2013 tax revision bill.
The 2013 Tax Revision Bill aims to support national priorities, such as transforming Korea into a creative economy, achieving 70 percent employment, fostering smalland medium-sized enterprises (SMEs), and promoting culture and the arts. The tax code will be revised such that it can be easily understood by the Korean people and will reinforce existing support for the working class. The bill will make the tax code more transparent by legitimatizing the shadow economy and will restructure tax incentives, both of which will lead to an increase in tax revenue.
1. Supporting national priorities
1) Developing growth engines and increasing SME support
Promising service industries will be granted increased R&D support and SME tax incentives: 3 to 25 percent of R&D or human resources development costs or 40 to 50 percent of the cost increase from the previous year will be tax deductible.
Some intellectual property-related services, promising service industries and social services will be eligible for SME tax incentives, which include a 5 to 30 percent tax reduction and a 4 to 7 percent tax deduction for investments that create jobs.
Other SME-related tax revisions are as follows:
Investment tax incentives offered to startup SMEs for the initial investment to establish the company will be extended from 5 years to 7 years.
Investment in the Long-term Employment Reward Fund will be treated as an ordinary and necessary expense, which is expected to lead to long-term employment in SMEs.
The 7 percent tax deduction that is offered to companies that invest in large enterprise-SME cooperation funds will only be given to companies that invest in firms that are not related to them.
A 50 percent individual income or corporate tax reduction will be offered for sales of technologies by SMEs, which is designed to help increase SME capabilities related to technology. M&As between high tech companies will be exempt from the gift tax.
Taxes on unfair contract practices in favor of subsidiaries or associates will be eased for SMEs. The tax will be imposed when the holding company owns more than 5 percent of shares and contracts with the parent company account for more than 50 percent of total transactions, an increase from 3 percent and 30 percent, respectively.
Transactions between two companies, which hold an equity stake in each other, will also be eligible to receive a tax exemption from the tax on unfair contract practices according to the amount of equity in the other firm that each firm owns.
Dividends paid to holding companies by corporations that have received contracts from the holding companies will be exempt from the gift tax, in order to eliminate double taxation as the dividend will no longer be taxed twice through the capital gains tax and the gift tax.
The 2013 Tax Revision Bill facilitates corporate inheritance. Corporate inheritance tax credits will be available to companies with annual revenues of 300 billion won
or less, while punitive tax rates for not keeping the same businesses for 10 years will be eased.
Tax deductions for facilities investment will be applied on a scale according to the size of corporations.
Deduction rate (%) Current Revised Facility investment Large corporations: 3 to improve medical 7 Medium-sized leading enterprises: 4 product quality SMEs: 5 control Facility investment Large corporations: 3 to protect 10 Medium-sized leading enterprises: 4 environment SMEs: 5 Facility investment Large corporations: 3 to save energy 10 Medium-sized leading enterprises: 4 SMEs: 5 R&D facility Large corporations: 3 investment 10 Medium-sized leading enterprises: 4 SMEs: 5
2) Promoting a creative economy
Tax incentives for angel investment will be expanded. Angel investors will be eligible to receive a 50 percent tax deduction for investments worth up to 50 million won and then will be eligible to receive a 30 percent deduction on any additional investments above 50 million won. These incentives will be applicable to up to 50 percent of annual income, and will not be affected by the income tax deduction limit.
There will be acquisition tax credits for the M&A of SMEs whose investments in R&D exceed 5 percent of revenue, and the sales tax on the swaps of unlisted venture company stocks will be imposed at the time of sale of the exchanged stocks. In addition, when company owners sell their shares and reinvest in venture companies, sales taxes will be suspended until the reinvested stocks are sold.
The same tax rules as the KOSDAQ market will be applied to the Korea New Exchange (KONEX), a stock market for startup businesses, and startup investment funds will receive tax credits when they invest in KONEX listed companies: there will not be stock sales taxes, capital gains taxes on dividends and stock transaction taxes.
Venture or startup company employees will be allowed to pay taxes in three year installments on their stock option transactions, a measure that is expected to attract quality human resources to venture or startup companies.
3) Increasing tax credits to help achieve 70 percent employment
The government will increase tax deductions for job-creating investments by counting one regular part time employee as 0.75 full time employees, an increase from 0.5 full time employees. To promote SME employment, the government will continue to provide tax deductions for social security insurance costs, introduce a tax deduction of 1 million won per part-time employee that has been hired as a full-time employee, and expand the job sharing tax credit* to all SMEs. Currently the tax credit is applied to SMEs suffering from management difficulties.
* SMEs that are forced to cut wages in order to maintain employment, and the employees who have had their wages cut, will both be eligible to receive a deduction worth 50 percent of the wage cut. The SME will be able to apply this deduction to their corporate taxes and the individual will be able to apply this deduction to their income taxes.
Businesses employing the socially vulnerable and the physically disabled will receive increased tax credits: a tax exemption for three years and a 50 percent tax reduction for the following two years, an increase from 50 percent for five years. Tax deductions for employing the elderly and the physically disabled will also be increased from 10 million won per employee to 15 million won.
4) Promoting culture and the arts
Investment in cultural facilities, such as libraries and museums, will receive the same tax deduction that is given to job-creating investments, while corporate entertainment spending on cultural events and activities will be made tax deductible. In order to be tax deductible, the current tax system requires companies to spend more than 1 percent of total entertainment costs on cultural entertainment. This requirement will be lifted, and corporate cultural entertainment spending will be made 100 percent tax-deductible.
Hotels will have their value-added tax (VAT) refunded on foreign tourist accommodations, which is expected to contribute to boosting domestic demand.
2. Putting people first
1) The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC)
The EITC will be expanded, and the CTC will be adopted in 2015.
Single-member families will be eligible for the EITC in addition to families with children, and families with children will be categorized according to the mothers' employment status.
The number of families receiving the EITC and CTC will be increased as the income ceiling will be raised: families with two children or less and annual income of 25 million or less will be eligible for the EITC, and the CTC, which is 500,000 won per child, will be given to families earning 40 million won or less a year.
The EITC will be made available for basic social security recipients in order to encourage them to work.
2) Working class support
The Special Tax for Rural Development, scheduled to sunset on June 30, 2014, will be extended to 2024, while taxi companies will continue to be granted a 90 percent VAT reduction. Those VAT tax savings will be paid directly to taxi drivers.
Both landlords and tenants will receive income tax credits for key money received and rents paid, respectively. Low tax rates of 3 to 5 percent will be applied to money utilized from pension funds to pay for medical expenses, and the money will be taxed separately from other income.
3) Making the tax code more convenient
Rules regarding income and corporate taxes will be rewritten in an easy to understand manner, and special laws regulating FTAs will be reorganized so that they can be more easily understood. Furthermore, the government will work on sharing the National Tax Service's taxation information with the four social security insurance institutions: the National Pension Fund, the National Health Insurance Service, the National Industrial Damage Compensation Fund and the Unemployment Fund.
Gift tax deductions will be increased, reflecting inflation, from 30 million won to 50 million won for adults, and from 15 million won to 20 million won for minors.
The provisional tariff rate of 20 percent will be applied to sugar imports, a decrease from the 30 percent basic tariff rate, to boost competition in the domestic sugar market.
3. Increasing tax fairness and broadening the tax base
1) Income tax deductions
Personal spending-related income tax deductions will be applied to taxes owed instead of income, which will increase the tax burden of high income earners. Earned income tax deductions will also be adjusted to minimize tax exemptions. However, the current income tax deduction method, which applies deductions to income, will be maintained for the basic income tax deduction, the public pension and national health care insurance deduction and the earned income tax deduction.
According to the new method, those earning 55 million won or less a year will not be subject to a tax increase, while those earning between 55 million won and 70 million won will be imposed a minimum increase of 20,000 to 30,000 won. There will be a progressive tax increase for those earning more than 70 million won a year.
2) Modifying tax breaks
The tax deduction for corporate R&D reserves will be removed, and training and overseas education costs will no longer be tax-deductible.
The government will adjust the energy saving investment tax deduction and other tax incentives which favor large enterprises.
When properties are sold to the government for policy purposes, such as public projects or development restriction, real estate sales tax reductions have been applied at a high rate. However, considering market price level compensation, the tax reduction rates will be adjusted.
3) Broadening the tax base
Value-added tax (VAT)
VAT tax credits applied to processed food made from tax-exempt agricultural and fishery products will be limited to 30 percent of revenues. VAT tax credits for recycled product purchases will be reduced, and the VAT will now be applied to cosmetic surgeries.
Real estate sales tax deductions applied to long term ownership will be reduced from up to 80 percent of sales price to up to 60 percent from 2015. Farmland sales tax exemptions, currently applied to those with more than eight years of farming, will not count as farming periods the years when nonfarming income exceeded 37 million won. Income tax for the clergy
Clergymen's income will be taxed as honorariums from 2015, and religious groups will be subject to withholding taxes.
Income tax for high-income farmers
Income from high income farming will be taxed when it exceeds a certain level, but income from growing staple crops, such as rice and barley, will continue to be tax-exempt.
Income tax on government employee allowances
Government employees will be required to pay income taxes for their allowances starting in 2015.
Individual consumption tax on gambling
Individual consumption taxes will be included in admission fees for casinos and gambling games, such as horse racing, cycling and motor boat racing.
Stamp taxes will be applied to gift certificates and electronic documents, such as construction contracts.
4) Legitimatizing the shadow economy
In order to properly tax overseas income and properties, individuals who do not meet the requirement of reporting overseas bank accounts will be ordered to clarify the sources of the funds, and fines will be imposed on the funds whose sources are not clarified. Overseas investors are required to report their investment specifications, and fines will be imposed when they fail to report the specifications.
Receipts will be required to be issued for cash transactions exceeding 100,000 won. In addition, self-employed businesses earning more than a certain level will be obliged to issue electronic receipts, and businesses which are highly likely to avoid taxes on cash transactions will be made legally responsible for the issuance of cash transaction receipts.
These changes are expected to produce a net increase of 2.49 trillion won in tax revenues as gross revenues will increase by about 4.48 trillion won but will be offset by 1.99 trillion won in decreases. The increase will be mainly due to changes in the income tax credit calculation method, in which tax credits will be applied to taxes owed instead of income, adjustments in the VAT tax exemption for processed food which is made from tax-exempt agricultural and fishery food products, and strict requirements to issue cash transaction receipts. The decrease will be mainly due to an increase in the EITC, CTC and job creating investment tax credits for the elderly and physically disabled.
<Changes in Tax Revenues> (y-o-y, trillion won) Total 2014 2015 2016 2017 2018 and after Income tax 0.52 -0.17 0.89 -0.08 -0.11 -0.01 Corporate tax 1.02 -- 1.02 -- -- -- VAT 0.77 0.55 0.18 0.04 -- -- Others 0.18 0.05 0.03 0.09 0.01 -- total 2.49 0.43 2.12 0.05 -0.1 -0.01 <Tax Burden> (trillion won, %) Working class, High income earners/ Others Total middle class/SMEs large corporations -0.62 2.97 0.14 2.49 -24.9% 119.3% 5.6% 100%
The government will work on the revision of 15 related laws, 12 tax laws and three customs laws. The 2013 Tax Revision Bill will be submitted to the National Assembly at the end of September.
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|Title Annotation:||Policy Issues|
|Publication:||Economic Bulletin (Korea)|
|Date:||Aug 1, 2013|
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