South Korea’s updated Enforcement Regulation and Enforcement Decree provides for OECD Administrative Guidance Updates

General

South Korea’s Decree No. 35348 of February 28, 2025 amending the Enforcement Decree to the International Tax Adjustment Act (‘the Enforcement Decree’) and the Decree of the Ministry of Economy and Finance No. 1114 of March 21, 2025 amending the Enforcement Regulations to the International Tax Adjustment Act (‘the Enforcement Regulations’) provide for further aspects of the June 2024 OECD Administrative Guidance as well as additional Pillar 2 top-up tax forms.

This follows Law No. 20612, of December 31, 2024  to amend the International Tax Adjustment Act for the 2025 Tax Reform provisions. This included the Transitional UTPR Safe Harbour and a number of amendments to the South Korean global minimum tax law to reflect aspects of the OECD Administrative Guidance from January 1, 2025 (for more information see South Korea Issues 2025 Amendments to its Global Minimum Tax Law).

OECD Administrative Guidance

The Enforcement Decree No. 35348 of February 28, 2025 and the Decree of the Ministry of Economy and Finance No. 1114 of March 21, 2025 provide for further aspects of the June 2024 OECD Administrative Guidance, including:

-Aggregate DTL Category basis (Article 1.2.1);

-Exclusion of certain types of GL accounts and separate tracking (Article 1.2.1);

-Exclusion of GL accounts that generate standalone DTAs (Article 1.2.1);

-Exclusion of swinging accounts and separate tracking (Article 1.2.1);

-FIFO/LIFO Basis (Article 1.2.2);

-Aggregation of Short-term DTLs (Article 1.2.3);

-Reversal of DTLs that accrued before the Transition Year (Article 1.2.2);

-5 year unclaimed accrual election (Article 1.2.2);

-Recalculated deferred tax where GloBE carrying value differs from accounting carrying value (Article 2.1.2);

-Exclusion of GloBE carrying value from SBIE (Article 2.1.2);

-Extension of the Substitute Loss Carry-forward DTA to PEs, hybrids and reverse hybrids (Article 4.1);

-Allocation of deferred tax expenses and benefits from a Parent Entity to a CFC, PE Hybrid or Reverse Hybrid: 5 step process (Article 4.2);

-Five-Year Election to exclude the allocation of all deferred tax expenses and benefits to CFCs, PEs, Hybrids and Reverse Hybrids (Article 4.2.2);

-Determining GloBE status when a Flow-through Entity is held directly by another Flow-through Entity (Article 5.2.2);

-Non-group owners: Partially owned Flow-through Entities (Article 5.3.2);

-Non-group owners: Indirect minority ownership (Article 5.3.5);

-Taxes allocated to a flow-through entity (Article 5.4.2);

-Hybrid entities – Taxes pushed down include indirect owners (Article 5.5.2);

-Hybrid entities – Entities located in jurisdictions without a Corporate Income Tax system (Article 5.5.4); and

-Extension of taxes pushed down to include Reverse Hybrids (Article 5.6.2).

Transitional CbCR Safe Harbour

Decree No. 1114 of March 21, 2025 of the Ministry of Economy and Finance, amended the Enforcement Regulations to provide for aspects of the December 2023 OECD Administrative Guidance that relate to the Transitional CbCR Safe Harbour, including:

-Transitional CbCR – Purchase Accounting Adjustments (consistent reporting condition, goodwill impairment adjustment);

-Transitional CbCR – JVs;

-Transitional CbCR – Same Financial Statements/Local Financial Statements for Statutory Reporting;

-Transitional CbCR – MNEs not required to file CbC Reports;

-Transitional CbCR – Qualified Financial Statements for PEs; and

-Transitional CbCR – Treatment of hybrid arbitrage arrangements.

Top-Up Tax Forms

The amended Article 142 of the Enforcement Decree and Article 91 of the Enforcement Regulation provides for additional filing requirements for the Income Inclusion Rule (IIR) and the Under-Taxed Profits Rule (UTPR).  The forms are attached to the Enforcement Regulation. As well as new forms, they also issued revised versions of the current forms (eg the GloBE Information Return).

The filing requirements (in additional to the GloBE Information Return) are:

IIR

Domestic constituent entities subject to IIR top-up tax are required to file an IIR top-up tax return (Form 56)

UTPR

Domestic constituent entities subject to UTPR top-up tax are required to file a UTPR top-up tax return (Form 56-2), as well as either form 57 or form 58 to report the UTPR top-up tax allocation mechanism used. This is to implement the reporting provisions for Article 73(5)/(6) of Law No. 20612 which provided for new allocation methods for UTPR top-up taxes.

Article 73 provides that the UTPR allocation to constituent entities in a jurisdiction is generally based on (1) a method taking into account the ownership ratio of the domestic constituent entity company directly or indirectly held by the UPE and the available capacity of the constituent entity based on the IIR rules, or (2) a method designated by the reporting constituent entity, agreed upon by all domestic constituent entities of the MNE group.

The amended Article 73(5) provides that all or part of the UTPR tax allocated has not been paid by the end of the fiscal year immediately preceding the fiscal year in which the allocation is made, the unpaid tax is allocated entirely to the UPE if located in Korea, and if the ultimate parent company is not located in Korea, method 1 is used.

If method 1 is used, form 57 is filed (the ‘Statement of additional tax calculation’). If method 2 is used, form 58 is filed (the ‘Additional tax allocation and designation agreement form’).