SOUTH KOREA: Government Negligent in BEPS.

As published on businesskorea.co.kr, Monday 22 August, 2022.

The OECD initiated its Base Erosion and Profit Shifting (BEPS) project this year and South Korea’s tax law revision in response to the project is yet to be done. As a result, South Korean investors are facing an additional tax payment of at least trillions of won.

According to investment banking industry sources, a major domestic pension fund recently asked an accounting firm to provide consulting on the anti-reverse hybrid entity regulations of the BEPS and additional taxes resulting from the regulations.

The reverse hybrid entity is an entity that has different legal and tax-related definitions at home and abroad. The OECD is regarding reverse hybrid entities as potential tax evasion tools. It advised governments to change tax laws and agreements against the entities and most governments are already implementing new regulations in compliance.

South Korea’s problem is that special-purpose companies (SPCs) investors and enterprises set up abroad for alternative investment and so on are classified as reverse hybrid entities in the current state. This is because an SPC is defined simply as an overseas corporation due to the lack of legal basis in South Korea whereas foreign SPCs are regarded as partnership entities serving simply as profit-transferring entities.

EU member states raised their tax rate on reverse hybrid entities from 0 to 25 percent this year. The United States decided to repeal its 15 percent or less dividend income tax cut for reverse hybrid entities. It is planning to adopt a tax rate of up to 30 percent this year. Last year in South Korea, the National Pension Service and the Korea Investment Corporation earned 18 trillion won and 10 trillion won by alternative investment alone, respectively. They may have to pay trillions of won abroad unless a solution is found immediately.

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