November 2015, Issue 91

KPMG Tax

Korean Tax Brief

Contents
Tax Brief - November 2015
1. The OECD released its final report
for its Base Erosion and Profit
Shifting (BEPS) action plan
2. The Korean tax authority will shorten
the approval period of one-sided
Advance Pricing Agreements
(APAs) for transfer pricing of
intangible assets
3. The Ministry of Government
Administration and Home Affairs
has included a provision for
expanding the acquisition tax on
trust assets in the proposed tax
amendments for 2016
4. Large companies won a lawsuit
on surety commissions paid by
foreign subsidiaries.
5. The NTS rejected current deduction
of class-action lawsuit settlement
costs

1 Tax Brief - November 2015

Update on Current Issues and Trends

1. The OECD released its final report for its Base Erosion and
Profit Shifting (BEPS) action plan
On October 5, 2015, the Organization for Economic Co-operation and
Development (the OECD) issued its final recommendations on addressing
BEPS (the BEPS Final Report). The OECD has identified tax avoidance
schemes used by multinational corporations that abuse discrepancies in
domestic tax laws of different countries as well as loopholes in different income
tax treaties. The OECD has been preparing the BEPS Final Report since 2012
and the BEPS Final Reports central theme is increased transparency and
reporting regarding business models, legal entity structures and transfer pricing
practices used by multinationals. The BEPS Final Report is the final
deliverable of the 3-year-long OECD BEPS project. The BEPS Final Report
was pre-approved at the G20 finance ministers meeting held in Rima, Peru on
October 8, 2015, and was approved at the 2015 G20 summit, held in Antalya,
Turkey on November 15 and 16, 2015.
The BEPS Final Report consists of 15 action items, each action item addresses
international tax avoidance issues from different perspectives and provides
recommendations for such issues. At the G20 finance ministers meeting held
on October 8, 2015, each action item of the final report was classified into one
of four different groups based on the extent of their binding power from
strongest to weakest : Minimum standard, Revision of existing tax rule,
Common approach, and Best practice. Action items 5, 6, 13 and 14 of the
Minimum standard group will be included in the proposed tax amendments
for 2016.

Tax Brief - November 2015

The purpose of the BEPS Final Report is to provide a uniform set of rules to
encourage countries to be cooperative and consistent in responding to common
tax avoidance schemes used by multinational corporations.

2. The Korean tax authority will shorten the approval

period of one-sided Advance Pricing Agreements
(APAs) for transfer pricing of intangible assets
Effective January 1, 2016, the Korean tax authority will shorten the period for
one-sided APA approval from 2 years to 18 months for APAs relating to
intangible assets held by large multinational corporations. The intent of the
legislative changes is to encourage foreign direct investment in Korea.
The provision relating to the one-sided APAs is specified under Article 11-2 of
the Enforcement Decree of Adjustment of International Taxes Act (the AITA),
and the 18-month-approval period will apply to qualifying APAs submitted after
January 1, 2016. In order to qualify for the expedited APA approval period, a
multinational corporation having its business place in Korea must manage at
least two foreign subsidiaries and its worldwide revenue must be at least KRW
3,000 billion.

3. The Ministry of Government Administration and

Home Affairs has included a provision for expanding
the acquisition tax on trust assets in the proposed tax
amendments for 2016
According to the Local Tax Act, a taxpayer that becomes a controlling stockholder
by acquiring more than 50% of the shares in a domestic corporation would
be deemed to have directly acquired real estate owned by such domestic
corporation and is subject to an acquisition tax.
In the absence of clear tax law regarding the imposition of deemed acquisition
tax on trust assets, the Supreme Court ruled that if real estate of a domestic
corporation acquired by a controlling stockholder is held in trust, the legal
ownership of the real estate is transferred to the trust company, thus the
transferred real estate would not be subject to a deemed acquisition tax.
The proposed 2016 Local Tax Act amendments include Article 7(5) of the Local
Tax Act which treats any trust assets registered under the name of a trustee in
accordance with the Trust Act as real estate subject to the deemed acquisition tax.

4. Large companies won a lawsuit on surety commissions

paid by foreign subsidiaries.
2015 KPMG Samjong Accounting Corp., the Korean member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Korea.

Tax Brief - November 2015

The National Tax Service (the NTS) imposed a tax on surety commissions
received by large domestic companies from their foreign subsidiaries. The NTS
determined the surety commissions by applying the standard surety
commission calculated under the normal price determination model developed
by the NTS in 2012. Some companies, raised an objection to the NTSs assessment
and filed an appeal with the Tax Tribunal ; however, such companies lost their
appeals.
Administration Department 11 of the Seoul Administrative Court ruled on October
21, 2015 that the NTSs tax assessment on surety commissions of 10 large domestic
companies are unfair on the grounds that the price determination model
developed by the NTS was applied uniformly to all worldwide subsidiaries without
consideration of differing business operations across different foreign countries.
The NTS imposed a corporate income tax on over 100 companies applying this
model and the ruling by the Seoul Administrative Court will likely affect related
lawsuits filed by those companies.

5. The NTS rejected current deduction of class-action

lawsuit settlement costs
Company H is the top seller of fiber-optic storage devices in the world. During
2013, H incurred over KRW 12 billion for the settlement of a class-action
lawsuit for damages filed by direct consumers in the United States for violating
the United States Anti-Trust Act. H deducted costs relating to the settlement of
the class-action lawsuit.
The NTS rejected the deduction of the settlement costs on Hs income tax return
on the grounds that penalties incurred within or outside Korea are not
deductible for tax purposes under the current Corporate Income Tax Act (the
CITA). H argued that the lawsuit settlement costs should be deductible as they
are amounts paid to direct consumers, not to the United States government or
any government, and the costs are reasonable costs of doing business.
The NTS insists that such costs cannot be deducted by H as the settlement cost and
lawsuit related costs arose from illegal acts and cannot be treated as ordinary and
necessary business expenses. However, H has argued that the lawsuit settlement
cost and related costs are not defined as non-deductible items under the CITA.
H and the NTS argued this issue during the judgment before assessment. The
issue was not resolved and NTS eventually issued a tax payment notice. As a
result of the NTS tax payment notice, H filed an appeal to the Tax Tribunal. The
appeal has not yet been decided by the Tax Tribunal.
The deductibility of lawsuit settlement payments and related costs can be a
common issue for many large companies in Korea. Accordingly, the Tax Tribunals
or the Courts ruling on this issue should be followed as it is likely to affect other
Korean companies.
2015 KPMG Samjong Accounting Corp., the Korean member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Korea.

Contact Us
For more information about how KPMG Tax can help your business with tax matters,
please contact one of the following professionals.

Head of Tax
Choi, Jeong Wook
T. 82(2)2112-0990
M. jeongwookchoi@kr.kpmg.com

Global Tax Services

Ihn, Byung Choon
T. 82(2)2112-0983
M. bihn@kr.kpmg.com

Domestic Tax Services

Lee, Kwan Bum
T. 82(2)2112-0917
M. kwanbumlee@kr.kpmg.com
Lee, Chan Gi
T. 82(2)2112-0913
M. changilee@kr.kpmg.com

Financial Tax Services

Cook, Chang Soo
T. 82(2)2112-0918
M. changsoocook@kr.kpmg.com

www.kpmg.com/kr

Accounting and Tax Outsourcing (ATO) &

Global Mobility Services
Kim, Ui Sung
T. 82(2)2112-0922
M. ukim@kr.kpmg.com

Transfer Pricing
Kang, Gil Won
T. 82(2)2112-0907
M. gilwonkang@kr.kpmg.com

M&A Tax Services

Koo, Jung Mo
T. 82(2)2112-0937
M. jungmokoo@kr.kpmg.com
Lee, Sung Wook
T. 82(2)2112-0946
M. sungwooklee@kr.kpmg.com

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. While every effort
has been made to ensure the correctness of the information provided and the opinions expressed in this publication, no warranty is given or implied as to
the correctness of the information provided and no liability is accepted for any opinion stated herein. Appropriate tax advice or other professional advice
should be sought or obtained for any specific issues that may arise from the information provided in this publication.
2015 KPMG Samjong Accounting Corp., the Korean member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Korea.