Major Changes in 2016
3. Tax Treaties, Etc.
A. Foreign Account Tax Compliance Act (“FATCA”) – Intergovernmental Agreement
On September 7, 2016, the National Assembly in Korea ratified the Korea-U.S. Intergovernmental Agreement (“IGA”) related to the FATCA. As a result, the IGA between Korea and the U.S. entered into force on September 8, 2016. Under the IGA, financial institutions in both countries must report the account information to the National Tax Service or the Internal Revenue Service for periodic exchange of information between the two. It is assumed that the automatic exchange of account information for years 2014 and 2015 was made sometime in December 2016.
B. Korea-Hong Kong Tax Treaty
The Korea-Hong Kong Tax Treaty has been ratified by the National Assembly in Korea on September 7, 2016. The treaty will be effective for Korean tax for taxable years beginning on or after January 1, 2017 (for Korean withholding tax, the treaty will be effective for any amounts payable on or after April 1, 2017). Accordingly, the National Tax Service has become able to obtain information held by financial institutions of Hong Kong, including information on past transactions of Korean residents.
C. OECD’s Release of Multilateral Convention to Prevent BEPS
On November 24, 2016, the Organisation for Economic Co-operation and Development (“OECD”) released the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” (“The Multilateral Convention”). The Multilateral Convention, developed in accordance with 15 BEPS Action Plans which were jointly launched by the OECD and the G20 countries, includes the following items relating to tax treaties among BEPS recommendations: “Neutralizing the Effects of Hybrid Mismatch Arrangements (Action 2)”; “Preventing Treaty Abuse (Action 6)”; “Preventing the Artificial Avoidance of Permanent Establishment Status (Action 7)”; and “Making Dispute Resolution Mechanisms More Effective (Action 14)”. Although including “Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance” in the preamble of a tax treaty (Article 6 of the Multilateral Convention) and adopting the limitation on benefits provision and the principal purpose test provision (Article 7 of the Multilateral Convention) are minimum standards which cannot be reserved, participating countries can reserve adopting other provisions. If provisions under the Multilateral Convention are ratified by the contracting states to this Convention, they will have the effect of amending the existing bilateral tax treaties. Thus, it is expected that more than 2,000 tax treaties concluded by more than 100 countries participating in this project will be amended in near future.
Negotiations between countries on the Multilateral Convention started in 2015 and the final version of the Convention was released in November 2016. From December 31, 2016, countries that intend to conclude the Multilateral Convention can sign the Convention, and the OECD is planning to hold a large-scale signing event in June 2017. Governments of each country should prepare the list of tax treaties to be amended in effect by the Multilateral Convention, determine which alternative to choose and reserve among the alternatives presented under the Multilateral Convention and notify the OECD of its decision. It is expected that the Korean government will notify the OECD of its position on the Multilateral Convention before June 2017 and participate in the signing event held in June 2017.