South Korea First to Enact Global Minimum Tax Rules Amid Concerns

As Part of the 2023 Tax Reform Act, South Korea enacted new global minimum tax rules—GloBE Rules—to align with the OECD BEPS 2.0 Pillar Two. The Korean GloBE Rules are included in the Law for the Coordination of International Tax Affairs, effective on or after Jan. 1, 2024. South Korea is the first country to have codified the Organization for Economic Cooperation and Development Pillar Two into its domestic legislation.

However, the relevant presidential decrees haven’t yet been codified by the Korean Ministry of Economy and Finance. In South Korea, the tax law provides the key framework and general principles, and presidential decrees contain detailed application and specific guidelines.

Background

The Korean GloBE Rules are substantially identical to the GloBE Rules in the OECD Pillar Two Model Rules. This includes the top-up tax applicable to constituent entities of multinational entities with an effective tax rate, or ETR, of less than 15% under the income inclusion rule, or IIR.

Under the GloBE Rules in the OECD Pillar Two, the jurisdiction where the ultimate parent entity, UPE, is located will be given top-up taxing rights if any of its constituent entities pays ETR of less than 15%. However, if the jurisdiction where the UPE is located doesn’t legislate for the IIR, or if the locally legislated version of IIR is different from the OECD GloBE Rules, the top-up tax rights may be transferred to another jurisdiction.

Jurisdictions therefore have an incentive to implement the OECD Pillar Two Model Rules without alteration, and to adopt them as soon as possible. The Ministry of Economy and Finance stated in its press release of Jan. 18 that South Korea’s early codification of the GloBE Rules was implemented against such backdrop.

There has been considerable criticism in the country regarding this early adoption, mostly from domestic companies and business organizations. One common criticism has been that the South Korean government’s embrace of GloBE Rules has been too hasty, and that it hasn’t thought through the implications of adopting Pillar Two, particularly when some major jurisdictions are still considering whether or not to do so.

In response, the Ministry has stated that the timing of actual implementation can be adjusted in consideration of developments in other jurisdictions. For example, the relevant presidential decrees may be delayed by the ministry depending on the global situation.

Compliance Issues for Foreign Companies

The following reporting obligations apply to foreign companies operating in South Korea in relation to GloBE:

If the revenue of the consolidated financial statements of the UPE in at least two of the immediately preceding four business years is more than 750 million euros ($816 million), it is obligated to submit a GloBE return (and pay top-up tax, as discussed below) in South Korea. This applies to both subsidiaries and permanent establishments of foreign companies doing business in the country.
Generally, the Korean GloBE Rules are effective from the fiscal year starting Jan. 1, 2024, and the GloBE return must be submitted to the tax office within 15 months from the end of the fiscal year. As an exception to this deadline, taxpayers are allowed to submit a GloBE return within 18 months in the first applicable year. Thus, foreign companies following the calendar year are required to submit their first GloBE return (for 2024) by June 30, 2026.
Where another constituent entity of an MNE has already submitted a GloBE return to the tax authorities of the jurisdiction where the UPE is located, it isn’t obligated to submit a GloBE return in South Korea. However, in such cases, foreign companies are required to submit a statement to the Korean tax office confirming that the GloBE return has already been filed in another jurisdiction.

MNEs and Top-Up Taxes

As discussed above, the GloBE Rules require that the top-up tax on the foreign MNE’s constituent entities with ETR of less than 15% be paid to the jurisdiction where the UPE is located. However, if the country where the UPE is located is a low-tax country or implements GloBE Rules different from the OECD Pillar Two, the top-up tax shall be paid in the jurisdiction where the intermediate parent entity, or IPE, is located.

But, as a backstop to the IIR, if there is no jurisdiction with a 15% or higher ETR, or no jurisdiction with the GloBE Rule at the level of the IPE, the jurisdictions with a GloBE rule that is the same as OECD Pillar Two where other constituent entities are located will be given top-up taxing rights in proportion to a prescribed rate (the under-taxed payment rule, or UTPR). The Korean GloBE Rules mirror the OECD Pillar Two rules regarding the order of the top-up taxing rights, that is, the IIR and UTPR.

In addition to the Korean MNEs that must comply with the IIR in the GloBE Rules, foreign MNEs with subsidiaries or permanent establishments in South Korea can also be subject to the Korean GloBE Rules and may need to pay the top-up tax in South Korea in accordance with the UTPR for fiscal years from 2024.

Under the currently enacted UTPR in South Korea, foreign MNEs whose parent company (including the UPE) is located in a jurisdiction that hasn’t yet announced plans to implement the OECD Pillar Two, such as the US and China, may face fiscal burdens under the Korean UTPR. Even for MNEs whose parent company is located in a jurisdiction where the legislative procedures are in progress, such as the UK and the EU member states, the possibility of a UTPR top-up tax allocation to Korean constituent entities for 2024 can’t be excluded, in case adoption of the GloBE Rules in those countries is delayed.

It is important to note that we understand the Ministry of Economy and Finance may be considering pushing back the implementation of the UTPR from 2024 to 2025 to align with the EU as well as other jurisdictions. However, as this hasn’t been formally announced or confirmed, we recommend that foreign MNEs brace and plan for the worst-case scenario.

MNEs should monitor the progress of the introduction of the global minimum tax legislation in other jurisdictions as well as the development of the OECD’s Implementation Framework. 

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Tom Kwon is a senior foreign attorney and co-head of international tax practice, Steve Minhoo Kim is a senior foreign attorney, and Tae Hwan Kim is a certified public accountant, with Lee & Ko.