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Tax Reform in 2007

The purpose of tax reform in 2007 is to create a simple, fair and pro-growth tax system. Tax reform directions are as follows: expanding support for low-and middle-income families, developing growth engines for the future, broadening tax bases by improving transparency in tax revenue source and advancing tax system.
Highlights of 2007 tax reforms are as follows:

(a) Expanding support for low-and middle-income families and the socially disadvantaged

i) Tax base brackets of global income have adjusted upward.
Tax base brackets of global income have adjusted upward
Before revision After revision
Tax base Tax rate Tax base Tax rate
Nor more than 10 million won 8% Not more than 12 million won 8%
10 - 40 million won 17% 12 - 46 million won 17%
40 - 80 million won or less 26% 46 - 88 million won 26%
Over 80 million won 35% Over 88 million won 35%
ii) Medical and educational cost deduction for self-employed businessmen
Medical and educational costs are deductible for self-employed businessmen, who have paid taxes faithfully. The deduction is allowed sometime between 2008 and 2009 in the form of two-year sunset clause. The deduction has been expanded gradually depending on its performance.

iii) Expanding support for the elderly and the disabled
Deductible items are added to include insurance premiums for long-term elderly care paid by employees. Insurance premiums paid by employers are treated as a necessary cost under the insurance law for nursing senior citizens. The premiums are currently co-paid by employees and employers and the amount is 0.2% of payroll.
Deduction for the disabled is also allowed in the case where the spouse of a lineal descendant, who is disabled, is also a disabled person. The spouse is entitled to deduction.

iv) Expanding support for low-and middle-income families
Individual consumption tax on kerosene has dropped from 181 won per liter to 90won per liter. The cut is to relieve low income families in rural areas from the cost burden of heating oil.

(b) Developing growth engines for the future

i) Expanded support for venture companies and SMEs
Requirements for tax deduction applied to start-up ventures have been relieved. For example, the period of confirming a SME as a venture company has extended to three years since its establishment. The extension aims to consider the difficulty in meeting the requirements* to be qualified as a venture company in the early period of business launching.
* The requirements: investors need to invest more than 10% of business capital, invest money needs to be at least more than 50M won and investment needs to continue more than 6 months.

ii) Environment and energy industry support
Sunset clause for bio-diesel tax deduction has extended to December 31, 2010. The extension aims to support alternative energy development.

iii) Partnership taxation system
Partnership taxation system is expected to be introduced to address double taxation issue for Hapmyong Hoesa, Hapja Hoesa and limited companies prescribed by the Presidential Decree. Partnership’s income is not subject to corporate income tax and each partner’ income is subject to the tax upon distributing income.

(c) Broadening tax bases by improving transparency in revenue source
The year 2007 had the end dates of sunset clauses for 22 tax exemptions and reductions. Among them, ten had expired, four had been reduced in its coverage and eight had been extended in its period.

i) Measures to improve transparency in tax revenue source
As part of an effort to enhance transparency, threshold for issuing cash receipt has been eliminated. The threshold was 5,000 won, but it was abolished to improve transparency in small payment in cash.

ii) Clarification of substance-over-form rule to prevent tax evasion
If a third party transaction* turns out to reduce taxes unfairly, it is treated as a direct transaction or a continuous activity or transaction depending on its economic substance. The treatment aims to clarify the legitimacy of taxation on various tax-evading transactions. The ban on tax evasion, which is stipulated in the Law for the Coordination of International Tax Affairs, is also included in Framework Law on National Taxes. Accordingly, the prevention of tax evasion is applied to local trades as well as international trades.
* The evasion of capital gains tax using exchange transactions, the evasion of corporate income tax using the transaction of anomaly derivatives

(d) Advancing tax system

i) Paying national taxes using credit cards
Tax payers are allowed to pay national taxes using credit cards: income tax paid by individuals or individual business owners, VAT, comprehensive real-estate holding tax, and tariffs (travelers, portable items, and freight for moving.) The allowed tax amount is limited to 2 million won or less. The credit card payment fee (around 1% of transaction) is paid by taxpayers. The adoption of credit card payment aims to help taxpayers pay taxes more easily.

ii) Making tax system easy-to-understand
To help taxpayers understand tax law, tax law has been revised to be easy-to-understand. A total of 326 provisions among 11 laws and enforcement decrees (scheduled to be revised in 2007) have been revised to be easier to read (That is 33% of 985 provisions, the total.) For example, difficult or unfamiliar terms have changed into simple and easy words.

iii) The term Special Excise Tax has changed into Individual Consumption Tax
The name change reflects its tax purpose, which has changed to impose tax for correcting goods inducing negative externality such as automobiles and petroleum. As of 2006, the tax composition is as follows: six kinds of petroleum including kerosene and heavy oil account for 72.9%, automobiles 20.4%, taxable places 5.9%, twelve items including jewelry and precious metals 0.8%.

Korean Taxation 2013. Ministry of Strategy and Finance, 30 Sep. 2013. Web.