Tax Reform in 2008
The purpose of tax reform carried out in 2008 is to establish a low tax rate and rational taxation system so as to facilitate job creation and secure new growth engines. Based on that goal, the Korean government set the following tax reform directions: supporting the low & middle income families; making a transition toward lower tax rates to promote investment; supporting R&D sectors to improve growth potential; rationalizing tax systems.
Highlights of Tax Reform in 2008 are as follows:
(a) Supporting the low & middle income households
i) Income tax rate has been reduced by 2%p in each tax bracket, and the personal deduction (i.e., the basic deduction and dependant deduction) amount per person has increased to 1.5 million from 1 million won. More deductions for education and medical expenses have also been allowed.
ii) With a view to easing the impact of high oil prices, tax refunds of up to 240,000 won per year have been provided to workers and the self-employed.
iii) Income deduction amount for day laborers and non-taxable income ceiling for overseas construction workers have increased from 80,000 won to 100,000 won per day and from 1 million won to 1.5 million won per annum respectively. The Earned Income Tax Credit (EITC) has also been expanded from 800,000 won to 1.2 million won per annum while the eligibility for EITC has been eased. For the purpose of supporting the self-employed small businesses, the rate of output tax credit for credit card has been expanded from 1% to 1.3% for general business and from 2% to 2.6% for restaurant & lodging with the ceiling of up to 7 million won. In addition, deemed input tax credit rate of VAT in restaurant business for individuals has been expanded from 6/106 to 8/108.
iv) Individual consumption tax rate on vehicle has been lowered by 30%. The new measure lowered the 5 percent consumption tax for vehicles with engine of between 1,000 and 2,000 cc to 3.5 percent while the 10 percent tax placed on vehicles with engines of larger than 2,000 cc has been lowered to 7 percent (effective from Dec. 19, 2008 to Jun. 30, 2009).
(b) Making a transition toward lower tax rates to promote investment and benefit all economic players
i) Corporate tax rate has been reduced and tax brackets have been adjusted upward as follows:
○1 Tax base of 200 million or less: 13%→11% for 2008 and 2009→1% for 2010 and thereafter
○2 Tax base of more than 200 million: 25%→22% for 2009→2% for 2010 and thereafter
ii) Temporary investment tax credit has been extended one year until the end of December 2009, and new investment in densely-populated metropolitan areas has been added to the scope of application of the tax credit. Such investment tax credit rate has been differently graded between the metropolitan and local areas. (i.e. densely-populated metropolitan areas: 3%, local areas (except densely-populated metropolitan areas: 10%).
iii) Taxation for companies has been eased as well. To be more specific, the documentation maintenance requirement under which a company spending an entertainment expense of 500,000 won or more is required to maintain expenditure details has been abolished. The ceiling of deductible congratulatory/condolatory entertainment expenses for which documentary evidences are not required has been eased from 100 thousand won to 200 thousand won.
iv) Special tax credit for SMEs has been extended 3 years from December 2008 to December 2011.
v) Corporate taxation has been upgraded to the level of global standards. For example, loss carry-forward can now be made up to 10 years, instead of up to 5 years as in the case before the tax reform.
vi) Regarding the long-term stock funds held for 3 years or more, a certain percentage of contributions are deductible and dividends therefrom are non-taxable in the case where the contribution amount does not exceed 3 million won quarterly and 12 million annually per person.
vii) Proactive supports have been provided to service industries (e.g. culture and tourism). Specifically, the scope of business eligible for the temporary investment tax credit has been expanded to cover certain business service industries including automobile, communication equipment repair and advertising service businesses.
viii) To lay the groundwork for ‘Green Growth’, tax credit rate in respect of investment on environment preservation facility has increased from 7% to 10% of the investment, and individual consumption tax for hybrid cars is now exempt from tax.
(c) Increasing the support for R&D sector to secure a growth potential
At the preparation stage, R&D reserve (3% of sales revenue) is newly introduced. And at the investment stage, tax credit rate for R&D facilities investment increases from 7% to 10%. Moreover, R&D expenditure tax credit for SMEs is also expanded from 15% to 25%. Lastly, at the stage of industrial-academic cooperation, tax credits for contribution to a university for the purpose of industrial-academic cooperation increase as well.
(d) Rationalizing tax system
i) There have been various measures taken to rationalize capital gains tax system. In the case of single home owners, capital gains tax burden has been significantly eased. Firstly, deductions have been expanded for housing held by single home owners for 10 years. Annual deduction for a long-term house holding, which used to increase by 4%, now grows by 8% (ceiling: 80% of capital gains). Secondly, the price level eligible for capital gains tax exemption has been raised to 900 million won from 600 million won. Thirdly, capital gains tax rate (9%~36%) has been adjusted downward in line with personal income tax rate (6%~35%).
ii) Several measures have also been taken to make the Comprehensive Real-Estate Holding Tax (CREHT) more reasonable as follows: the ratio of applying tax base with regard to house and land of general aggregation remains the same at 80% in the previous year, and ceiling of CREHT liability has been adjusted downward from 300% to 150% compared to the previous year. Besides, value threshold for house has increased from 600 million won to 900 million won. With regard to long-term house holding and the elderly, tax credits of up to 40% and 30% of the calculated tax amounts have also been allowable respectively. For business properties, the value threshold of government-evaluated prices of business-purpose properties has risen from 4 billion to 8 billion won, and its tax rate has been down to 0.5 ~ 0.7%.
iii) Inheritance and gift taxes have been cut in order to encourage entrepreneurship and help address the issue of capital outflow. Deduction of up to 10 billion won has been allowed in the case of inheritance of family businesses in the form of SMEs. Moreover, inheritance deduction has been allowable for those who own a house for a household at a rate of 40% with a ceiling at 500 million won.
Korean Taxation 2013. Ministry of Strategy and Finance, 30 Sep. 2013. Web.