Items	Issues	Recommendations
2010-01 Retroactive Tax Assessment Registration Tax	Korea regulators plan to introduce a prior review requirement on certain types of OTC derivatives transactions. Based on their plan, the OTC Derivatives Review Committee will be established as part of the Korea Financial Investment Association (the “KOFIA”). The scope of such prior approval process would cover the following: 1) Any new OTC derivatives product whose underlying asset is referenced to credit risk or, natural or economic risks (e.g., credit derivatives product) 2) Any new OTC derivatives product offered to "General Investors" as defined in the Financial Investment Services and Capital Markets Act of Korea (the “FSCMA”) Under a past ruling (Sejung-1495, 2004. 6. 8), many foreign invested companies obtained the exemption of registration tax on their increased paid-in-capital and some even got a refund of wrongly paid registration tax from the district government office. In December, 2009, however, the Ministry of Public Administration and Security (MOPAS) released a new guideline, saying that registration tax exemption is not applicable to the increase of paid-in-capital in the first place, expressing that additional tax assessment would be made for those companies who benefited the exemption in past years, including those companies who received a refund from the determination by the local district office. The foreign invested companies, who applied and obtained registration tax exemption on their capital increase have done so in good faith, relying on the government’s own interpretation set out in 2004. And following the same interpretation, the local government offices have also accepted the refund request.	If this is a change in position by MOPAS, the enforcement shall be made just going forward, rather than making assessments in retroactive. Even in the case where it is not a change in position but a correction of misunderstanding, MOPAS shall still take its responsibility for its prior interpretation/position, which is taken by the tax payer and the district government offices in good faith. Such a practice of retroactive tax assessment can seriously undermine the reliability of the government’s current policy and its own interpretation.
2010-02 Amended Tax Filing Not Available for Local Taxes	For local taxes, if there are additional taxes over or wrongly paid, the tax payer can only request a refund to the district government office within the statute of limitation of 5 years. But if the district office refuses to such a request, there is no tax appeal procedure available for the tax payer as such a refusal is not regarded as a determination by the tax authorities, which is a precondition for a tax appeal. Against a refusal of a local tax refund, the tax payer can only resort to filing a civil law suit to the Administrative Court, however small the tax amount at issue is. And considering time, cost and complexity of this measure, the option is meaningless to the tax payer in practice.	Like the case with national taxes, voluntary filing of amended tax return shall be allowed and the same tax appeal options shall be granted if the district government office determines not to accept the amended tax filing of the tax payer. Local Tax Law has been amended and pronounced on Mar. 31, 2010 by passing the National Assembly on Feb. 26, 2010 and the tax reform takes into effect as of Jan. 1, 2011. Since amended tax filing is not included in the new local tax regime, however, the issue still remains as one of our trade issues.
2010-03 Deduction of Bad Debts Written Off	According to §19-2, Corporate Income Tax Law, bad debts can be tax deductible if any of the conditions as prescribed in the relevant presidential decree is met and one of them is the lapse of the statute of limitation (SOL) under a different legal regime (e.g. Commercial Act, Civil Law, etc.) In practice, however, the tax authorities tend to deny the tax deductibility of bad debts written off upon the lapse of SOL arguing that the tax payer have not sought all the available remedies including legal actions before removing them off the book. And most of times, the tax authorities try to treat them as “entertainment expenses”, seeing the write-off as giving a favor to the customers. Writing off the bad debts upon the lapse of SOL by itself meets one of the conditions for tax deduction under CITL and it is extremely unfair to the tax payer considering the additional cost for collection and the general business environment as collection disputes/and settlement with a reduced amount often happen in the ordinary course of business. Denying the tax deduction for such commercial/ business loss doubles the cost burden to the business operators, who are already suffering from a loss of revenue collection. Filing a legal action to the court may often be an unrealistic option in terms of cost effectiveness and the potential detrimental impact to the future business with the relevant customers, let alone such a legal action extends the SOL (which results in further delay in tax deduction for another 10 years).	Seeing the bad debts written off (with SOL lapsed) as entertainment expenses is extremely unreasonable as it is simply assuming that the tax payer is providing a favor to the debtor without any evidence or basis for such position. Rather, unless there is evidence that a tax payer wrote off some receivable with a clear intention to give a favor to a specific debtor, bad debts written upon the lapse of SOL (without any further legal actions) shall be allowed for tax deduction.
2010-04 VAT Credit for Bad Debts Written Off	Sales VAT which are not recovered due to the default of the payer can be claimed as a credit under §17-2, VAT Law (VATL). The qualified reasons for obtaining this VAT credit are the same as the conditions for bad-debt writeoffs under CITL or Individual Income Tax Law. But VATL (§63-2, Presidential Decree) prescribes that such a VAT credit is available only up to the filing due of the VAT period in which it becomes 5 years from the original date of supply. In often cases, however, SOL is extended for several causes including filing a legal action, etc., which leads to a situation that the tax payer can write off certain receivables after 5 years from the date of supply for corporate tax purposes. Legally, the more the tax payer tries to collect bad debts, the longer the SOL is extended. And in a way, this means that if the tax payer tries to collect bad debts, there is higher chance of losing the VAT credit opportunity. This is unfair to the tax payer because it has to bear all sale VAT for bad debts it cannot collect/ deduct for a long time due to the extended SOL.	It is strongly recommended that the period where the sales VAT credit is allowed for bad debts be made consistent with the bad debt deduction for corporate income tax purposes.
2010-05 Refund Request Due	Under §45-2, Basic National Tax Law, a request for a tax refund shall be filed within 3 years from the date of the statutory filing due while the tax payers can file an amended tax return for additional liability any time before the tax authorities make an assessment. Considering the 5 year statute of limitation for tax assessment, such an amended filing for additional tax payment is allowed within 5 years from the date of the statutory filing due. This limits the tax payer’s right to claim a refund for any over or wrongly paid tax amounts while giving larger room for tax assessment by the tax authorities.	It is recommended that the deadline for a tax refund request be made consistent with the due for an amended tax filing for additional payment (5 years).
2010-06 R&D Tax Credit	Under §10, STTCL, tax payers are eligible for a tax credit for their R&D expenses. In the case of consigned R&D, the consignor is allowed to claim the tax credit while the consignee (R&D service provider) is not as interpreted in Basic Ruling 10-0…2 released in July 7, 2005. In case where a Korean company incurs R&D expenses for its R&D service provision to a non-resident foreign company, neither the consignor (a non-resident) nor the consignee can get any benefit from the R&D activities performed in Korea. If the intention to grant R&D tax credit is to encourage R&D activities and develop new technology in Korea, it would be worth considering the grant of same benefit to Korean companies, who are consigned to render R&D services for foreign customers.	It is recommended that R&D tax credit under STTCL be made available for Korean R&D service providers, who perform R&D activities for nonresident foreign customers.
2010-07 VAT Refund Procedure for Non-Residents	Under §107, Presidential Decree, STTCL, foreign business operators having no business place in Korea are allowed to request a refund of purchase VAT incurred in Korea for their purchase of foods, accommodations, advertisements, electricity, telecommunications, and rents. The request for the refund of VAT paid from Jan. 1 through Dec. 31 shall be filed with the Regional Office of NTS as designated by NTS by June 30 of the following year. And upon receiving such a refund request, the tax authorities may determine and make a refund by Dec. 31 of the year such a request is filed. For this VAT refund request, the foreign companies shall submit its business registration certificate and the original VAT invoices in addition to the schedule of the transaction details. In practice, it takes too much time from the purchase of VATable goods or services until a foreign company can actually receive the cash refund as it takes at least one year and up to two years. Moreover, the refund request is allowed only once a year to the Regional Office of NTS (rather than any district tax office) and the procedure is difficult to follow for nonresident business operators, unless they engage an agent in Korea solely for this refund request work.	It is recommended that the refund request can be made on a monthly or quarterly basis and the procedure be streamlined so that nonresidents can make a request in an easier way.
Foreign Investment Tax Exemption for Additional Capital Increase	Under §121-4, STTCL, additional capital increase of a qualified foreign invested company is also eligible for tax exemption as set forth in §121-2 and §121-3. Under §121-2, STTCL, a qualified foreign invested company can enjoy 100% tax exemption from the start date of the fiscal year when the relevant profit is generated from the qualified business up to the fiscal year that ends within 5 years from this start date (i.e. 5 years in total). In the case of capital increase, however, the tax exemption is applicable from the court registration date for the capital increase up to the fiscal year that ends within 5 years (e.g. if a capital increase occurs in December 1, 2010, 100% exemption is applicable for only 4 years and one month). In that an additional capital increase to a qualified foreign invested company has the same effect as a new incorporation, the same benefit shall be applicable.	It is recommended that 100% exemption be made available for 5 years in full regardless when the capital increase occurs during a year.
2010-9 Reduction of International Tax Experts in NTS	According to National Tax Administration Plan for 2010 released by NTS on Jan. 11, 2010, NTS has determined to reduce its personal resources at the head office by 10%, which is applicable to every department within the organization. For multinational companies, the most relevant group within NTS might be the International Cooperation Department, which is primarily dealing with important cross border tax matters including APA, Competent Authorities Procedures, relations with OECD, etc. Even before this head cut, there are only 15 or so international tax experts within the group, which is too small to handle the tremendous work burden of APA and CA at the moment. Cases of APA and CA have increased a lot in recent years and the numbers are expected to grow even higher. Technical discussions and negotiations with other taxing authorities are of great importance to protect the Korean tax revenue and the Korean tax payers, and it takes much time and effort to develop resources to obtain soft and hard skill for such complicated cross border negotiations, let alone to build expertise in international tax issues. Understandably, reduction to the current international tax experts in NTS may seriously affect the quality of their work, while putting more burdens to the remaining personnel, who are already overwhelmed with the work in process. And this would mean more time and cost to the tax payers.	Contrary to what is planned/ implemented, it is recommended that the resources in the International Cooperation Department of NTS be increased by 50% of the current level in the next 2-3 years so that NTS can deal with the increasing cases of APA and CA in an efficient manner. This would be a right decision not just for the tax payers but for the Korean government’