Korean Taxation
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2018 KOREAN TAXATION Ministry of Economy and Finance KOREA PREFACE Dear readers, The Korean economy is seeking to shift toward a “new economic paradigm” to address its structural and complex issue of low growth and polarization, and sustain growth – that is, job-driven and income-led growth, innovative growth, and fair economy. With this new initiative, we aim to improve people’s quality of life to the level befitting a country with some $30,000 in per capita income. The 2017 tax revision has strived to support this new economic paradigm so that it could quickly take root in the Korean economic soil, while revamping institutions related to raising fiscal soundness and tax equity, which are the two underlying features of tax policy. To that end, the tax revision has focused on supporting job creation and innovative growth, securing a tax revenue base, and rationalizing the Korean tax regime. Highlights of the tax revision are as follows: First, overhauling tax incentives for “job creation.” Tax support programs for enterprises have been reformed in a whole new way to encourage job generation. With the establishment of “Tax Credit for Enterprises Increasing Job Creation,” tax reduction for companies making more jobs has been expanded while the applicable period of tax credit for social insurance premiums paid by SMEs boosting employment has also been extended. In addition, tax benefits for SMEs changing the employment status of their workers from temporary to permanent have been expanded. For SME employees, income tax has been reduced up to 90% and its coverage has also been expanded to those aged between 15 and 34. Second, supporting “innovative growth.” For angel investors, investment amount of up to 30 million won has become fully deductible and the scope of beneficiaries has been expanded from venture companies to enterprises with excellent TCB (Technology Credit Bureau) rating. Moreover, requirements for the collective investment schemes operated by venture companies have been greatly eased to promote the ecosystem of the venture capital market. For better R&D support, deduction rates on R&D expenses of SMEs and high potential enterprises listed on KOSDAQ have been raised from 30% to 40%. To ensure easy financing for high potential enterprises, capital gains tax exemption has been granted on shares acquired through K-OTC (Korea Over The Counter). Third, securing “a stable tax revenue base.” In response to an increasing fiscal demand led, in part, by a hike in welfare expenditures, corporate tax rate has been raised back to the previous level for companies with tax bases exceeding 300 billion won. The effectiveness of tax relief programs, whose sun-set are due, has been assessed, and either repealed or redesigned. Furthermore, reform measures have been conducted to enhance transparency in tax bases by introducing proxy VAT payments by a credit card company. Finally, rationalizing of the Korean tax regime. The overall taxation system has been augmented by strengthening tax payers’ rights with extension of the period of prior notice for tax audit and carrying out more robust follow-up monitoring for designated donation organizations. Determination of one’s residency status for tax purposes has been changed to a person who has a domicile in Korea or has resided in Korea for 183 days or longer during one taxable period, from the previous 2 taxable periods. Also, tax compliance burdens on foreigners staying in Korea have been relieved to a reasonable level by exempting those residing in Korea less than 5 years within 10 years from their obligation to submit business profiles of overseas subsidiary. Korean Taxation 2018 covers the most updated overview of Korean tax regime in general. I sincerely hope that this edition will serve as a useful reference for readers both at home and abroad to better understand the reformed Korean tax system. Kim Byungkyoo Deputy Minister for Tax and Customs Ministry of Economy and Finance Republic of Korea Table of Contents Part 1: Introduction Chapter I: Tax System in Korea 1. Taxes in Korea …………………………………………………….1 2. Tax Laws and Regulations...…………………………………....….3 3. Government Authorities Concerned……………….……………....6 4. A Brief History of Taxation in Korea……………….…………. 9 Part 2: National Taxes – Internal Taxes Chapter II: Income Tax 1. Taxpayer …………………………………………………………30 2. Taxable, Non-Taxable, and Tax-Exempt Income………………….30 3. Tax Base and Deductions…………………………………………39 4. Tax Rates and Credits…………………………………………...57 5. Tax Returns and Payment……………………………………64 6. Tax Assessment and Collection……………………………68 7. Withholding Tax………………………………………………69 8. Penalty Tax …………………………………………………….71 9. Bookkeeping, Reporting and Other Obligation……………….74 10. Non-Resident Income Taxation…………………………...75 Chapter III: Corporation Tax 1. Taxpayer ………………………………………………….……83 2. Place of Tax Payment…...……………….………….………84 3. Taxable and Non-Taxable Income………………………………86 4. Tax Base……………………………………………..………86 5. Gains……………………………………………………………88 i 6. Avoiding Double Taxation on Dividend Income ………………91 7. Losses……………………………………………….………92 8. Tax Rates and Credits……………………………….…………104 9. Tax Returns and Payment………………………………………106 10. Tax Computation, Adjustments, and Collection…………………107 11. Withholding Tax………………………………………………110 12. Penalty Tax…………………………………………………….110 13. Bookkeeping…………………………………………………….113 14. Taxation of Liquidation Income………………….…………….113 15. Consolidated Tax Return System ……………………………….116 16. Taxation of Foreign Corporation……………………………..…122 Chapter IV: Inheritance & Gift Tax 1. Inheritance Tax……………………………………………….…132 2. Gift Tax………………………………………………………….139 Chapter V: Comprehensive Real Estate Holding Tax……………………..144 Chapter VI: Value Added Tax 1. Taxpayer ………………………………………………………...149 2. Taxable Period…………………………………………………..149 3. Taxable Transactions……………………………………………151 4. Zero-Rating and Exemptions……………………………………155 5. Tax Base and Assessment……………………………………….158 6. Tax Returns and Payment………………………….……………165 7. Adjustments, Collection, and Refund…………………………...168 8. Simplified Taxation ……………………………………………175 ii Chapter VII: Individual Consumption Tax 1. Taxpayer ………………………………………………………...177 2. Tax Base ………………………………………………………...177 3. Tax Rates………………………………………………………...178 4. Tax Returns and Payment…………………………………...180 5. Non-Taxable Goods……………………………………………..181 6. Tax Credits and Refund………………………………………...184 Chapter VIII: Liquor Tax……………………………………………………...186 Chapter IX: Stamp Tax………………………………………………………189 Chapter X: Securities Transaction Tax…………………………………….192 Part 3: National Taxes - Earmarked Taxes Chapter XI: Transportation· Energy· Environment Tax………………….194 Chapter XII: Education Tax………………………………………………….198 Chapter XIII: Special Tax for Rural Development…………………………..202 Part 4: Tax Payment, Collection, & Disputes Chapter XIV: Payment, Collection & Disputes ……………………………..205 Part 5: Tax Incentives Chapter XV: The Special Tax Treatment Control Law…………………….212 Part 6: International Taxation Chapter XVI: Non-Resident Income Taxation……………………………….252 Chapter XVII: The Law for the Coordination of International Tax Affairs iii 1. Transfer Pricing Regime………………………………………...283 2. A System Adjusting Taxable Value between National Tax and Customs duty……………………………………………………291 3. Thin Capitalization Rules……………………………………….291 4. Controlled Foreign Corporation (CFC) Rules………………..293 5. Gift Tax on Property Located Outside Korea…………………...295 6. Mutual Agreement Procedure (MAP)…………………………..295 7. International Tax Cooperation…………………………………..296 8. Foreign Financial Accounts Reporting Requirement…………..297 Part 7: Local Taxes Chapter XVIII: Local Taxes 1. Acquisition Tax………………………………………………….298 2. Registration & License Tax…………………………………300 3. Leisure Tax……………………………………………………...305 4. Inhabitant Tax…………………………………………………...307 5. Property Tax……………………………………………………..319 6. Automobile Tax…………………………………………………312 7. Tobacco Consumption Tax……………………………………...315 8. Community Resource and Facility Tax.………………………316 9. Local Education Tax ……………………………………...319 10. Local Income Tax……………………………………...320 11. Local Consumption Tax ……………………………….…324 Appendix: Summary of Income Taxation for Non-Residents……………………..325 iv Part 1: Introduction Chapter I: Tax System in Korea 1. Taxes in Korea Taxes in Korea comprise national and local taxes. National taxes are divided into internal taxes, customs duties, and three earmarked taxes; the local taxes include province taxes and city & county taxes as shown below. National Taxes Internal Taxes Income Tax Corporation Tax Inheritance Tax Gift Tax Comprehensive real estate holding Tax Value-added Tax Individual Consumption Tax Liquor Tax Stamp Tax Securities Transaction Tax Customs Duties Earmarked Taxes Transportation· Energy· Environment Tax Education Tax Special Tax for Rural Development Local Taxes Province Taxes Ordinary Taxes Acquisition Tax Registration and License Tax Leisure Tax Local Consumption Tax Earmarked Taxes Community Resource and Facility Tax 1 Local Education Tax City & County Taxes Ordinary Taxes Inhabitant Tax Property Tax Automobile Tax Local Income Tax Tobacco Consumption Tax The national internal taxes consist of direct and indirect taxes and each consists of five internal taxes. Of these ten taxes, Income Tax, Corporation Tax, and Value Added Tax make up the bulk of Korean tax revenue. There also exist three national earmarked taxes, namely the Transportation·Energy·EnvironmentTax, Education Tax, and Special Tax for Rural Development; the revenues from these sources go directly to pre-designated government programs. There are