In a significant move towards bolstering tax regulations, the Korean Ministry of Economy and Finance has unveiled an array of proposed amendments for the year 2023. These revisions encompass the acceleration of submission deadlines for local and master files and the reinforcement of value-added tax (VAT) registration requirements for foreign electronic service suppliers. Presented on the 27th of July 2023, these proposals await the approval of the National Assembly before being enshrined in law.
Outlined below are the key modifications suggested within the ambit of these proposals.
Expediting Submission Deadlines for Local and Master Files
At present, any Korean entity or a Korean Permanent Establishment (PE) of a foreign corporation that meets specific criteria, such as sales revenue, is obligated to provide local files, master files, and country-by-country (CbC) reports to the pertinent tax office within a year from the close of a fiscal year. The proposition advocates for a reduction in the timeline for presenting master files and local files (excluding CbC reports) to a span of 6 months from the conclusion of a fiscal year.
For taxpayers involved in cross-border transactions with affiliated foreign entities, the responsibility to provide international transaction statements (comprising statements of international transactions, summarized profit and loss statements, and arm’s length price calculation reports) within 6 months from the conclusion of a fiscal year has been exempted since January 1, 2020. This exemption applies when the taxpayer is mandated to submit a local file and the international transaction statements are submitted as an appendix to the local file. In the spirit of enhancing transparency, the proposal advocates that even if a taxpayer is obligated to submit both a local and master file, international transaction statements must be submitted independently within 6 months from the conclusion of a fiscal year.
The proposed amendment is anticipated to be effective for fiscal years commencing on or after January 1, 2024.
Stringent Penalties for VAT Registration Lapses by Foreign Electronic Service Suppliers
Currently, any foreign entity (foreign corporations or non-resident individuals) that directly or indirectly offers electronic services to consumers in Korea is mandated to undergo a “simplified business registration” within 20 days of commencing business in Korea. Subsequently, they are required to report and remit VAT in Korea. To strengthen compliance with this requirement, the proposal introduces a two-pronged approach:
- Empowering the relevant tax office to conduct investigations and register the foreign electronic service supplier, using the simplified business registration process, at their discretion in cases of non-compliance.
- Imposing a penalty equivalent to 1% of the aggregate value of supply during the unregistered period.
These amendments are slated to apply to supplies made on or after January 1, 2024.
As Korea charts its course towards heightened fiscal accountability, these proposals reflect the nation’s commitment to ensuring transparency, timeliness, and stringent adherence to taxation regulations. As these changes await legislative approval, businesses and stakeholders are urged to remain vigilant and adapt their practices to align with the evolving landscape of Korean tax policies.
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