In continuation of my writing on the taxation of the top 25 GDP rated countries, South Korea with its unique income tax for individuals deserves special treatment. I got the latest information from the web site of National Tax Service, (NTS) the government owned one to help with tax information. Proper reference is given at the end.
Let me flow with the calculations shown by NTS which is an interesting exercise and a totally new experience.
Now the flow of tax information: (Information taken from the website for authentic reasons, and to know how they represent them) (won – Indian rupees 0.063: US Dollar .00084)
“Total Income from Employments
- Refers to all forms of compensation received in exchange for provision of service of employment (excluding compensation for service provided by daily workers) Total Income from Employments
- Compensation of Actual Expenses (Owner driver subsidy, research subsidies, travel expenses paid under company regulations: Up to 200,000 won per month)
- Wage & salary income from overseas: Up to 1 mil. won (3 mil. won) per month
- Non-taxable tuition expenses, work-study scholarship Allowance for overtime work paid to workers in manufacturing or related industries: Up to 2.4 mil. won per year
- Meal expenses or meal allowances up to 100,000 won per month
- Childbirth allowances up to 100,000 won per month and childcare allowance of children aged 6 and under
- Childcare leave benefits, maternity leave benefits, etc. paid pursuant to the Employment Insurance Act.
Gross Wage & Salary Income = Annual wage and salary income – Non – taxable income. (amount in Won)
Gross Wage & Salary Income Bracket Deduction
Up to 5 mil. 70% of gross wage & salary income
Over 5 mil. – Up to 15 mil. 3.5 mil. + 40% of the amount over 5 mil.
Over 15 mil. – Up to 45 mil. 7.5 mil. + 15% of the amount over 15 mil.
Over 45 mil. – Up to 100 mil. 12 mil. + 5% of the amount over 45 mil.
Over 100 mil. Won 14.75 mil. + 2% of the amount over 100 mil.
Deduction up to 20 million won allowed.
Adjusted wage& salary income = Gross Wage & Salary Income- deduction of wage and salary income.
What are the deductions?
Personal deductions
- Basic deduction: 1.5 mil. won per person – An employee, his/her spouse with annual income of 1 mil. won or less (if he/she only has wage & salary income, gross wage & salary income of 5 mil. won or less) and dependents living together (persons other than disabled persons should meet age requirements)
- Additional deductions (when a person who is qualified for basic deduction falls under any of the following:) – The disabled: 2 mil. won per person – The elderly (aged 70 years or older): 1 mil. won per person – Woman: 0.5 mil. won – Single-parent: 1 mil. Won Pension Contribution Deduction: National pension contribution by an employee: Full amount.
Special income deduction: Insurance premium – National health insurance, employment insurance, long-term care insurance premium: Full amount.
- Other deduction: Personal pension savings: 40% of the deposits made in personal pension savings subscribed on or before Dec. 31, 2000 (up to 720,000 won per year)
- Deduction of deposits made in a mutual aid fund for small enterprises and small entrepreneurs (Ceiling: 5 mil. won for adjusted wage & salary income of 40 mil. won or less; 3 mil. won for adjusted wage & salary income of 100 mil. won or less; 2 mil. won for adjusted wage & salary income over 100 mil. won)
- Income deduction of contributions to a small and medium business start-up investment fund – 10% of the investment or contribution amount is deducted (for direct investment in a venture company, the deduction rate is as follows: 100% for investment of 30 mil. won or less, 70% for investment of 50 mil. won or less, 30% for over 50 mil. won) – Within 50% of the global income amount of the relevant year; ceiling of 3 mil. won applied to venture business investment trust
- Deduction for credit card use, etc. ① Total amount spent = Credit card charges + Debit card use + Prepaid card use + Cash receipt amount
- ② Deductible amount = [①-(25% of gross wage & salary income)] × 15%* *(40% is applied to the amount spent in traditional markets or on public transportation, 30% is applied to the amount spent on books and performance tickets, etc cash receipt amount and debit card use in the case of those with gross wage & salary income of not over 70 mil. won)
- ③ Deduction ceiling = The lesser amount between 20% of gross wage & salary income and 3 mil. won (2.5 mil. won for those with gross wage & salary income of 70-120 mil. won, 2 mil. won for those with gross wage & salary income of over 120 mil. won) However, where the amount exceeds the ceiling, the lesser of: the amount exceeding the ceiling; and the addition of the amount used in traditional markets and for public transportation, and the amount that those with gross wage & salary of 70 million won or lower spent on books, performance tickets and museum and art exhibition tickets that is subject to deduction (ceiling of 1 million won applies to each)
- Deduction of contributions to employee stock ownership association –The amount contributed by an employee stock ownership association member to purchase stocks (up to 4 million won per year, up to 15 million won for venture companies)
- Employees of small-to-mid sized companies that have maintained the size of employment: 50% of the reduced amount in wage payment (up to 10 mil. won per year)
- Long-term collective investment security savings: 40% of deposits in long-term collective investment security savings (up to 2.4 mil. won per year)
What is the tax base?
= Adjusted Wage & salary income – Personal deduction – Pension contribution deduction – Special deduction – Other income deduction + (Amount exceeding the composite ceiling of income deduction)*
*Amount in excess of composite ceiling for income deduction: Where the composite ceiling for special income deduction and other income deduction exceeds 25 mil. won, the amount in excess shall be included in the tax base.
Tax base *tax rate (6%-42%)
Tax Base (amount in won) Tax Rate(amount in won)
Up to 12 mil. 6%
Over 12 mil-Up to 46 mil. 720,000 +15% of amt over 12 mil.
Over 46 mil-Up to 88 mil. 5,820,000 +24% of the amount over 46 mil.
Over 88 mil-Up to 150 mil. 15,900,000+35% of the amount over 88 mil.
Over 150 mil-Up to 300 mil. 37,600,000 +38% of the amount over 150 mil.
Over 300 mil-Up to 500 mil. 94,600,000 +40% of the amount over 300 mil.
Over 500 mil 174,600,000 + 42% of the amount over 500 mil.
Explanation: 12 mil indicates 12 million won.
Calculated income tax: (Income tax is calculated by applying the basic tax rate to the tax base)
Time to concentrate on credits
Let us wade through the tax credits.
What are they?
Tax credit for wage & salary income: The ceiling is 740,000 won, 660,000 won and 1,300,000 won
Taxpayer association credit: 5% of income tax withheld by a taxpayer association
Important
Foreign tax credit – Foreign income tax amount paid or payable in a foreign country – Tax credit ceiling = Calculated income tax × (foreign source income/global income.
Child tax credit: 150,000 won for one child, 300,000 won for two children, 300,000 won each for the third child and up subject to basic deduction (children aged 7 and up, children under 7 enrolled in school) Newborn/ adopted child: 300,000 won for the first child, 500,000 won for the second child, 700,000 won each for the third child and up.
Details of other credits like pension account tax credit, special tax credit (insurance premium, medical expenses, educational expenses, donations) and standard tax credit are available in book on page 101-109.
Final tax liability – pre- paid tax = calculated income tax-tax credit exemption
What is prepaid tax = Tax prepaid at principal (present) workplace + Tax prepaid at secondary (previous) workplace
Payable/Refundable Tax = =Final tax liability – Prepaid tax) ※ Final tax liability > Pre-paid tax: Pay the difference, Final tax liability < Pre-paid tax: Refund the difference.
My observation
South Korean tax authorities have provided maximum benefits, credits, or ways to make learning a pleasure by encouraging tax- payers to use them as means to pay less tax, and gain knowledge at the same time.
Let us learn more about individual tax.
I have gone through the book published with 225 pages with maximum explanations, examples, and all relevant information with Korean/English language usage.
I shall reproduce many relevant information of special usage for tax preparers of other countries to learn, use, and propagate the excellence of South Korean taxation system.
Please continue the learning journey———————
From page 45 of the book.
“Special taxation for foreign employees (Article 18-2, Restriction of Special Taxation Act) If a foreign executive or employee (excluding daily workers) provided service in Korea for the first time on or before Dec. 31, 2021 (excluding cases where service was provided to a special related company), the amount calculated by multiplying 19% to the relevant wage and salary income (including non-taxable income) can be imposed as the tax amount, instead of the amount computed by applying the basic tax rate.
In such cases, provisions concerning income taxation, such as non-taxation, deduction, reduction or exemption, and tax credit under the Income Tax Act and the Restriction of Special Taxation Act shall not be applicable. And the wage and salary income thereunder shall not be included in the calculation of tax base of global income.”
Resident, or non-resident?
“Resident and non-resident
(1) Resident and Non-Resident (Article 1-2, Income Tax Act)
(2) In principle, a resident means any individual who has had his/her domicile or place of residence in the Republic of Korea for at least 183 days. A non-resident means any individual who is not a resident.”
Often asked questions and the answers from tax authorities. Many interesting information for an inquisitive learner too.”
Q&A
All from the book, of course. Small introduction by myself.
“Q. On the simplified year-end tax settlement service system provided by the NTS, the amount of medical expense eligible for tax credit is less than the actual amount of medical expense that I have spent. If I were to receive tax credit for the other medical expenses, what do I do?
A. If the medical expense eligible for tax credit does not cover all of your medical expenses, write down the missing expenses in the specification of payment of medical expenses and submit it with documentary evidence issued by a hospital or pharmacy to receive tax credit.”
On donations.
“Q. Are donations that I made to a charitable organization in another country eligible for tax credit?
A. Tax credit for donations is permitted as long as the charitable organization is registered in Korea or meets other requirements stipulated in relevant Korean laws.”
Basic deductions for parents.
“Q. Can I claim basic deduction for my parents whom I do not live with?
A Yes, as long as your parents meet the income and age requirement, and if you actually support them and none of your siblings claimed basic deduction for them.”
Amazing but true.
“Q. Special taxation for foreign employees (Article 18-2, Restriction of Special Taxation Act)
If a foreign executive or employee (excluding daily workers) provided service in Korea for the first time on or before Dec. 31, 2021 (excluding cases where service was provided to a special related company), the amount calculated by multiplying 19% to the relevant wage and salary income (including non-taxable income) can be imposed as the tax amount, instead of the amount computed by applying the basic tax rate.”
Let us learn more.
What is a global income and whether it is applicable for both residents and non-residents?
Income derived by residents and non-residents is subject to global and schedular taxation. Under global taxation, business income, wages and salaries, pension income, and “other income” are aggregated and taxed progressively. Interest and dividends were taxed globally until 1997, but they were temporarily excluded from global taxation until 2000.
A combined income of dividends and interest exceeding 20 million won is subject to global taxation. Currently, interests and dividends are subject to withholding tax of 14%. Under schedular taxation, capital gains and retirement income are taxed separately at varying tax rates.
Let us explain global income as one which denotes income subject to global taxation and includes the following: interests, dividends, business income, wages and salaries, pension income, and other income.
Also, to guide one who wants to have a bird’s view of the contents of 225 pages tax book some lead.
Year-end Tax Settlement of Wage & Salary Income _ 31
Wage & Salary Income _ 53
Income Deduction _ 71
Tax Reduction or Exemption & Tax Credit _ 83
Others _ 111
Examples of Income Tax Calculation for 2020 _ 123
Year-end Tax Settlement of Religious Workers’ Income _ 137
FAQ / Q&A _ 161
Tax Forms _ 173
Appendix _ 201
Anyone interested in detailed study may refer the books under reference.
However, I may refer some of the tax forms before we proceed which is very important in our conversation.
Form 24 (1). Receipt for Wage & Salary Income Tax Withholding ………175
♦ Form 37. Report of Income Deduction & Tax Credit/ Report of Income Deduction & Tax Credit from Wage & Salary Income ………185
♦ Statement of Income Deduction & Tax Credit for Pension, Savings, etc. ……..191
♦ Form 23 (6). Statement of Payment of Religious Workers‘ Wage & Salary Income (Attached form no. 23 (6) of the Enforcement Rules of the Income Tax Act ····················· 193
♦ Form 23 (4). A Resident‘s Statement of Payment of Other Income (Attached form no. 23 (4) of the Enforcement Rules of the Income Tax Act) 195
195 ♦ Form 8. Application for Flat Tax Rate Application for Foreign Employees ························· 197
♦ Form 29-2 (3). Application for Non-Taxation & Exemption of Tax on Wage &
Salary Income Under a Tax Treaty ………….199
Conclusion
My analysis of South Korean taxation which started with my earlier article on the evolution of its taxation system, now reveals many splendors of its various treatment of individual tax excessively tailored to help every individual who qualifies to pay the taxes and if so, how to help the taxpayer to get maximum benefits but pay the taxes on time. One of the best taxation regimes from South Korea may help other countries to follow their lead.
Reference
Services for foreign taxpayers provided by the National Tax Service.
Foreign Taxpayer Help-line(English) 1588-0560 ☎ Q&A, Foreign Taxpayer Advocate(English) www.nts.go.kr/eng English website of NTS www.nts.go.kr/eng National Tax Consultation Center 126 ☎ NTS Hometax Service www.hometax.go.kr.
Book:
https://www.nts.go.kr/upload/english/sub/2020%20Easy%20Guide%20for%20Foreigners’%20Year-end%20Tax%20Settlement.pdf
(2020 Easy Guide for Foreigners’ Year-end Tax Settlement.pdf)
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Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting because of the above write up. The possibility of other views on the subject matter cannot be ruled out. By use of the said information, you agree that Author/Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.
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