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The South Korean Ministry of Strategy and Finance has announced that, following recent meetings in Washington, D.C., South Korea and the United States have agreed to the regular exchange of tax information, from next year, to implement the Foreign Account Tax Compliance Act (FATCA).
FATCA, enacted by the US Congress in 2010, is intended to ensure that the US obtains information on accounts held abroad at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients, including account ownership, balances and amounts moving in and out of the accounts, will result in a requirement to withhold 30 percent tax on payments of US-sourced income.
South Korea and the US have therefore agreed the text of an inter-governmental agreement (IGA) to allow for the automatic exchange of information between the South Korean National Tax Service (NTS) and the US Internal Revenue Service so that South Korean FFIs can comply with FATCA. The completion of an IGA had first been discussed between the two countries in April 2012.
The Ministry stressed that, under the IGA, the automatic exchange of information would be reciprocal. In fact, it was stated that, under the agreement, the NTS would also be able to obtain information, in September each year, concerning the financial accounts of South Koreans residing or working in the US that yield more than USD10 in interest annually.
The agreement with the US comes at a time when, in a bid to reduce the incidence of tax evasion, the NTS is trying to put pressure on those South Korean residents who are found to hold substantial unexplained financial accounts in overseas jurisdictions. South Koreans with overseas financial accounts worth more than KRW1bn (USD927,000) are currently obligated to report the assets, and to explain the sources of the funds, or pay at least a 10 percent fine.
Banks, investment firms and insurance companies are among the FFIs that will be subject to the IGA, which is expected to be signed shortly and come into effect sometime next year.
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