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| JULY 2010 |
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| MOSF's Proposal of IFRS-Related Amendments to Corporate Income Tax Law |
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| From 2011, the adoption of the Korean International Financial Reporting Standards ("K-IFRS") becomes mandatory for all listed companies and designated financial institutions in Korea, while other enterprises not subject to the foregoing requirement would continue to use the existing Generally Accepted Accounting Principles with some revisions ("Local GAAP"), resulting in the bifurcation of the financial accounting framework. In line with the forthcoming change, the Ministry of Strategy and Finance ("MOSF") released a detailed report on the proposed CITA amendments on July 1, 2010. This report contains MOSF's analysis of the impact of the K-IFRS and the Local GAAP adoption from the tax perspective and sets forth the proposed Corporate Income Tax Act ("CITA") amendments designed to mitigate tax burdens of the affected taxpayers. The following highlights the key issues addressed in the report. |
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| 1. Tax issues arising out of the bifurcated financial accounting framework: Local GAAP and K-IFRS |
The difference between the K-IFRS and the Local GAAP treatment of the income and loss recognition, and other factors affecting the amount of taxable income would significantly impact the ultimate tax liabilities of the enterprises concerned. Also, certain items, which has been treated as expenses for policy reasons, will no longer be recognized as expenses under the new K-IFRS rules, which would have the effect of increasing tax burdens of the affected enterprises unless the tax law provides appropriate mitigating measures.
The K-IFRS applies the fair value revaluation method for evaluating tangible and intangible assets, whereas the tax law does not allow recognition of income or loss arising from changes in the fair value of assets. Accordingly, the resulting book-tax difference would need to be reconciled for tax purposes. |
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| 2. Proposed tax law amendments in line with the bifurcated financial accounting framework |
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| A. |
[Principle 1] Maintain the same level of tax burden with respect to the same economic activity |
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Amend the relevant tax law provisions so as to ensure that the differences in the accounting standards under the K-IFRS and the Local GAAP do not lead to significant changes in tax burdens of the affected enterprises (e.g., due to different treatment of convertible preferred stock, fair value evaluation method, etc.) |
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| B. |
[Principle 2] Minimize the additional compliance burden resulting from book-tax reconciliation by following the accounting treatment for items with relatively insignificant tax effects |
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Follow the accounting treatment for tax purposes where anticipated impact on the segment profit/loss is minimal but the differences in book and tax treatment would likely entail significant compliance burden to reconcile the book-tax differences (e.g., lease classification, functional currency, foreign exchange conversion for foreign branches, etc.) |
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| C. |
[Principle 3] Adopt the tax accounting measures that are considered reasonable for tax purposes even if such adoption would likely result in increased tax burdens for affected enterprise (however, implement measures to mitigate the initial impact during the early years of conversion to the K-IFRS) |
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Adopt in the tax laws the K-IFRS measures respecting accounting of expenses if they better reflect the economic substance of such expenses, even if doing so would likely culminate in increased tax burdens for the K-IFRS adopters. However, mitigate the potential impact on their tax positions by simultaneously adopting appropriate measures for the early years of conversion to the K-IFRS (e.g., for depreciation of tangible assets, bad-debt loss allowances, etc.). |
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| 3. Key Points of the Proposed CITA Amendments |
| Please click on the following link to view the report detailing the key points of the proposed CITA amendments. [Link] |
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