No Match Found
South Korea's budget bill for 2023, approved by parliament on December 23, includes the Korean rules on a global minimum tax (the GloBE Rules). The newly enacted rules are added to the existing Korean Law for the Coordination of International Tax Affairs (the ‘LCITA’) by establishing new Section 5. This section includes five sub-sections and 27 Articles that correspond closely to the OECD’s Pillar Two Model Rules. The rules include an Income Inclusion Rule (IIR) and ‘Supplementary rules for income inclusion’ (referred to as the UTPR in the OECD Model Rules). Both rules will be effective for fiscal years beginning on or after January 1, 2024.
The takeaway: Now that the new rules are in force, South Korea is the first country to have codified the global minimum tax rules in its domestic legislation. Given the short timeline before the new rules become effective, non-Korean MNEs that have a Korean presence are highly encouraged to assess the impact of the new rules and understand the additional compliance and reporting obligations.
Over 140 countries have joined the Pillar Two agreement (the Global Anti-Base Erosion Proposal, or ‘GloBE’) to address international corporate taxation rules. The Pillar Two GloBE Tax Rules aim to ensure that multinational entities (MNEs) pay a minimum effective tax rate of 15%. The OECD released the Pillar Two Model Rules in December 2021 and the Commentary in March 2022 to provide legislative guidelines. Since then, many countries including South Korea, the EU member states, the United Kingdom, Switzerland, Japan, and Australia have initiated domestic legislative procedures to introduce the global minimum tax rules.
In July 2022, the Korean Government announced its 2023 budget bill, which included domestic legislation to introduce the global minimum tax rules as one of the amendments to the LCITA, which is the Korean tax law that governs international transactions. The South Korean parliament approved the draft legislation without amendments on December 23, 2022, and the amended LCITA entered into force on January 1, 2023. The detailed Pillar Two Rules are expected to be further codified in the LCITA Presidential Decree (or the Enforcement Decree) in February 2023. Soon after the Presidential Decree, the Ministry of Finance is expected to provide additional guidance on the Pillar Two rules in the form of Enforcement Regulations and Basic Interpretation/Executive Rulings.
In addition to Korean MNEs that must comply with the Korean IIR rules, a number of non-Korean MNEs with subsidiaries or permanent establishments in Korea are expected to be subject to the Korean global minimum tax rules and may need to pay the Top-up Tax to the Korean tax authorities in accordance with the Korean UTPR for fiscal years from 2024. In particular, non-Korean MNEs whose parent entities (including the UPE) are located in countries that have not yet announced plans to implement the Pillar Two rules, such as the United States and China, may face significant fiscal burdens under the Korean UTPR.
Even for MNEs whose parent entities are located in countries where the legislative procedures are in progress, such as the United Kingdom and the EU member states, the possibility of an UTPR Top-up Tax allocation to Korean CEs for 2024 cannot be ruled out, in case adoption of the GloBE Rules in those countries is delayed. Therefore, MNEs should monitor the progress of the introduction of global minimum tax legislation in other jurisdictions as well as the OECD’s Implementation Framework.