Providing Excellence In Client Services
January 2013
Newsletter
Bi-monthly Newsletter of Horwath Choongjung LLC
Contents
This newsletter is prepared and issued by Horwath Choongjung LLC
(Choongjung Accounting Corp.) on a bi-monthly basis and intended to
provide foreign investors with an update on tax law changes in Korea
2013 Tax Law Changes
and other related subjects of special interests to foreign investors.
The information provided herein should not form a basis of any
2012 Year-end Settlement
of Individual Income Taxes
decision as to a particular course of action, nor should it be relied upon
as a substitute for a detailed advice in individual cases.
Tax Law Changes for Yearend Settlement of
Individual Income Taxes
for 2012
---------------------------------------------------------------------------------------------------
Notes and Tips
Contacts: H.S. Kim or G.S. Sim at Tax&BPO Services of Horwath
Choongjung [Tel: (82)(2) 316-6600, Fax: (82)(2) 775-5885, E-mail:
post@crowehorwath.co.kr]
(You may find this newsletter and other items of interest at
http://www.crowehorwath.co.kr)
Audit l Tax l Advisory
Please contact any of the following individuals with any inquiries or
comments.
www.crowehorwath.co.kr
-1-
January 2013
2013 Tax Law
Changes
We summarized below some of the major tax law changes for 2013 to keep you updated. All
of the tax law changes we discussed below came into force for the fiscal year starting, or
income earned, on or after January 1, 2013.
1. Corporate Tax Law (CTL)
Reduction of tax limit on entertainment expenses for specially related parties
(CTL-Article 25)
In an effort to discourage companies from incurring entertainment expenses for specially
related parties, the applicable rate to the revenue (defined) from specially related parties to
calculate tax limit on entertainment expenses is reduced from 20% to 10% of the tax limit for
ordinary entertainment expenses.
2. Individual Income Tax Law (IITL)
Changes in formula for retirement (severance) income tax liability to increase tax
burden (IITL-Article 55)
In order to promote receiving retirement pay in a form of pension payment rather than in
lump sum for stable settlement and development of the retirement pension schemes,
retirement income tax burden is increased to the level higher than the minimum tax rate on
pension income.
Old provision
□ Retirement income tax liability
(computed in the order below)
Amended provision
□ Retirement income tax liability
(computed in the order below)
① tax base / years of service
① tax base x 5 / years of service
② ① x tax rates (6%~38%)
② ① x tax rates (6%~38%)
③ ② x years of service
③ (② / 5) x years of service
Reduction in threshold of financial income for comprehensive taxation (IITL-Article
14)
In order to enhance effectiveness and fairness of taxation, the threshold of financial income
(interests, dividends, etc) for comprehensive taxation is reduced from 40 million Won to 20
million Won. Any taxpayer whose financial income exceeds 20 million Won per year must
file a global comprehensive income tax return together with necessary tax payment by the
end of May in the following year.
Audit l Tax l Advisory
www.crowehorwath.co.kr
-2-
January 2013
3. Value-added Tax Law (VATL)
Expansion of input VAT deduction with regard to VAT exempt transaction (VATL-Article
17)
Before revision of the VATL, if a purchaser receives a regular VAT invoice (including 10%
VAT) for a VAT exempt transaction, the input VAT therefrom may not be deductible, and a
seller should issue a revised VAT invoice and file an amended VAT return for a refund of the
output VAT.
However, under the revised VATL, such input VAT shall be deductible in the case where it is
substantiated that the seller has fully paid out the output VAT. The seller does not need to
issue a revised VAT invoice nor file an amended VAT return for a refund of the output VAT.
4. International Tax Coordination Law (ITCL)
Clarification of withholding tax rate on payment for the use of industrial,
commercial or scientific equipment (ITCL-Article 29)
Under the provisions of CTL, a payment for the use of industrial, commercial or scientific
equipment (the “payment”) is classified as rental income, whereas the payment is treated as
royalty income under a majority of tax treaties. Before revision of the ITCL, the payment
was subject to the lower of the withholding tax rate on rental income (2%) pursuant to the
provisions of CTL and a reduced withholding tax rate (0~15%) under the relevant tax treaty
according to the existing National Tax Service (“NTS”) ruling.
Through revision of the ITCL, if the payment is classified as royalty income under the
relevant tax treaty, the payment shall be subject to the lower of the withholding tax rate on
royalty income (20%) pursuant to the provisions of CTL and a reduced withholding tax rate
(0~15%) under the relevant tax treaty.
5. Special Tax Treatment Control Law (STTCL)
Introduction of limit on total income deductions (STTCL-Article 132-2)
In order to prevent high income earner from receiving excessive income deductions, a limit
on gross income deductions has been newly established.
Audit l Tax l Advisory
www.crowehorwath.co.kr
-3-
January 2013
Old provision
<New provision>
Amended provision
□ deduction limit : 25 million Won
□ deduction items subject to deduction
limit :
Insurance premiums, medical expenses,
education
expenses,
housing
funds,
designated
donations,
housing
related
savings,
investments
on
employee
stockholders association or venture capital
association, and credit card expenditures
□
deduction
items
not
subject
to
deduction limit :
Personal
deductions,
insurance
deductions,
four
major
premiums,
earned
income
social
security
pension
statutory donations, and the
savings,
“disabled”
related expenses
2012 Year-end
Settlement of
Individual
Income Taxes
Tax Law Changes for Year-end Settlement of Individual Income Taxes for
2012
An employer paying wage and salary income must withhod income tax monthly from the
earnings of their employees based on “the Quick Tax Table” issued by the NTS and the total
of these income tax withholding has to be paid over to the NTS (through the district tax
office) by the 10th day of the following month throughout the year.
After the year-end, in February of every year, the tax liabilities of employee's (excluding
daily workers) prior year wage and salary are then finalized by its employer through the
declaration of year-end settlement of exact payroll withholding taxes in Korea.
Based on the results of year-end settlement, the employer shall make necessary
adjustments for any overwithholding (or underwithholding) in the February payroll
accordingly.
Major tax law changes related to year-end settlement for 2012 are as below:
Criteria for housing funds special deduction (Individual Income Tax Law,
Presidential Decree (“IITL-PD”) §112 ④, ⑤)
The gross salary ceiling for non-house owning workers is increased from KRW 30 million to
KRW 50 million for application of ‘monthly housing rental deduction’ and ‘principal and
Audit l Tax l Advisory
www.crowehorwath.co.kr
-4-
January 2013
interest payment of home rental loans’ borrowed from the individual who does not run the
rental business.
The head of a household who does not have spouse or dependents can also deduct the
above housing funds special deduction.
Overseas education expense deduction (ITTL-PD §110-3 ④)
The education expense for students who study abroad should meet the qualification below
for claiming the special deduction.
The overseas high school and university students do
not need to meet the qualification to claim special deduction.
Qualification for overseas education: the preschool children and elementary/junior high
school students would be applied.
- Students who study abroad at one’s own expense based on the Regulation of Overseas
Education (Article 5), or
- Students who live abroad with a person having duty of care for 1 year or longer.
Income deduction rate increased for direct debit card/cash receipt usage (STTCL
§126-2)
To encourage a healthy consumption culture, the income deduction rate for direct debit card
usage is increased from 25% to 30%.
To activate the traditional street market, the taxable income deduction rate for credit
card/cash receipt usage paid in the street market is increased to 30% and additional
deduction limit of Won 1 million is also allowed.
Other changes
The progressive tax rate which was increased as of January 1, 2012 will be applied for the
year-end settlement (38% income tax rate is applied for taxable income of Won 300 million
or more).
The effective income brackets and tax rates are as follows.
(*) Local income tax will be additionally imposed at 10% of the individual income tax liability.
Audit l Tax l Advisory
Income tax base (in Won)
Tax rate
Up to 12 million
6%
12 ~ 46 million
15%
46 ~ 88 million
24%
88 ~ 300 million
35%
Over 300 million
38%
www.crowehorwath.co.kr
-5-
January 2013
The fully tax deductible donation can be carried forward to the next 3 years (formerly 1 year)
for claiming the special deduction.
The youth (15 years to 29 years of age) who joins/joined small/mid sized companies
(defined) during the years 2012/2013 can enjoy 100% income tax credit for 3 years from the
joining date.
Notes and Tips
When using the receipts provided from simplified year-end settlement service
operated by NTS
The simplified year-end settlement service available at www.yesone.go.kr operated by the
NTS is a one-stop service where the taxpayers may collect the receipts required for income
deduction claim for their year-end settlement.
The simplified year-end settlement service is an internet-based service that shows the
allowable amount of deduction that a taxpayer can take for himself/herself and his/her
dependents. A print-out of the screen displaying such records is used as a valid supporting
document that they can submit to their withholding agent. The taxpayer would need to
register his/her dependents in the website first in order to view their deductibility records
(such as their medical and insurance fees).
The taxpayer should verify whether those receipts meet the income deduction qualifications
under their responsibility.
Due care for excessive deduction
Once the year-end tax settlement is filed with the tax office, the tax office reviews whether
the taxpayer applied the income deduction excessively over the deduction ceiling and
notifies to the taxpayer, in the case of any findings, to file an amended income tax return
through the tax withholding agent (the employer).
If a taxpayer applied the deduction excessively over the deduction ceiling, he/she should
pay penalty on top of the income taxes.
As such, before claiming deductions, each
taxpayer needs to review the deduction criteria with due care.
If a withholding agent (the employer) files a considerable number of insincere year-end tax
settlement returns for its employees, the tax office may undertake a comprehensive review
on the whole withholding tax returns filed by the employer.
Audit l Tax l Advisory
www.crowehorwath.co.kr
-6-
January 2013
<Most frequent cases where the taxpayers claim excessive tax deduction over the
limit>
Examples
Deduction claims for dependents who
Detail
- Basic/additional/special deductions for the
have earned income of more than Won
dependents who have earned
1 million
earned/business/severance income and
capital gains in total of more than Won 1
million are not allowed.
Duplicated dependents deduction
- Children dependent deduction by both
parents is not allowed.
- Parents dependent deduction by multiple
direct descendants is not allowed.
Deceased or overseas emigrant
dependents deduction
- Basic deduction for the dependents who are
deceased or who emigrated overseas before
immediately preceding year (i.e., deceased
/emigrated by 2011) is not allowed.
Excessive pension savings deduction
- Deduction of pension savings on behalf of
spouse or dependents is not allowed.
- Deduction of pension contributions saved
during the year (i.e., 2012) is not allowed if
such savings are terminated early during the
year (i.e., 2012)
Excessive insurance deduction
- Insurance deduction paid for the dependents
who are not listed on the basic deduction
dependents is not allowed.
Excessive education expense
deduction
- Deduction of graduate school education
expense paid for direct descendants or
siblings is not allowed.
- Deduction of the expenses for preliminary or
pre-course education, for overseas university
transfer or language study abroad, which is
not a regular education course, is not
allowed.
Excessive medical expense deduction
- Shared medical expense deduction by
siblings is not allowed (only the taxpayer who
supports his/her parent may claim deduction).
- Deduction of nursing payment or postnatal
care center payment as part of medical
expense deduction is not allowed.
- Medical expense deduction which was
reimbursed by the insurance company is not
Audit l Tax l Advisory
www.crowehorwath.co.kr
-7-
January 2013
allowed.
Excessive housing fund deduction
- Deduction of interest payment of loans for
long-term housing mortgage for the taxpayer
who owns 2 houses or more as of year-end
(i.e., 12/31/2012) is not allowed.
Excessive credit card usage deduction
- Deduction of credit card usage on behalf of
siblings is not allowed.
- Duplicate deduction of children’s credit card
usage by both parents is not allowed.
*
*
*
*
*
Horwath Choongjung LLC
Member Crowe Horwath International
PMAA Jaram Building, 16th Floor, 566 Dohwa-dong,
Mapo-gu, Seoul 121-815, Korea
TEL: (82)(2) 316-6600 FAX: (82)(2) 775-5885 E-mail: post@crowehorwath.co.kr
Website: http://www.crowehorwath.co.kr
Horwath Choongjung LLC is a member of Crowe Horwath International, a Swiss association. Each member firm of Crowe Horwath International is a
separate and independent legal entity. Horwath Choongjung LLC and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath
International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of
Crowe Horwath International or any other Crowe Horwath International member.
Audit l Tax l Advisory
www.crowehorwath.co.kr
-8-