International tax system in Korea : The reform proposal
Asian Tax Journal Vol. 6 No. 3 (2005), pp. 55-82
Abstract
International tax is neither exactly defined science area nor established in the positive law. In a broad sense, it is a comparable concept to internal tax and it usually cares the double taxation problems between nations. Accordingly, the following subjects are handled in international tax area: 1. tax treaties concluded to prevent double taxation problems arising from personal and capital transactions between nations, 2. the domestic tax problems concerning foreign enterprises, 3. the foreign and domestic tax problems arising from outbound investment of Korean enterprises, 4. Transfer Pricing Taxation system, Thin Capitalization rule, Controlled Foreign Companies rule and Anti-Treaty-Shopping system to regulate tax evasion and tax avoidance of multinational enterprises, and 5. cooperation between national tax authorities to resolve above mentioned tax avoidance problems. In this study we tried to identify the problems relating to the transfer pricing taxation system, thin capitalization rule, controlled foreign companies rule and gift tax exemption system for foreign asset and to propose reform direction. In Korea, the transfer pricing taxation system was implemented in Corporation Tax Law in 1988. In this initial period the Korean TP taxation system was just in the framework of denying the calculation of unfair practices and his availability is also limited to domestic enterprises. Consequently the efficient regulation on tax avoidance of multinational firms was relatively unsatisfactory. In the recent years international transactions have sharply increased with the launching of WTO and globalization of Korean economy. The inbound investment of foreign multinationals into Korea and at the same time outbound Investment of Korean firms have rapidly increased. As the majority of advanced countries including the USA in the last 20 years has strengthened their sovereign position concerning taxation of foreign firms, Korea also had the strong need to tax multinational firms effectively. The Law for the Coordination of International Tax Affairs(LCITA) was enacted in the late 1995 and provided for such taxation systems against tax avoidance by multinational firms; transfer pricing system, thin capitalization rule, controlled foreign companies rule etc. The background for enactment of LCITA is not only for effective regulating tax avoidance of multinational firms but also for tax administration cooperaton between nations and for providing the tax dispute procedures related to multinational firms between nations. In this study we suggest the following reform directions for LCITA. Concerning the transfer pricing taxation system : 1. The current limit of fines should be removed to secure the taxpayer's bona-fide obligation to submit evidence materials, as the case of the USA. 2. Even though it is impossible to make an accurate computation of arm's length prices, it is very important for effective transfer pricing taxation. Thus it would be desirable to set and apply the range of arm's length prices. 3. It is necessary to accumulate comparable transactions materials to compute arm's length prices and to instruct transfer pricing experts. Concerning thin capitalization rule : It is necessary to implement thin capitalization rule with a fixed safe haven ratio so as not to have a negative effect on capital import while maintaining the control effect on the excessive borrowing of foreign firms. More consideration should be given to a proper choice of debt/capital ratio. Concerning the CFC legtlation : 1. According to current Korean Special Tax Exemption Limit Law 13% of corporate income should be paid as minimum tax. So it is necessary to revise the current 15% of actual tax burden provision of LCITA that categorizes the countries of less than this rate as tax haven. 2. It is desirable to reduce the application scope so that CFC rule may apply only to the retained income of the firm acquiring passive income such as interests, dividend, real estate income etc. by establishing the processing company in tax havens. Finally, concerning the special gift tax exemption : 1. For the levying on foreign gift it is inevitable to identify the fact that the overseas property is transferred and the market price of the property. For doing that, it is necessary to revise the provisions on information exchange in tax treaties so that information on property transfer and their market prices may be regularly and automatically exchanged. 2. It is considerable to establish branch office of domestic property valuation body in countries of large Korean populations and to instruct international specialized public- certified appraisers.
Keywords
- International Tax
- Transfer Pricing
- Arm's Length Price
- Thin Capitalization
- Tax Haven
Related Articles
A Study on the Improvement of Market Price Evaluation for Intangible Asset Transactions between Specially Related Persons in Korea
22(6) 9-43
Research on Taxation of Foreign Bank Branches
11(2) 209-237
International Efforts to Prevent Tax Evasion and Corresponding Actions of Korean Government
11(3) 179-204
Recent International Experiences and Optimal Transfer Pricing Tax Policy of Korea and China
7(1) 89-116
Implication and Role of Culture Variables in Decision Making on International Tax
1(2) 243-276