Foreign Tax Credit

Korea 

1. Purpose

When a domestic corporation has foreign source income, this income becomes object of taxation added-up to the local domestic source income in Korea where is the resident country while this primarily is taxable income in the foreign country.  This creates the double taxation in two countries for the same object of same place and period.  To adjust this international double taxation, the Income Tax Act in Korea includes the clause for Foreign Tax Credit system which allows the deductions of tax on the foreign source income paid or payable.

2. Foreign Source Income Tax

(1) Direct Foreign Tax

The amount of direct foreign tax means the following amounts of tax (excluding additional taxes and surcharges) imposed by a foreign government.

➀ The amount of excess profit tax and other taxes imposed with other income, etc. of the corporation as the tax base

➁ The amount of value-added tax imposed with the income, etc. of the corporation as the tax base

➂ The amount of tax imposed with the amount of earnings, other than income, as the tax base and other corresponding taxes falling under the same tax items as the tax imposed with the income, etc., of the corporation as the tax base.

(2) Deemed Foreign Tax

An amount equivalent to the amount of the corporate tax reduction or exemption granted to a domestic corporation having foreign source income in a country which is a party to a tax treaty shall be deemed the amount of foreign tax for which the domestic corporation is entitled to a tax credit or inclusion in deductible expenses within the limits stipulated by the relevant tax treaty.

3. Tax Credit Method

One of calculation method either foreign tax credit method or including in necessary expenses method could be selected and applied for business income.  And foreign tax credit method should be applied to foreign source income tax deduction on global income other than business income.

(1) Foreign Tax Credit

➀ Foreign Tax Credit Limit

Deduct the foreign tax credit amount from the tax amount on global income with limit as follows.

➁ Foreign Tax Credit Carried Forward

Where the foreign source income is deducted from the calculated tax on global income and the foreign income tax paid or payable to a foreign government exceeds the credit limit, such excess may be carried forward to the taxable period to be completed within five years from the taxable period following the relevant taxable period, and deducted within the credit limit for the taxable period to which it is carried forward.

➂ Separate Calculation of Credit Limit by Each Country

In calculating the limit of deduction of foreign tax credit, the relevant business operator should apply it by method of separate calculation for each country if the overseas places of business are located in two or more foreign countries.

(2) Including Foreign Income Tax in Necessary Expenses

A resident with business income could include foreign income tax amount on the foreign source income paid or payable in necessary expenses in the calculation of income in the relevant taxable period. 

4. Local Tax Saving Effect on the Foreign Tax Credit

Having all those taxes of income tax and local income tax in global tax calculation, the taxpayer could be eligible to deduct an amount equivalent to 10% of such deducted amount from the calculated amount of individual local income tax according to the current Local Income Tax Act when the tax credit was applied in the calculation structure for the global income tax.

Thus, the taxpayer has benefit of additional local tax deduction effect of 10% of the foreign tax paid despite the taxpayer has not paid the local tax at the foreign country.

Actually this could be against the initial purpose of foreign tax credit which is to adjust the double taxation or deduct tax amount already paid, but the taxpayer could deduct the local tax amount despite the taxpayer has not paid the local tax at the foreign country as there are no separate rules to restrict those.