Tax Reform in 2001
The tax reform in 2001 focused on broadening tax base via the reduction of tax exemption and deduction in order to enhance tax equity. At the same time, the tax reform was focusing on building a competitive tax system through tax cuts and business-friendly tax measures. These changes intend to recover economic vigor and secure tax revenue for medium and long term.
1. Encourage entrepreneurship of the self-employed
To encourage entrepreneurship of the self-employed, who had a hard time during the process of restructuring and to relieve increased tax burdens of the self-employed. As a result of expanded usage of credit card, global income tax rates were cut by 10%(10%~40 → 9%~36%) and deduction for taxable income was increased.
2. Create business-friendly environment
To create business-friendly environment, various tax reforms were executed such as relieving tax burdens of corporations. Corporation tax rates of 16% and 28% were lowered by one percentage point each to 15% and 27%, respectively, and the higher corporate income tax levied on profits accumulated by certain corporations in excess of a level set by a tax law was abolished. Also, requirements for incentives relating to investment in Foreign Investment Zones were eased.
3. Tax Regimes and corporate restructuring
Tax regimes found to be stumbling blocks to corporate restructuring such as merger and investment in-kind were lifted. Under the amended tax law, environments have been created where restructuring can be done regularly by companies spurred by their self-regulation and accountability. For example, tax reconciliation items to be carried-over in a merger were expanded. Along with this, various restrictions to doing business, which were embedded in the Korean tax system, were eased. The gap between tax accounting and corporate accounting was narrowed in order to lessen burdens of corporation in reconciling these two accountings.
4. Tax exemption/reduction
Tax exemption or reduction was curtailed in an attempt to increase tax revenues and improve tax equity. Especially, excessive reduction or ineffective exemption were reduced or abolished. For instance, foreign investment in specified advanced technology and industry supporting service used to be granted a 100% exemption on corporate income tax and dividend. However, under the revised tax law, exemptions for foreign investment by means of business transfer was reduced since such investment was not effective in creating new employment and facility investment. Meanwhile, exemptions needed for supporting creation of wealth of middle and working classes remained as before.
6. Capital gain tax rates
Previously, in order to crack down on speculation in the real estate market, higher capital gain tax rates were provided. As the environment surrounding real estate market changed, capital gain tax regime was normalized, granting lower tax rates and smaller tax exemptions. By bringing capital gain tax rates on property to the level of global income tax rates (20%~40%→9%~36%), tax burden arising from real estate transaction was alleviated. Also, the scope of tax exemption was dramatically reduced to regain the function of capital gain tax as an income tax. While the tax rate for capital gain from the sale of stocks remained the same as before, transfer of stock held for a short term by a large shareholder was subject to a flat tax rate of 30%.