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7. Losses

a. Losses

Losses denote the amount of losses and expenses incurred by transactions that

decrease the net assets of the corporation, except for the refund of capital or shares,

appropriation of surplus, or what may be prescribed in the Corporation Tax Law.

Losses include the following:

(1) Purchase value of raw materials and incidental expenses against merchandise or

products sold, excluding purchase allowances and eligible purchase discounts;

(2) Book value of transferred assets at the time of transfer;

(3) Salaries and wages;

(4) Repair and maintenance costs of fixed assets;

(5) Depreciation costs of fixed assets;

(6) Rent of assets;

(7) Interest on financial debts;

(8) Insolvent debts (including output VAT which is not collected and which is not eligible

for insolvent debt tax credit under the VAT law);

(9) Losses on revaluation of assets;

(10)Taxes and public imposts;

(11)Fees paid to entrepreneur organizations that are corporations or registered associations;

(12)Exploration expenses in mining businesses including development costs for exploration;

(13) Advertisement and sales promotion expenses;

(14) Losses on transfer of securities and disposition of fixed assets;

(15) Public contributions, designated as donations and entertainment expenses within

the prescribed limit;

(16) Tax-free reserves;

(17) Welfare expenses for employees and directors;

(18) Other expenses which have been or are to be vested in the corporation.

(19) Acquisition cost, where the acquisition cost for a work of art displayed normally in an

office or hallway for the purpose of adornment, where a lot of people appreciate it is

treated as deductible loss (the cost should be limited up to one million won per a work of

art)

b. Tax Free Reserves

(1) Reserves under the following items are counted as losses within the limit described.

(a)

Reserves for retirement allowance: up to 10% of the total amount of wages paid to

employees and managing directors (excluding bonuses, which are excluded

from deductible expenses) who have been in service for one year or more;

however, the accumulated amount of the reserves shall be limited to not more

than 40% of the estimated retirement allowances payable to all employees if they

retire on the closing date of the business year;

(b)

Reserves for bad debts:

Aggregate amount of debts in the year concerned X rate (%)

Rate: the larger one of (1) and (2)

(1)

1% (2% in case of financial institutions prescribed in the relevant Presidential

Decree) of aggregate amount of debts

(2)

Non-redeemable bad debts in the year concerne

Aggregate amount of debts in the previous year.

Law: up to an amount prescribed in the relevant Presidential Decree;

(d) Reserves for interest payment to insurance holders set aside by the insurance

company: up to an amount approved according to the standard agreed between the

Financial Supervisory Commission and the Ministry of Finance and Economy

(e) Reserves for nonprofit organizations: within the scope of the aggregate amount of

the following:

i) interest income including distribution of profit arising from securities investment trusts, or

ii) 50% of the income, excluding interest income mentioned in i), arising from profit

making businesses; the remaining amounts after offsetting actual nonprofit use

within 5 years are included as gains.

(f) Reserves for the write-off of a compensation claim set aside by trust guarantee

funds in each business year: up to an amount equivalent to 1% of the balance of the

trust guarantee by the end of the business year concerned (the remaining amount

after offsetting actual losses are included in the gains of the following year).

(2) The amounts enumerated below are counted as losses in calculating income for the

business year:

(a) the amount of gains from insurance claims used to acquire the same kinds of

fixed assets as the lost fixed assets, or to improve the damaged fixed assets within 2

years after the beginning day of the business year following the business year in

which the gains fall;

(b) the amount of a beneficiary's share of construction costs received by a domestic

corporation engaged in the electricity or gas business, etc., used for the acquisition

of fixed assets;

improvement of fixed assets for business.

c. Non-inclusion of Losses

(1) Losses and expenses enumerated under the following items shall not be counted as

losses in the calculation of the income amount of a domestic corporation for each

business year.

(a) An appropriated surplus which is included in losses and expenses, except for (i)

bonus paid with an entrepreneur's own stocks acquired by Stock Transaction Law

(Article 189, 2) (ii) Stock option available under the Special Tax Treatment Control

Law, and (iii) profit-sharing bonus

(b) Dividends of interest payable during construction

(d) Corporation tax (including foreign corporation tax amount) or inhabitant tax pro

rata income paid or payable in each business year: taxes paid or payable for failure

to comply with tax laws (including penalty tax) and an input tax amount in value

added tax (excluding any tax amount where the value added tax is exempt or in other

cases prescribed by the relevant Presidential Decree)

(e) Unpaid amounts of liquor tax, transportation tax, and special excise taxes on

inspected or carried out products not yet sold

(f) Fines, penalty taxes and expenses for disposition of tax barriers

(g) Losses from revaluation of assets other than the revaluation set forth in Article

42-2 and 42-3 of the Corporation Tax Law

(h) Expenses deemed not directly related to a corporation's business

(i) Bonuses payable by a corporation to its directors in excess of the amount

prescribed in the Articles of corporation Tax Law, determined by a resolution of a

stockholders' meeting or a general meeting of company members (including

bonuses paid to the directors based on an appropriation of retained earnings)

(j) Interest as follows:

i) Interest on debt incurred specifically from construction of business assets

ii) Interest on private loans from unknown sources

iii) Interest or an amount of discount on debentures and securities paid to

obscure payees not affirmed objectively

(k) The amount exceeding the limit of the depreciation of fixed assets allocated for

each business year of a corporation, set forth in the corporation tax law

(l) The amount of retirement allowance payable to directors by a corporation in

excess of the amount as follows:

i) The amount set forth in the articles of incorporation

ii) Total amount of (salary received by the retiring officer for one year) 1/10

(Length of employment of the officer before retirement) (excluding the deductible

expenses)

(m) The amount exceeding the limit of business expense incurred to

insurance corporation which is set forth in the Presidential Decrees based on its

total premium gains during the same year

(2) Designated donations

(a) Where a corporation makes donations other than those listed below, or where the

amount of the designated donation is in excess of the aggregate of an amount

equivalent to 5% of the taxable income, is not counted as losses but can be carried

over for 3 years.

i) Donations to public interest entities, social welfare organizations, and religious

organizations

ii) Donations and scholarship for academic research, technical development,

and development of athletic skills

iii) An amount disbursed by a non-profit corporation engaged in profit-making

businesses for its own non-profit business

iv) Other donations to public entities prescribed by the Presidential Decree

* A contribution donated to a private school established under the Private

School Act as funds for facilities, education, or research shall be counted as

expenses in calculating the income of the taxable year concerned.

(b) The following public contributions are counted in losses within the limit of taxable

income except carried-over losses:

i) Value of money and goods donated to government agencies and local

government bodies without compensation

ii) Contributions for national defense and war relief

iii) Value of money and goods donated for the relief of disaster victims

(3) Entertainment expenses

(a) Where the entertainment expenses exceed the aggregate sum of the following,

the amount in excess thereof is not to be counted as losses.

i) An amount calculated by multiplying 12 million won (18 million won for small and

medium-sized enterprises) with the number of months in the respective tax

period divided by 12

ii) An amount calculated by multiplying the amount of gross receipts for a

business year with rates listed in the following table (in case of receipts from

transactions between related taxpayers, 20% of the amount calculated by

multiplying the receipts with following rates shall be applied)

amount of gross receipts

Rate

10 billion Won or less

0.2%

over 10 billion Won but not

20 million Won + 0.1% of an amount in

more than 50 billion Won

excess of 10 billion Won

over 50 billion Won

60 million Won + 0.03% of an amount

in excess of 50 billion Won

(4) Where a domestic corporation that runs a "consumptive service business" spends

an amount of PR expenses in excess of the ratio of the Presidential Decree (2% of the

gross sales amount), the amount in excess thereof is not counted as losses.

(5) Arm's length price on transactions by related parties

Where a domestic corporation unreasonably reduces its tax burden in

transactions with related persons, the tax authority may calculate the taxable

income using the arm's length price.

(6) An expense amounting to 500 thousand won or more

Only where data concerning entertainer, entertainee and the purpose of the

entertainment expense are kept in writing.

d. Depreciation

Depreciation is considered as losses in calculating income within the limit of an amount

set aside at the depreciation rate according to the serviceable life of the fixed assets

when a corporation has counted the depreciation amount of fixed assets in losses.

(1) Methods for calculating depreciation

Depreciation of fixed assets of corporations is calculated according to the methods

enumerated below.

(a) Buildings and intangible assets: Straight-line method

(b) Tangible fixed assets (excluding tangible fixed assets used in mining):

Fixed percentage method or straight-line method

Service output method or straight-line method

(d) Tangible fixed assets used in mining:

Service output method, fixed percentage method, or straight-line method

(e) Research and Development cost:

equally-distributed amount within 20 years after the year when sales or use of

merchandise is possible

(f) Assets which are donated to the nation, local provinces, and designated

non-profit corporations after having been used:

equally-distributed amount during the using period of the assets can be

counted as loss

(2) Acquisition value of fixed asset

(a) In the case of fixed assets that have been purchased, it is the price quoted at the

time of the purchase (including registration tax, acquisition tax, and other incidental

costs).

(b) In the case of fixed assets acquired by means of one's own construction,

fabrication, etc., it is the aggregate of raw material cost, labor cost, freight, loading

and unloading cost, insurance dues, fees, public imposts (including registration tax

and acquisition tax), installation expenses, and other incidental cost.

the normal price quoted at the time of acquisition.

(3) Serviceable life and depreciation rate

(a) The serviceable life and depreciation rate of fixed assets are calculated

according to the guideline for serviceable life of fixed assets prescribed in the

Ministerial Decrees whereupon taxpayers may elect the respective serviceable life

within the limit of 25% of the guideline, excluding fixed assets used for experimental

research.

(b) In the following cases, taxpayers may elect between 50% of the serviceable life

and the 100% of serviceable life set forth in the guideline.

i) When a company purchases assets that have been used for equal to or more

than 50% of the serviceable life

ii) When a company purchases assets through mergers or liquidations of

companies

(4) Residual value

The residual value of a fixed asset is zero; but in case of depreciation by the fixed

percentage method, the residual value is regarded as the amount equivalent to 5% of

the acquisition amount which is treated as expense at the final year of depreciation.

(5) Revenue expenditures and capital expenditures

(a) Maintenance expenses disbursed by a corporation either to restore its assets to

their original state or to maintain their efficiency are regarded as revenue

expenditures.

(b) Maintenance expenditures either to extend the serviceable life of fixed assets or

to increase their value are regarded as capital expenditures.

e. Evaluation of Inventory Assets

(1) A corporation may elect one of the following methods of inventory evaluation and

submit a report on its evaluation method by the due date.

(a) Cost method

(b) Lower of the price estimated by the cost method and the market price estimated

by Financial Accounting Standards

(2) In applying the cost method, one of the following is applicable:

(a) Individual cost method

(b) First-in first-out method

(d) Weighted average cost method

(e) Moving average cost method

(f) Cost of sale rebate method

(3) Different evaluation methods may be used for the following different categories and

different business places.

(a) Products and merchandise

(b) Semi-finished goods and goods in process

(d) Goods in stock

4) In one of the following cases, the head of the district tax office may value inventory

assets according to the first-in first-out method (individual cost method is used in the

case of real estate owned for the purpose of sale):

(a) if a corporation has failed to report its evaluation method of inventory assets within

the reporting period;

(b) if a corporation has valued the inventory assets according to an evaluation

method other than the reported method;

change thereof.

(5) Valuation of securities

The valuation of securities shall be made using the cost method. For cost method,

the following methods shall be applied for the purpose of valuation of securities.

i) Weighted average cost method

ii) Moving average cost method

* Individual cost method may be used for valuation of bonds.