For Simple, Fair, Pro-growth Regime

MOFE eyes overhaul of tax system with focus on helping mid-and low-income earners

By Kim Do-hyeong, Dir.Gen. of the Tax Policy Bureau of the Finance and Economy Ministry

The Korean economy has recently shown a sign of recovery mainly thanks to sustained export increase. However, the export-led economic recovery tends to be rarely felt by the mid-and low-income families.
Given that, in the revision of the tax code for this year, the Korean government has put a particular focus on the development of tax measures designed to help the mid-and low- income earners which account for the majority of the population.
The basic direction for this year's tax reform is to ensure "simple, fair and pro-growth tax regime." and based thereupon, the government identified five major areas which merit particular attention: 1) supporting the mid-and low-income families; 2) supporting the development of a future growth engine; 3) broadening the tax base through the enhancement of compliance; 4) supporting the implementation of other major national policy; 5) advancing the tax system.
Featured items of the new tax reform measures are as follows:

Supporting the mid-and low-income families
Firstly, income brackets for global taxation will be adjusted in a manner that ensures more benefits to low income earners. The lowest income bracket which is subject to the income tax rate of 8% will be changed to taxable income of 12 million won or less and the second lowest income bracket subject to the 17% rate will be changed to taxable income of between more than 12 million won and 46 million or less. The income brackets subject to the rate of 26% and 35% will be adjusted to taxable income of between 46 million won and 88 million won and taxable income of more than 88 million won, respectively.
Secondly, the scope of deductible education expenses will be broadened to include expenses for after-school activities, school meals and purchase of school text books.
Thirdly, the government plans to allow for a special deduction with regard to adoption and baby births. Under the new measure, in the year of baby birth or adoption, additional deduction equal to 2 million won per baby will be granted.
Fourthly, small self-employed business owners who have been compliant taxpayers will be allowed to have their expenses incurred in association with education and medical care deductible.
Fifthly, with a view to closing the gap between the rates on kerosene and LNG, the Korean government plans to reduce the special tax rate on kerosene from 134 won per liter to 90 won per liter.

Developing a future growth engine
Firstly, tax credit for R&D investment made by large businesses will be expanded so that R&D investment can be further promoted.
Secondly, investment into the Gaeseong Industrial Park in North Korea will also be deemed as domestic investment. This means that tax incentives granted to domestic investment (e.g. temporary tax credit) will be also available to investment into the North Korean district.
Thirdly, given the importance of logistical industries as a future growth, some relevant tax measures which are not in line with global standards will be eliminated, while shippers which consign goods to a third logistics company will be granted tax benefits so that nurturing top notch logistics companies in Korea can be facilitated.
Fourthly, a number of tax incentives aimed at expanding investment in overseas resource development will be newly provided, as oil prices continue to rise and uncertainty over stable supply of energy is growing.
Fifthly, the government will alleviate the inheritance tax burden with regard to the inheritance of family businesses. To be more specific, the current deductible amount in respect of inheritance of a small family business will be increased to 200 million won or 20 percent of the value of the business, whichever is greater, from the current level of 100 million won, so that those businesses can continue to contribute to the national economy such as through the transfer of management know-how.
Sixthly, the government plans to introduce a pass-through taxation for partnership in order to facilitate the creation and operation of a limited liability company. Under the tax regime, there is no tax imposed at a partnership level, while all the profits distributed are subject to tax at a partner level.

Broadening the tax base through the enhancement of compliance
The government will streamline tax exemptions or reductions on a gradual basis with a view to broadening the tax base and enhancing efficiency in the provision of tax incentives. Of the 18 tax incentives which are due to expire at the end of this year, tax exemption on fuel oil for agriculture or fishery purposes will be extended by another five years. Among the remaining 17 incentives, eight incentives will be phased out and three of them will be curtailed, while six will be extended.
In the meantime, as the cash-receipt system introduced in 2005 with an aim of enhancing transparency in hard-to-trace cash transactions has been evaluated as successful, the government intends to eliminate the receipt issuance threshold of 5,000 won so that the system can be further promoted.
Also, the government has decided to put off to December 31, 2009 the expiration date of the benefit of deduction for credit card charges, as the incentive has greatly contributed to improving taxpayers'compliance since its introduction in 1999.

Supporting the implementation of other major national policy
First of all, as a follow-up measure to the Korea-US FTA, the government will cut the special consumption tax rate on cars with engine capacity of over 2,000 cc to 8 % first and then reduce the rate by 1 % every year until the rate will ultimately become 5% when the FTA is enforced.
In addition, tax benefits will be provided for supporting the recently announced 2-stage policy for balanced regional development. To be more specific, the government will classify a total of 231 local authorities across the nation into four classes depending on development degree and grant to SMEs a 70, 50, 30 or 0% exemption from the corporate or income taxes, depending on their location. Besides, large companies relocating to local areas will be granted the 70, 50, 30 or 0% corporate tax reduction in full, as the case may be, for the first 10 years, with 50% of the reduction rates applicable to them for the next 5 years.

Advancing the tax system
Taxpayers will be able to pay national taxes with a credit card to the extent of 2 million won. The tax items which can be paid with a credit card include income tax, VAT and customs, etc.
Tax incentives aimed at promoting a contribution culture will also be reinforced. Deductibility of donations made by individuals will be expanded from the current 10% of total income to 15% in 2008 and then to 20% in 2010, while donations made to a national trust, museums and art galleries in the form of cultural heritage, remains or work of art will also be considered as special donation.
In the meantime, taxation on non-resident entertainers or athletes will be improved. Under the existing rule, the tax on payment made to non-resident entertainers or sportsmen by a foreign entertainment or sports company should be withheld by the company at the rate of 20%, but, in reality, it is difficult to enforce the rule due to the inapplicability of our taxing right over the foreign country concerned. To address this issue, the government will amend the rule so that tax on payment made to a foreign entertainment or sports company for performance or play by non-resident entertainers or athletes can be withheld at the rate of 20% in Korea. In this case, if the entertainment or sports company concerned makes an application for reassessment of the tax amount, any overpaid tax amount will be refunded after review by the tax authorities. nw

Kim Do-hyeong, Dir.Gen. of the Tax Policy Bureau of the Finance and Economy Ministry