The recent approval of tax amendments for 2020 by the National Assembly of Korea included the following international tax-related changes:
1. Burden of proof shifted to a taxpayer involved in an indirect transaction through a third party
Where a taxpayer pursues an indirect transaction through a third party for the purpose of gaining tax benefits under the “Adjustment of International Taxes Act” and the relevant tax treaty, the Korean tax authority can apply the “substance-over-form” principle to the transaction.
Previously, in order to apply such a principle, the Korean tax authority was required to substantiate that the taxpayer’s intent through the indirect transaction was to avoid taxation in Korea without a reasonable business purpose or commercial objective (reasoning). However, due to the Korean tax authority’s limited access to the relevant information of the foreign taxpayer (who is based in another jurisdiction for tax purposes), it was not easy for the Korean tax authority to substantiate the foreign taxpayer’s intent (i.e., whether he or she intended to avoid taxes in Korea through the indirect transaction).
In this context, this 2020 tax amendment was intended to shift the burden of proof to the taxpayer, who has obtained a substantial tax benefit in Korea, surpassing the prescribed threshold (i.e., 50% or more of the tax burden). Hence, the Korean tax authority can apply the substance-over-form principle to set aside the unjust tax benefits unless the taxpayer proves that he/she (or the entity) did not have any bad faith intent to avoid taxes in Korea concerning the subject matter.
The exception to this rule is a minor tax benefit, which is defined as a tax benefit of KRW 10 million or less, provided that the underlying transaction amount is not more than KRW 1 billion.
2. Taxation of royalties concerning an unregistered patent improved
3. Other tax amendments
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