Korea: proposed introduction of partnership taxation
The Korean Institute of Finance recently held a public hearing to announce a preliminary draft of proposed new rules on partnership taxation which are expected to be issued by Korea’s Ministry of Finance & Economy (MOFE). If enacted as currently proposed, these new rules should provide taxpayers with more flexibility in alleviating double taxation.
Under current law, a business in Korea may be operated through a limited company, Chusik Hoesa (CH) or Yuhan Hoesa (YH), or an unlimited company, Hapmyong Hoesa (HMH) or Hapja Hoesa (HJH). The liabilities of CH and YH limited companies are limited to the amount of their contributed capital. In a HMH, all members jointly and severally share the liabilities, and in a HJH, at least one member must have unlimited liability. The HMH and HJH are similar to partnerships in substance, but these unlimited companies are subject to the Korean Corporate Income Tax Law.
The new partnership taxation rules will likely apply to the unlimited companies, HMH and HJH, as well as to two new entities that would be introduced under the new rules, a Hapja Johap (HJ) limited partnership and a Yunhanchaegim Hoesa (YCH) limited liability company. HMH, HJH and YCH may be allowed to elect to be taxed as a Kondong Saupjang (which currently has a limited flow through tax treatment) or a partnership. As currently contemplated, the election would be valid for a five-year period and could not be rescinded during the five consecutive years for which the election applies.
Under the new measures, a partnership would be treated as a flow-through entity, with each partner subject to corporate or individual tax on its respective share of income. Income or loss would be allocated in accordance with the partnership agreement. Losses would be limited by a partner’s outside basis and excess losses could be carried forward for five years for use when the partner’s outside basis is increased.
The new measures will also likely include measures with respect to ‘in-kind’ contributions to the partnership and transactions occurring between the parties outside the partner/partnership relationship.
China withholding tax changes in corporate income tax law
Proposals currently being considered by China’s State Council may impose further taxes on multinational companies (MNCs).
It is currently proposed that when the new law takes effect on 1 January 2008, dividends distributed by Foreign Invested Enterprises (FIEs) to their foreign investors will no longer enjoy a tax exemption, and will be subject to 10 per cent withholding tax. For existing investments of MNCs in China, it may be possible to mitigate Chinese withholding tax to a level around 5 per cent with appropriate planning.
New Zealand (NZ) to close tax loopholes for portfolio investment entities
On 5 September 2007, the NZ Minister of Finance and the NZ Minister of Revenue announced that the NZ Government will close loopholes in the tax rules on portfolio investment entities (PIEs) to prevent their use by land-owning companies seeking tax advantages for their shareholders.
The PIE rules coming into force on 1 October 2007 prevent lower-income taxpayers being over-taxed on their earnings through passive savings vehicles such as managed funds. Investors in savings vehicles that choose to become PIEs and whose personal tax rates are 33 per cent or 39 per cent will have their earnings taxed at a final rate of 33 per cent until the beginning of the 2008-2009 income year, when it will drop to 30 per cent. Investors on lower income tax rates will be taxed at 19.5 per cent.
“To ensure that these tax rate benefits are not clawed back, dividends paid by companies qualifying as PIEs are not taxed - unless the shareholder elects that they are. This make PIEs an attractive form for companies that earn some non-taxable income that they want to distribute to shareholders," the Ministers said. But according to the Ministers, “because PIEs can invest in land, some land-owning companies that run active businesses are contemplating using a gap in the new rules to structure the land part of their business as a PIE, to reduce final tax on shareholder earnings. That is against the policy intent of the PIE rules. The government will introduce legislation at the earliest opportunity to prevent it occurring, allowing sufficient time for consultation".
The Ministers also noted that a further error in the law needed correction. Specifically, the Ministers said that “a second recently identified gap in the new rules concerns the requirement that income earned by PIEs must be passive in nature. An error in the legislation, however, means that requirement does not apply to PIE subsidiaries, which it should. That error will be corrected as soon as possible".
The signalled changes will be made effective from 1 October 2007.
Decision regarding IRS access to tax accrual workpapers
Following on from our article in last month’s TaxTalk (FIN 48 and tax audits), we note that the Federal District Court for the District of Rhode Island recently denied the United States (US) Internal Revenue Service (IRS) access to tax accrual workpapers of Textron Inc. This decision was based upon the ‘work product privilege’. This is the first instance in which a US Federal Court has addressed the applicability of that privilege in relation to tax accrual workpapers.
In a Memorandum and Order released on 29 August 2007, the Court denied a petition to enforce an IRS summons served on Textron Inc. seeking Textron’s tax accrual workpapers for its 2001 tax year. In the Memorandum and Order, the Court, noting that the workpapers at issue consisted solely of counsel’s opinions and assessment, firstly found that the workpapers, at creation, were protected by the attorney-client privilege, the tax practitioner-client privilege and the work product privilege. However, the Court held that both the attorney-client and tax practitioner-client privileges had been waived when Textron Inc. provided the workpapers to its independent auditor with only the work product privilege surviving.
Finally, the Court found that the IRS failed to demonstrate the ‘substantial need’ required to overcome the work product privilege.
With respect to the work-product privilege claim, the Court said that the purpose of this privilege is to prevent adversaries from gaining an unfair advantage by obtaining documents prepared in anticipation of litigation, and it noted that in seven of Textron’s last eight tax examinations, disputes arose and three resulted in litigation.
For further information, please complete the following form, or contact:
Peter Collins, Partner
PricewaterhouseCoopers Tax
International Tax and Transaction Services
Phone: +61 3 8603 6247
Norah Seddon, Partner
PricewaterhouseCoopers Tax
International Tax and Transaction Services
Phone: +61 2 8266 5864
