Pillar Two: South Korea's Draft Pillar Two Law



On July 22, 2022, South Korea released a draft law to implement the OECD’s Pillar Two GloBE Rules (the ‘draft law’) in legislative notice 2022-128

The draft law amends the International Tax Adjustment Act (the ‘revised law’) and applies the Pillar Two GloBE Rules from January 1, 2024.
UPDATE: On December 31, 2022, South Korea passed Law 19191 to amend the International Tax Adjustment Act to provide for the Pillar Two Global Minimum Tax from January 1, 2024.  See:
South Korea has taken a similar approach to the UK and the EU and has redrafted the OECD Model Rules into its domestic tax legislation. This is different to the approach taken by Switzerland which transposed the OECD Model GloBE Rules by way of a direct reference. 
Nevertheless, the draft law is not self-contained legislation.
Although detailed, it frequently refers to Presidential Decrees (as yet unpublished) for the more granular aspects.  This is in line with the general approach taken in the South Korean tax legislation, with the tax law providing the key framework and Presidential Decrees containing the detailed application. 
The draft law replaces Chapter 5 of the International Tax Adjustment Act. Under the current version of the law, Chapter 5 relates to penalties and contains four articles (Arts 60-63). The revisions under the draft law apply new Articles 60 – 83 and move the existing penalty articles which now commence at Article 84 (with some further amendments).
In general, the implementation of the GloBE Rules in the draft law mirrors the OECD Model Rules. 
Key aspects to note are:
Under Article 61(1) of the revised law, the Pillar Two GloBE rules in South Korea apply to groups that have annual revenue of 750 million euros or more in the Consolidated Financial Statements of the UPE in at least two of the four Fiscal Years preceding the relevant Fiscal Year.
Excluded Entities
Excluded entities under Article 61(4) of the revised law mirror the provisions of Article 1.5 of the OECD Model Rules.
Top-Up Tax Calculation
Articles 64-69 of the revised law incorporate the mechanics of the Pillar Two top-up tax calculation. This is in accordance with Article 5 of the OECD Model Rules.
Income Inclusion Rule
Article 69 of the draft law applies the income inclusion rule. It follows the same approach as Article 2 of the OECD Model Rules, including the specific rules for intermediate parent entities and partially-owned parent entities. 
Under-Taxed Payments Rule
The under-taxed payments rule (which is called the ‘supplementary income inclusion rule’ in the draft law) is included in Article 70 of the revised law.
This is unlike the UK which has not included the under-taxed payments rule in its draft legislation.
De Minimis Exclusion
The de minimis exclusion provided in Article 5.5 of the OECD Model Rules is included in Article 71 of the draft law. This provides that there is no top-up tax for a fiscal year if:
  • the average Pillar Two GloBE revenue of the jurisdiction for the current and the two preceding fiscal years is less than EUR 10 million; and
  • the average net Pillar Two GloBE income or loss of the jurisdiction for the current and the two preceding fiscal years is a loss or is less than EUR 1 million.
Specific Entities and Reorganisations
Article 72 of the revised law incorporates the rules for minority-owned companies and subgroups. Again, these effectively mirror the provisions in Article 5.6 of the OECD Model Rules.
The reorganisation provisions included in Articles 6.2 and 6.3 of the OECD Model Rules are included in Article 73 of the revised law.
In general, gains and losses on asset transfers are recognized in accordance with their accounting treatment, but Article 73(3) of the revised law incorporates the provisions of Article 6.3.2 of the OECD Model Rules and allows for the exclusion of gains and losses under a qualifying GloBE reorganisation.
The draft law doesn’t provide the detail of what is and is not a qualifying GloBE reorganisation and defers this to a Presidential Decree.
The special rules for joint ventures provided in Article 6.4 of the OECD Model Rules and investment companies (Article 7.4 of the OECD Model Rules) are included in Articles 74  and 76, respectively. 
Transitional Rule for Initial Phase of Activity 
One point to note is that Article 79(2) of the revised provides that South Korea is an implementing jurisdiction for the purpose of Article 9.3.5 of the OECD Model Rules. 
This is an optional anti-avoidance rule for corporate inversions  that jurisdictions can choose to implement or not. It relates to the transitional rule that excludes MNEs from the under-taxed payments rule for the first five years of operations. 
There is the potential for an MNE group to use the UTPR transitional rules to avoid or minimise Pillar Two top-up tax.
This is because if an MNE group had its Ultimate Parent Entity (UPE) in a jurisdiction it would generally be subject to the Income Inclusion Rule (IIR) on low-taxed profits of its foreign constituent entities. However, the UTPR transitional rules treats all jurisdictions as having no UTPR top-up tax liability.
Therefore, a UPE could restructure the group to create a new UPE in a jurisdiction that did not implement an IIR. The UTPR would then not apply to its foreign subsidiaries providing the conditions were met for the UTPR transitional rule.
As such, Article 9.3.1 of the OECD Model Rules includes an optional provision that allows a jurisdiction to apply the UTPR to MNE groups that have a foreign UPE but significant operations in that jurisdiction.  South Korea includes this provision in the draft law. 
Does the Draft Law Differ From the OECD Model Rules?