the current VAT regulations, specific veterinary services, such as vaccination, are exempt from VAT. A proposed revision seeks to broaden the range of VAT-exempt veterinary services and include the treatment of more than 100 common diseases. This change would be in effect after 1 October 2023.