[Title] Exchange of Notes, Convention between Japan and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income
I a
Tokyo, March 3, 1970
Excellency,
I have the honour to refer to the Convention between Japan and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income signed today at Tokyo, and to confirm the following understandings on behalf of the Government of Japan.
1. With reference to paragraph (3) of Article 6 of the Convention, the expenses to be allocable to a permanent establishment which a resident or corporation of a Contracting State has in the other Contracting State (hereinafter referred to as "the permanent establishment") in the determination of the industrial or commercial profits of the permanent establishment shall be computed in the following manner:
(1) The items of expenses subject to allocation
The items of expenses subject to the allocation to the permanent establishment shall be those of selling expenses and executive and general administrative expenses which are allowed as deductions under the provisions of the tax laws of the Contracting State in which the expenses are incurred.
(2) The amount of expenses subject to allocation
The amount of expenses subject to the allocation to the permanent establishment shall be that of the selling expenses and executive and general administrative expenses, as provided for in the preceding subparagraph, incurred by (a) the head or main office including branches making a sale to a person in that other Contracting State of the resident or corporation of the first-mentioned Contracting State having that permanent establishment (hereinafter referred to as "the head or main office") or (b) that permanent establishment, which is allowed as deductions according to the provisions of the tax laws of the Contracting State in which the expenses are incurred.
(3) The computation of the amount of allocable expenses
(a) The amount of expenses incurred by the head or main office which is allocable to the permanent establishment (hereinafter referred to as "the amount of allocable expenses of the head or main office") shall be that proportion of the amount of the expenses of the head or main office obtained in accordance with the provisions of subparagraphs (1) and (2) of this paragraph which the gross receipts derived by the head or main office from the sales transactions, excluding non-taxable sales transactions, with a person in that other Contracting State bear to the entire gross receipts from the world-wide sales transactions by the head or main office.
(b) The amount of expenses, excluding tax, incurred by the permanent establishment which is allocable to itself (hereinafter referred to as "the amount of allocable expenses of the permanent establishment") shall be that proportion of the amount of the expenses of the permanent establishment obtained in accordance with the provisions of subparagraphs (1) and (2) of this paragraph, excluding tax, which the gross amount of the transactions, excluding non-taxable transactions, with a person in that other Contracting State bears to the entire gross amount of the transactions with a person in that other Contracting State.
The amount of tax as expenses incurred by the permanent establishment which is allocable to itself (hereinafter referred to as "the amount of allocable tax of the permanent establishment") shall be that proportion of the amount of tax obtained in accordance with the provisions of subparagraphs (1) and (2) of this paragraph which the gross amount of the transactions, excluding non-taxable transactions, with a person in that other Contracting State which or the profits of which are subject to tax bears to the entire gross amount of the transactions which or the profits of which are subject to tax.
(c) In subparagraph (3) (b), the term "tax" means the enterprise tax of Japan or the business tax of Korea, as the context requires.
2. With reference to paragraph (5) of Article 6 of the Convention, the apportionment of sources of the industrial or commercial profits shall be made in the following manner:
(1) The income from purchase and sale
As to the income derived by a resident or corporation of a Contracting State having the permanent establishment from the sale in the other Contracting State of goods or merchandise purchased in the first-mentioned Contracting State, the apportionment to that other Contracting State shall be made on the net income basis according to the ratio of allocation to that other Contracting State which shall be obtained by dividing the amount of allocable expenses of the permanent establishment and the amount of allocable tax of the permanent establishment by the total of (i) the amount of allocable expenses of the permanent establishment and the amount of allocable tax of the permanent establishment and (ii) the amount of allocable expenses of the head or main office.
(2) The income from manufacturing and sale
As to the income derived by a resident or corporation of a Contracting State having the permanent establishment from the sale in the other Contracting State, such as exports of plants, of goods or merchandise manufactured in the first-mentioned Contracting State by the resident or corporation itself, the apportionment to that other Contracting State shall be made, if that income includes the profits derived from the manufacturing activities, on the net income basis according to the ratio of allocation to that other Contracting State which shall be obtained by dividing the amount of allocable expenses of the permanent establishment and the amount of allocable tax of the permanent establishment by the total of (i) the amount of allocable expenses of the permanent establishment and the amount of allocable tax of the permanent establishment, (ii) the amount of allocable expenses of the head or main office and (iii) the amount of manufacturing expenditure.
The amount of manufacturing expenditure referred to above shall be deemed to be 15 per cent of the amount of total manufacturing cost incurred by the resident or corporation in manufacturing such goods or merchandise.
As to the income derived by a resident or corporation of a Contracting State having the permanent establishment from the sale in that Contracting State of goods or merchandise manufactured in the other Contracting State by that resident or corporation itself, the apportionment to that other Contracting State shall be made on the net income basis according to the formula corresponding to the one mentioned in this subparagraph.
(3) The income from building, construction, installation or assembly
With respect to the income derived by a resident or corporation of a Contracting State having the permanent establishment from the building, construction, installation or assembly project carried on in the other Contracting State, the competent authorities of both Contracting States shall consult with each other taking into consideration the nature of such activities.
I have further the honour to request Your Excellency to be good enough to confirm the foregoing understandings on behalf of the Government of the Republic of Korea.
I avail myself of this opportunity to renew to Your Excellency the assurances of my highest consideration.
KIICHI AICHI
Minister for Foreign Affairs of Japan
His Excellency Mr. Hu Rak Lee
Ambassador Extraordinary and Plenipotentiary of the Republic of Korea to Japan
II a
Tokyo, March 3, 1970
Excellency,
I have the honour to acknowledge the receipt of Your Excellency's Note of today's date which reads as follows:
[See note I a]
I have further the honour to confirm the foregoing understandings on behalf of the Government of the Republic of Korea.
I avail myself of this opportunity to renew to Your Excellency the assurances of my highest consideration.
HU RAK LEE
Ambassador Extraordinary and Plenipotentiary of the Republic of Korea
Tokyo
His Excellency Mr. Kiichi Aichi
Minister for Foreign Affairs of Japan
I b
Tokyo, March 3, 1970
Excellency,
I have the honour to refer to paragraph (3) (b) of Article 18 of the Convention between the Republic of Korea and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income signed today at Tokyo, and to propose, on behalf of the Government of the Republic of Korea, that the two Governments shall agree that the measures set forth in the following Articles of the Foreign Capital Inducement Law, Law No 1802, 1966, of the Republic of Korea, effective on the date of signature of the aforementioned Convention are "the special incentive measures designed to promote economic development in Korea, effective on the date of signature of this Convention" referred to in the said paragraph:
(i) Article 15 (Exemption and Reduction of Taxes) - relating to exemption or reduction of income tax or corporation tax on the income of a foreign invested enterprise or foreign investor; and
(ii) Article 21 (Exemption and Reduction of Taxes) - relating to exemption or reduction of income tax or corporation tax on the income derived from a cash loan contract, a capital goods inducement contract or a technological inducement contract.
I have further the honour to propose that the present Note and Your Excellency's reply confirming the acceptance by the Government of Japan of the above proposal shall be regarded as constituting an agreement between the two Governments under paragraph (3) (b) of Article 18 of the aforementioned Convention.
I avail myself of this opportunity to renew to Your Excellency the assurances of my highest consideration.
HU RAK LEE
Ambassador Extraordinary and Plenipotentiary of the Republic of Korea
Tokyo
His Excellency Mr. Kiichi Aichi
Minister for Foreign Affairs of Japan
II b
Tokyo, March 3, 1970
Excellency,
I have the honour to acknowledge the receipt of Your Excellency's Note of today's date which reads as follows:
[See note I b]
I have further the honour to confirm that the Government of Japan accepts the proposal contained in Your Excellency's Note and to agree that the same and the present reply shall be regarded as constituting an agreement between the two Governments under paragraph (3) (b) of Article 18 of the aforementioned Convention.
I avail myself of this opportunity to renew to Your Excellency the assurances of my highest consideration.
KIICHI AICHI
Minister for Foreign Affairs of Japan
His Excellency Mr. Hu Rak Lee
Ambassador Extraordinary and Plenipotentiary of the Republic of Korea to Japan