Tax Reform in 2009
The direction of tax reform carried out in 2009 is three-fold; supporting the low & middle income families; achieving sustainable economic growth; and securing fiscal soundness in a mid-and-long term perspectives. More specifically, the government reduced the lower individual income and corporate income tax rates as planned to spur job growth and enhance the growth potential, and expanded the R&D supports to the world-class level. Under the principle of “Lowering tax rates and broadening tax base”, the Korean government is making efforts to improve fiscal soundness while facilitating the economic rebound.
Highlights of Tax Reform in 2009 are as follows:
(a) Supporting the low & middle income households
i) Self-employed small business owners who closed their businesses will be exempted from paying delinquent taxes of up to 5 million won for income tax and VAT amount due treated as written off in the case where they start new businesses or get new jobs until the end of 2010.
ii) Tax incentives for workers without a house will be expanded. The 40% of the monthly rental payments for small houses will be deducted from the earned income, and the annual contributions to the Comprehensive Savings Deposits for Housing Subscription will be deducted from the earned income at a rate of 40%.
iii) The carry forward of an excess amount of designated donation for social welfare, public interest, religion, arts, etc. will be extended to 5 years from only 3years, and workers involved in such donations are also eligible for deduction carried forward for 5 years. In addition, with the aim of boosting the microcredit business, where a person contributes to the Smile Micro Credit Bank or general microcredit banks, the contribution will be included in the deductible expenses of up to 50% of the earned income (from 5% for corporations, 20% for individual).
iv) The ceiling of national tax amount to be paid with credit card will be raised up to 5 million won from 2 million won for both corporations and individuals.
(b) Securing the future growth engines
i) The R&D expenses for new growth engine industries and source technologies will be eligible for tax credits, and individual consumption tax of 5% will be imposed on high energy consuming home appliances (air conditioner, refrigerator, TV, drum-type laundry machine). Tax exemption on both dividend and interest income is newly provided in regard to funds, term-deposits and bonds that invest more than 60% in government-certified green technologies and projects.
ii) With a view to stimulating corporate reorganization, the M&A tax rules will be amended in line with the level of advanced countries. This change will apply to comprehensive stock transfers/exchanges, and comprehensive asset transfers. In addition, the scope of assets eligible for capital gains tax deferral will be expanded to include all types of assets where a company establishes a new company or increases capital through an in-kind contribution with the assets.
iii) Corporation tax will be deductible for companies which are relocated to local areas (100% exemption for 5 years, 50% deduction for the subsequent 2 years), and underdeveloped and remote areas (100% exemption for 7 years, 50% deduction for the subsequent 3 years).
iv) Residents and domestic corporations will be subject to tax information exchanges between states, which have so far included only non-residents and foreign corporations.
v) The threshold shareholding ratio for claiming an indirect foreign tax credit has been lowered from 20% to 10% in order to facilitate inbound remittance of funds from overseas subsidiaries to domestic companies and to encourage the outbound investment by local companies.
(c) Ensuring the fiscal soundness
i) As for the high-income earners and large corporations, the ceiling of highest individual income and corporate income tax rates were supposed to be lowered (from 35% to 33%, from 22% to 20% respectively) from 2010, but the reductions will be postponed for another two years until the end of 2011. Meanwhile, the reduction in lower individual and corporate income tax rates will be enforced as scheduled in 2010.
ii) Punishment system on tax criminals will be reinforced to enhance tax filing compliance. Specifically, penalties will be imposed on high-income earners for not issuing cash receipt, and high-profile and frequent tax evaders will be also under more severe punishment. Moreover, the statute of limitation for prosecution of high-profile tax crimes by corporations will be extended to 10 years from 5 years.
iii) The electronic systems to recognize any rental income of commercial properties will be established, and the infrastructure to recognize the incomes for high-income earners like lawyers, tax accountants and patent agents will be diversified.
iv) Interest income from bonds received by financial institutions is again subject to withholding taxes at a rate of 14% in the same way as individual and general corporations. Moreover, in the case where an individual invests in stocks listed in an overseas stock exchange through investment funds, s/he is liable to pay income tax on stock trades and gain or loss on valuation from FY 2010. Moreover, securities transaction tax will be imposed on transfers of beneficiary certification of ETFs, and stocks sold by public funds and pension funds in stock market.
v) The temporary investment tax credit rate for investments made in areas other than Seoul Metropolitan Area is reduced from 10% to 7% of the amount invested in the fiscal year.
Korean Taxation 2013. Ministry of Strategy and Finance, 30 Sep. 2013. Web.