Introduction of Territorial System for Taxing Foreign Dividends －Focus on Introduction of Territorial System in UK and Japan－
Asian Tax Journal Vol. 13 No. 4 (2012), pp. 87-124
Abstract
In the past, the United States and other developed countries have adopted a worldwide system on international tax system to achieve capital export neutrality. In recent years, however,international tax system has been changing from a worldwide system to a territorial system. Depending on cross－border international movement of capital have been increasing, many countries have been trying to strengthen corporate competitiveness in the world market and redesigning competitive tax system. As a result, the trend on international tax system is changing from a worldwide system to a territorial system and UK and Japan have adopted a territorial system in 2009,Considering the legislative background of introducing a territorial system in UK and Japan, we can get the implication that it is necessary to introduce a territorial system in aspects of improving the international competitiveness of international corporation, increasing in domestic investment and alternative method of foreign tax credit in Korea. This paper also suggests details on the new tax system on the foreign source income that include types of exempt income, deductibility of costs indirectly associated with foreign source income and etc. in case a territorial system is adopted in Korea. First, we need to introduce a permanent rule rather than temporary rule territorial system to ensure predictability and legal stability for both taxpayers and tax authorities. Second, we suggest foreign dividend income exempted in the domestic tax system as a form of a territorial system. It means that other foreign income except dividend will be taxed by a worldwide system like most countries operating a territorial system. Third, the parent company must hold a minimum ownership in the shares of the foreign subsidiary paying the dividend. A threshold criteria for a minimum ownership must be decided by considering the current indirect foreign tax credit system in Korea. Finally, it’ll be reasonable to set a certain range of the dividend added back as a proxy for nondeductible expenses. The range of a substitute for denying deductibility of indirect expenses incurred to generate foreign dividend income should be decided by considering other tax systems introducing a territorial system and actual business environments in Korea. Moreover, we need to arrange anti－tax avoidance rules and tax incentives to domestic investments to raise the effectiveness of a territorial system.
Keywords
- International double taxation avoidance
- Dividend exemption
- Foreign tax credit
- Competitive tax system
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