[Abstract]

Problems of Government’s Proposal for Removing International Double Taxation to be Occurred by the Introduction of ‘Exit TaxAnd Alternative Proposals for Resolving Such Problems

Lee, Kyung Geun

This article outlined the contents of exit tax regime proposed by the Korean Government and reviewed the precedent international and domestic studies on exit tax. And then, this article analysed Government’s proposal for removing international double taxation based upon comparative legal studies. Further, this article made an in-depth analysis on Government’s proposal in a theoretical perspective while highlighting international guidance included in recently announced OECD’s BEPS Report, and finally put forward a set of proposals to resolve the problems of Government’s proposal in a desirable direction.
According to a Government’s proposing bill for 2016 Individual Income Tax Amendments submitted to the National Assembly in September this year, an individual taxpayer, who has lived in Korea for more than 5 years in the last 10 years before her emigration and has been a majority shareholder of Korean domestic companies, shall be subject to capital gains tax(a kind of individual income tax) by the time of her emigration at 20 percent on the gains arising from such capital appreciation. If the shares are subsequently transferred at a lower value than the value of the deemed transfer, a tax credit will be allowed reflecting this difference. Further, reverse credits shall be allowed against foreign taxes paid on the transfer of the same shares unless the foreign country relieves double taxation by the time when foreign income tax is imposed. Further, if a person who was subject to exit tax returns to Korea within 5 years from his departure from Korea, the exit tax paid shall be refunded to that person.
A closer look at the reverse foreign tax credit system constituting part of Government’s proposing exit tax regime reveals that this regime is not consistent with recently agreed OECD’s principle of international double tax avoidance with regard to exit tax. Further, it can constitute another problem that no apparent provision on the applicable period of the reverse credit is stipulated in the proposed bill even if we accept that the reverse credit system is needed. In order to resolve those problems, Korean Government is required to push forward tax treaty policy to the direction of apparently reflecting the legal base for imposing the exit tax in its tax treaties relying on the allocation principle of taxing rights among Contracting States as recommended by BEPS Action 6 Report so that the double taxation problem can be resolved by the immigration country’s measures for mitigating international double taxation issue. Further, it is required that Korean Government, while maintaining the main feature of the currently proposed foreign tax credit system, make more stringent the requirements for applying the reverse credits to the direction that such system is applicable only in case where the Head of National Tax Service agrees to provide the benefit of the reverse credit system either through Mutual Agreement Procedure(“MAP”) with competent authorities of other countries or through its approval on a taxpayer’s request for the application of that system in a situation where MAP cannot be open or the mutual agreement cannot be reached for whatever reasons. In addition, it is further required that the foreign tax credits can be allowed, through the revision of current relevant provisions of Basic National Tax Act and its Enforcement Decrees on later occurring reasons for re-determination of tax basis, even after current 5 year’s statute of limitation period for that re-determination is elapsed if a taxpayer requests for the re-determination of tax basis by applying Korea’s reverse credit system in order to avoid double taxation triggered by the immigration country’s taxation immediately after the transfer of the shares of Korean domestic companies.

▶ Key Words：exit tax, tax on capital appreciation, capital gains tax,reverse foreign tax credit system, tax treaty, BEPS action 6 report, mutual agreement procedure,requests for the re-determination of tax basis, later occurring reasons for re-determination of tax basis

** Published on January 2017
** Full article available in Korean only
** Download here →10-1 Removing International Double Taxation to be Occurred.pdf