1. 2005 Tax revision bill.
The Ministry of Finance and Economy convened the 38th meeting of the Tax Development Deliberation Committee and discussed the 2005 Tax Reform Bill on August 26, 2005. The meeting was presided over by Park Yong-sung, Chairman of the Korea Chamber of Commerce and Industry.
Major features of the 2005 Tax Revision Bill
1. Revitalizing economic momentum and expanding growth potential
The tax regime designed to promote business restructuring will be modified to ensure that the tax system does not stand in the way of corporate restructuring.
The corporate taxation framework will be streamlined by abolishing regulations on investment in a third-party corporation and discrimination against consumption-oriented service business.
The international taxation regime will be improved in line with global standards. The taxing principle of substance over form will be included. Special provisions on withholding taxes for foreign funds set up in tax havens, as designated by the Minister of Finance and Economy, will be introduced.
With the introduction of this system, when domestic taxpayers (charged with an obligation to withholding tax) provide funds with investment income such as dividends, interests and capital gains from stock transfer, the funds will be subject to withholding taxes according to domestic withholding tax rates. If a beneficial owner of investment income submits documents proving his or her country of residence to the tax office concerned within three years, he or she will receive the difference between the tax rate of the relevant tax treaty and that of the domestic law.
The corporate tax system will be improved and updated. Donations and dividends received are not likely to be included in the corporate tax payable. To expedite an economic recovery, venture start-ups will be promoted, the early inheritance system for start-up capital will be set up and the exemption of value-added taxes on operation income of private university facilities will be granted. Also, the tax deduction on investments in energy-saving facilities will be extended from the end of 2007 to the end of 2008.
2. Expanding tax base through curtailing tax exemptions and reductions
In principle, tax exemptions and reductions which are supposed to expire at the end of 2005 will be abolished as scheduled. Also, inefficient tax exemptions and benefits will be streamlined. For example, tax deduction on commercial paper and on credit card usage will be cut. Preferential tax treatments on income earned on long-term housing savings will be reduced. Reduced tariff on factory automation equipment will be adjusted lower.
To expand the tax base, the government will impose taxes on profit-making businesses operated by the state and local governments. In addition, tax rates on liquefied natural gas, distilled liquors and whiskey will be raised.
3. Complementing the tax system in response to aging population and economic polarization
Regarding pension savings, tax benefits for workers will be revised to protect the post-retirement income. In this regard, additional tax perks on pension savings accounts will be allowed and the ceiling for tax deduction on lump sum pension savings payment will be adjusted.
To support small and medium enterprises (SMEs) and small business owners, value-added taxes (VAT) will be lowered and the VAT rate for simplified taxpayers will be adjusted. Also, requirements for VAT tax exemption related to business transfer will be relaxed.
Support for production activities of farmers and fishermen will be enhanced. In line with this, the government will prolong the VAT zero rate on equipment for farming, livestock, forestry and fishery from the end of 2007 to the end of 2008.
The system enabling revenue authorities to gather information on taxpayers' incomes will be established. Toward this goal, submission of payment records on incomes earned by daily workers and earned on interest and dividend incomes which are non-taxable or subject to separate taxation will be mandatory.
Moreover, tax offices will be allowed to collect data on taxpayers' incomes, which are held by public agencies such as local governments and the National Pension Corporation.
4. Establishing new tax reductions for balanced regional development
The government will come up with new tax reductions for balanced regional development. Tax credits will be expanded for companies and employees opting for relocation out of major cities.
5. Improving service toward taxpayers by simplifying the tax system
The taxation framework will be simplified for SMEs so that those maintaining transparent book keeping by using the standard electronic account book can pay their taxes through simplified procedures for tax calculation.
Salaried workers' tax return process at year-end will be made easier by the new system which allows organizations issuing documentary evidence on deductible items to transmit the documents directly to tax offices concerned in electronic format, relieving the burdens of workers in gathering all relevant data and submitting them to withholding agents on an individual basis.
A single channel for customs procedures will be set up, so that the customs may deal with all declarations such as quarantine application for import/export declarations.
Future plans for implementation
Tax revision bills for the Corporation Tax Act, the Income Tax Act, the Restriction of Tax Reduction and Exemption Act, the Liquor Tax Act, the Special Consumption Tax Act, the Stamp Tax Act, the Adjustment of International Tax Act, the Customs Act, the Frame Act on National Taxes will be submitted to the National Assembly by October 2.
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|Title Annotation:||Policy Issues|
|Publication:||Economic Bulletin (Korea)|
|Date:||Sep 1, 2005|
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