Japan and South Korea signed a new taxation convention Thursday that will treat South Korea as a developed country by removing preferential measures and effectively increase Japan’s tax revenue.The agreement, to be applied from 2000 subject to parliamentary approval, promotes business activity taxation by the home country rather than the host.Under the existing bilateral convention, which took effect in 1970, exporting firms are taxed by the importing country if they have branches in that country. For instance, a Japanese manufacturer pays tax in Seoul for its exports to South Korea even if the taxable income does not belong to its South Korean branches.The new agreement would narrow the definition of taxable corporate income to mean income earned solely by corporate branches and offices in the partner’s country.Thus, under the new convention, South Korea’s taxation will be limited to the Japanese firm’s branches there and not cover exports directly from the head office in Japan. The new accord also will abolish Japan’s “tax-sparing credit” for Japanese firms investing in South Korea at the end of 2003.Tax-sparing credit artificially assumes that Japanese firms pay the full amount of South Korean taxes even if they do not because of tax incentives provided by Seoul. Japanese tax authorities regarded the amount as paid and deducted the amount from domestic corporate tax payments, effectively benefiting these Japanese firms.

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