South Korea and Tax Law Changes for 2010
Between 31 December 2009 and 1 January 2010 the Republic of Korea’s National Assembly passed legislation1 which contained modifications to the tax law revision bills that had been proposed by the Ministry of Strategy and Finance (“MOSF”) in August 2009. The revised laws became effective as of 1 January 2010. In a follow-up measure, on 12 January 2010, the MOSF announced proposed changes in relevant Presidential Enforcement Decrees that are scheduled to be promulgated as of mid-February.
Below are some of the key points of the laws’ and regulations’ revisions with respect to the taxation of individuals.
Individual Income Tax Law (“IITL”)
1. Postponement of Reduction in Income Tax Rate for Highest Income Bracket (IITL, Article 55)
Under the previous tax law revision enacted in December 2008, the progressive income tax rates had been scheduled to be reduced gradually by two percentage points until year 2010. However, citing the changes in economic environment since then, the government postponed the reduction in the highest tax rate until 2012. Below is a comparative summary of the tax rates for years 2009 and on.
In addition to the income tax, individuals are also subject to resident surtax (a.k.a. inhabitant tax) equivalent to 10 percent of the income tax amount.
It should be noted the flat rate of 15 percent (or 16.5 percent including resident surtax) that is applicable to a foreigner’s South Korea sourced earned income remains valid. (Please see Section 5 below for details.)
2. Reduction in Earned Income Deduction Rate for High Income Earners (IITL, Article 47)
Effective from 1 January 2012, the earned income deduction rate applicable to taxable gross income between KRW 80 million and KRW 100 million will decrease to 3 percent; and the rate applicable to KRW 100 million or higher in taxable gross income will decrease to 1 percent. The current deduction rate of 5 percent for these income brackets will continue to apply until the end of 2011.
3. Reduction in Earned Income Tax Credit for High Income Earners (IITL, Article 59)
Effective from 1 January 2012, the current earned income tax credit of KRW 500,000, will be phased out gradually by KRW 100,000, for each incremental income of KRW 5 million, for high income earners with taxable gross income of KRW 80 million or more. The credit is completely phased-out where the taxable gross income exceeds KRW 100 million.
4. Elimination of Tax Credit for Pre-filing of Capital Gains Tax Return (IITL, Articles 69-4 and 108 Abolished; and IITL, Supplementary Provision 16 Newly Enacted)
The 10-percent tax credit previously available for pre-filing of the capital gains tax return that had been allowed as an incentive for pre-payment of the tax was eliminated. As a grace-period measure, a reduced credit of 5 percent is available until the end of 2010 in cases where the capital gains are less than KRW 46 million or where the capital gains arise from expropriated properties.
As a substitute measure, penalties will now be applicable for failure in pre-filing of capital gains tax returns (articles 47-2. 6 and 47-5. 5 of the Framework Act on National Taxes). Where the pre-filing has appropriately been completed and there are no additional capital gains to report, filing of the annual capital gains tax return may not be required. Otherwise, the annual capital gains tax return needs to be filed by May 31 of the following year (e.g., where there are multiple transactions, the annual return would need to be filed for the aggregate capital gains to be taxed at appropriate graduated rates even if pre-filing was completed for each transaction).
Special Tax Treatment Control Law (“STTCL”)
5. Elimination of 30-Percent Exemption for Foreigners Working in South Korea (STTCL, Article 18-2)
The 30-percent exemption that was previously available to foreigners working in South Korea has been eliminated via the expiration of the sunset clause under the revised law. However, the flat tax rate election for foreigners still remains valid. It should be noted the flat-tax election is only applicable at the time of the year-end tax reconciliation for monthly
tax filing or when the annual tax return is filed, due by 10 March and 31 May of the year following the tax year, respectively.
With the flat-tax rate not being applicable for monthly tax filing purposes and the 30-percent exemption eliminated, it is anticipated monthly withholding tax for foreigners will significantly increase starting from the January 2010 monthly tax filing. However, when the flat-tax rate is elected in the following year, it would be possible to reclaim some of the excess taxes paid through monthly tax filings. The flat-tax rate is currently 16.5 percent (including resident surtax), which is applied to gross income with no deductions or credits allowed to be claimed.2
6. Decrease in Tax Exemption for Qualified Foreign Engineers (STTCL, Article 18)
Employment income received by certain qualified foreign engineers working in South Korea used to be fully exempt from individual income tax for five years. The revised tax law limits the tax exemption to 50 percent of the tax liability on income received for the first two years from the initial date of employment. Additionally, the existing sunset clause applicable to the employment service commencement date for purposes of this provision was extended to 31 December 2011 (i.e., to be eligible for the two-year exemption, the employment service should start on or before this date).
However, due to a grandfather rule, the existing five-year exemption will remain effective where the qualified exemption started on or before 31 December 2009.
7. Decrease in Maximum Deduction Amount for Credit Card Usage (STTCL, Article 126-2)
The previous maximum amount of KRW 5 million per year in respect of the credit card usage deduction was reduced to KRW 3 million. The credit card usage deduction is available for the aggregate personal expenditure billed within South Korea on South Korean credit cards3 of a taxpayer or his/her dependents that exceeds 25 percent of his/her gross income (“eligible amount”). The deductible amount is calculated in the following manner, subject to the combined maximum deduction of KRW 3 million per annum:
● Credit card/Official cash receipts: 20 percent of eligible amount.
● Debit card/Pre-paid cash cards: 25 percent of eligible amount.
The deduction is subject to a sunset clause expiring on 31 December 2011.
Proposed Revisions in Presidential Enforcement Decrees
The following is a summary of the main points contained in the MOSF’s proposed changes in Presidential Enforcement Decrees as announced on 12 January 2010. These changes are scheduled to be promulgated during February 2010.
1. Disqualification of South Korean Nationals Possessing Foreign Legal Permanent Residence Permits for Foreigners’ Tax Benefits (Per STTCL)
Previously, South Korean nationals possessing foreign legal permanent residence permits were also classified as a “foreigner” for certain tax benefits available to foreigners (please see related items in Sections 5 and 6). However, the MOSF’s proposed enforcement decree will specifically exclude these South Korean nationals from the foreigner categorization effective 1 January 2010.
2. Update of the Simplified Withholding Tax Table (Per IITL)
The simplified withholding tax table is used for the purpose of monthly withholding of income taxes. The rates will be adjusted to reflect the decrease in individual income tax rates as follows:
Taxable Income Tax Rates
Less than KRW 12 million 8% (2008) / 6% (2009)
KRW 12 million – 46 million 16% (2009) / 15% (2010)
KRW 46 million – 88 million 25% (2009) / 24% (2010)
Greater than KRW 88 million 35%
1 Source: National Tax Law Information System (http://taxinfo.nts.go.kr/index.jsp); Ministry of Strategy and Finance – news release (http://www.mosf.go.kr/_news/news02/news02.jsp).
2 Based on our estimate, the annual threshold income for the flat-tax rate election is approximately KRW 110 million or higher for a single taxpayer. However, this figure may vary widely depending on one’s personal tax situation.
3 For this purpose, amounts billed on debit cards or registered on official cash receipts are also included in the eligible amount. However, purchases of certain items, such as a car, are excluded from the eligible amount.
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This article is excerpted, with permission, from ”Taxation News“ (January 25, 2010), a publication of the KPMG International member firm in South Korea.