Tax on Internal Reserves
The Korean government is planning to levy more taxes on corporate internal reserves while imposing stricter restrictions on internal transactions in favor of affiliated companies.
“It seems that the taxation system did not work well under the previous government,” a Presidential aide said on June 8, adding, “Due to so many loopholes of the system, companies with large internal reserves still can avoid taxation with ease, and we are well aware of the necessity of a change in that system.”
The Corporate Tax Act has to be amended for the taxation system to be beefed up. The government or the ruling party is likely to include the issue in its tax law amendment in the second half of this year in the form of a corporate tax act amendment.
According to the current taxation system, taxation at a rate of 10% is applied to a company’s internal reserves when 30% to 80% of its income is not spent on its workers’ wages, dividend payment to shareholders, assistance for partner firms and equipment, etc. The government is looking to change the rules as the spending of the income for those purposes has shown little increase in certain companies and industries.