January 9, 2024 South Korea enacts 2024 tax reform bill includes a 12-month delay on Undertaxed Profits Rule
Executive summary On 31 December 2023, Korea enacted the 2024 Tax Reform Bill (the 2024 Tax Reform) after it was passed by Korea's National Assembly on 21 December 2023. Unless otherwise specified, the 2024 Tax Reform will generally become effective for fiscal years beginning on or after 1 January 2024. Significantly, the supplementary rules for income inclusion (known as Undertaxed Profits Rule (UTPR)) will be postponed by one year, extending the effective date to 1 January 2025. This Alert summarizes the key features of the new and amended tax laws. Detailed discussion Revision of the global minimum tax rule The 2024 Tax Reform include new and additional Global Anti-Base Erosion(GloBE) rules that apply on top of Korean GloBE regulations under the current Adjustment of International Taxes Act (AITA) to reflect the OECD's Pillar Two GloBE rules, including the relevant administrative guidance, as well as other member countries' Pillar Two legislation movements. In addition, the new Enforcement Decrees (EDs) to the AITA are enacted on 29 December 2023 and are effective 1 January 2024. Details regarding the GloBE rules in the 2024 Tax Reform are outlined below.
In addition, the new EDs, which provide more specific guidance on the AITA, include detailed requirements on definitions and the scope of the GloBE rules as well as details on calculating GloBE income or loss and covered tax, among others. The new EDs also contain the transitional country-by-country reporting safe harbor and GloBE information return requirements that were addressed in the OECD/Inclusive Framework (IF) Administrative Guideline (AG) issued in February 2023. However, other features of the GloBe rules that were introduced in the latest OECD/IF AG issued in July 2023, such as a UTPR safe harbor and QDMTT safe harbor, have not yet been introduced. New filing obligation for overseas stock-based compensation The 2024 Tax Reform introduces a filing obligation requiring domestic corporations (including the permanent establishment of foreign corporations) to report on transactions in which executives or employees receive the share-based compensation upon exercise (or payment) from foreign controlling shareholders. Domestic corporations must submit the transaction details (e.g., details of grant, exercise and payment of share-based compensation) by 10 March of the year following the taxable period when the exercise or payment of stock-based compensation occurred. This rule will be applied to stock-based compensation exercised (or paid) on or after 1 January 2024. Changes to when limitations period starts for treaty rectification Under the current Korean Corporate Income Tax Law, if a beneficial owner (foreign individual or foreign corporation) wants to apply a tax treaty exemption in respect of its Korean-sourced income, either the beneficial owner or income payer may request the refund claim. The claim must be submitted to the district tax office that has jurisdiction over tax payment of the income payer and must be made within five years from the last day of the month in which the tax is withheld. Effective 1 January 2024, the limitations period for the treaty rectification is the five years that follow the 10th day of the month following the month to which the withholding date belongs under the 2024 Tax Reform. Special tax rules for omnibus accounts for foreigner Under the 2024 Tax Reform, when foreign individuals or corporations invest through the omnibus account, the income payer must withhold tax from the payment. A reduced or exempted withholding tax rate under the treaties does not apply. However, either beneficial owners or income payers who wish to receive an exemption or reduced tax rates under tax treaties may apply for its rectification after withholding taxes are deducted. The new rule will be effective for the income paid on or after 1 January 2024. Change of document submission requirement for international transactions The current AITA provides an exemption from the requirement to submit the transfer pricing (TP) documents (i.e., statement of international transactions, summary income statement of foreign related parties and the report on arm's-length pricing method) for taxpayers who are required to file master/local files. Due to the 2024 Tax Reform, taxpayers required to file master/local files should also be given the relevant TP documents within six months from the last day of the month containing the fiscal year-end date, unless certain waiver conditions are met.
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