• Difference between Setoff and Intercompany Accounts
FAQ:

Difference between Setoff and Intercompany Accounts

25 March 2019

Difference between Setoff and Intercompany Accounts

When the receivables and payables are consistently incurred between resident (domestic corporation or branch of foreign corporation) and non-resident (overseas head-office or 3rd party foreign company) in Korea, It can be treated as a net amount only through procedures such as declaration in accordance with foreign exchange transaction regulations. The following is a method of handling the receivables and payables as net amount.

 

1. Setoff

1) Definition: Transaction where a resident is engaged in international transactions of import/export, service transactions, capital transactions etc. and mutually setoff receivables and payable and only pay (or get paid) the amount of net difference to (from) the non-resident at a certain time.

 

2) Exceptions to reporting

 

a.       When offsetting the receivable and payable which are less than USD 2,000 for each (sum of the amount of each payment etc.).

 

b.      When the receivable and payable are offset by receivable and payable to non-residents who are the parties to the transaction through intercompany accounts as explained in paragraph 2 intercompany accounts.

 

c.       In the case that one party desires to setoff import proceeds with export proceeds related to counter trade and processing trade

 

d.      In the case that one party desires to set-off the product’s import-export amounts against the broker or agency fees accompanying import-export transactions

 

 

e.       In the case of setoff between two residents for foreign currency denominated receivable or payable

 

f.        When a domestic telecommunications carrier shall offset the use of the telecommunication network to be received from the telecommunications carrier in the foreign country and the telecommunication network fee to be paid to the telecommunications carrier or when pay or receive the offset balance

 

g.      When a resident pays or receives a balance after tax withheld from non-resident income under the Tax Act.

 

 

3) Duty to report

a. Report to Foreign Exchange Bank

Except for the cases mentioned above 2) Except for the exception of notifications, when resident offset the receivable or payable of non-residents to receivable or payable to non-residents in foreign transactions such as import and export, service transactions, capital transactions, etc.

 

b. Report to the Governor of the Bank of Korea

 

When offsetting through the Counterparty Center of a multinational company or offsetting the receivable or payable of a number of parties, report it to the Governor of the Bank of Korea

 

4) Required documents

l  Report form for payment etc. (Foreign exchange transaction rule form number 5-1)

l  Parties’ agreement regarding the setoff (indicates receivable/payable amounts)

l  Supporting documents for receivable/payable that are subject to setoff (applicable agreement by transaction etc.)

 

5) Other

l  The President of Bank or Korea or the Commissioner of designated foreign exchange bank who was notified of setoffs must notify the details of such setoffs to the Director of Tax Office or Director of Customs Office by the end of the first month of the next semi-annual period.

l  Person who executes the setoff must keep all related supporting documents for 5 years.

 

2. Intercompany Accounts

1) Definition - Executing continuous setoff for receivable or payable that occur during an applicable period that is designated between the resident and non-resident for import-export, service transactions and capital transactions that occur frequently

 

2) How to deal with

A. Intercompany Accounts report to Foreign Exchange Bank by submitting following documents

 

l  Application to designate foreign exchange bank for transaction

l  Intercompany Accounts report

l  Certified copy of company registration and business registration

l  Intercompany Accounts agreement

 

B. Entry in Intercompany Accounts

l  Enter counterparty’s receivable/payable by establishing an Intercompany Accounts

l  However, a separate report should be filed regarding such payment, payment method and capital transaction if reporting is additionally required under foreign exchange law, enforcement regulations or rules.

l  Entry should be completed as follows:

Ø  if the applicable transaction is accompanied by an import/export or providing of service: within 30 days of completion of such import-export or service provision

Ø  Other transactions: within 30 days of confirmation of receivables-payable related to applicable transaction.

l  It is not allowed to include receivable or payable that occurred prior to the intercompany accounts report is made

 

 C. Settlement of Intercompany Accounts

l  Settlement of Intercompany Accounts should take place as monthly basis. If necessary, an alternate settlement cycle may be selected within the fiscal accounting period.

l  The balance from the closing of Intercompany Accounts should be the sum of the debit or credit balances of each party’s account.

l  The balance from the closing of Intercompany Accounts should be paid/received within 3 months of each settlement completion subsequent to a report to the Commissioner of the designated foreign exchange bank for the transaction.

l  The Person conducting Intercompany Accounts must submit a report form designated by the Commissioner of the designated foreign exchange bank such as a settlement report etc.

l  The Person conducting Intercompany Accounts must keep the accounting books and related supporting documents in 5 years.

 

D. Remitting or receiving of funds after setoff

l  In case there is an amount to be sent overseas as a result of Intercompany Accounts, the “Report of Intercompany Accounts Settlement” must be submitted to the designated foreign exchange bank for the transaction.