By Ross Harman, Foreign Attorney, and Jeongwoo Park, CPA, Lee & Ko, Seoul
On July 26, the Korean government released its proposed tax revision bill for 2021, with changes including expanded tax reductions for start-ups, extended job creation tax credits, and enhanced research and development (R&D) tax credits, among other provisions.
The changes proposed in the bill have been made against the backdrop of the Covid-19 pandemic, and the overriding theme of the revisions is enabling the Korean economy to prosper and flourish for everyone in the post-COVID era.
The bill, which will require changes to 16 statutes, will be finalized and submitted to the National Assembly for ratification on September 3. If approved, the bill is then expected to become law effective from January 1, 2022.
Supporting job market recovery
The Korean government is proposing a series of measures to bolster jobs, through a package of measures that will promote investment in start-ups and support job creation and retention.
As far as start-ups are concerned, these businesses currently receive a tax reduction of 50% of their corporate tax bill, or 100% in the case of start-ups outside of certain major cities. The proposal is to extend these tax reductions for a further three years, until 2024.
The definition of “start-up” is also being expanded. Whereas it previously meant businesses with an annual turnover of under 48 million Korean won (USD 40,000), this threshold is being raised to 80 million Korean won (USD 68,000).
Various tax credits are also being extended or expanded to promote job creation and job retention. Specifically, companies are currently incentivized to increase the number of full-time employees through a corporate income tax credit of up to 13 million Korean won (USD 11,000) for small companies, up to 9 million Korean won (USD 7,000) for medium-sized companies, and up to 5 million Korean won (USD 4,300) for large companies. Although these tax credits were due to expire at the end of 2021, they have now been extended for a further three years.
Similarly, an expansion is proposed to the tax credit given to companies that hire women who have taken a leave of absence from the workforce for various reasons, including pregnancy, childbirth, and childcare. The tax credit is equal to 30% of the wages of the relevant employee. Whereas previously the new employee needed to have been job-seeking for three years for the company to receive this tax credit, this has now been reduced to two years, making it easier for the company to meet the conditions.
Addressing inequality and supporting low-income households
Currently, small or medium-sized enterprises can deduct from their corporate income tax bill 10% of the amounts of profit shared with employees. To encourage corporate profit sharing, it is proposed to increase this amount to 15%, effective until 2024. The scope of employee stock options which are allowable as a deductible expense will also be expanded.
In addition, individual income tax deductions for charitable contributions would be temporarily increased to 20% of the contributed amount up to 10 million Korean won (USD 8,500), and 35% for any contributions above this threshold. These rates will change to 15% and 30% respectively, in 2022.
Many measures are proposed for lower-income employees and the self-employed. Among these, income support is going to be offered to a larger group of people, with the threshold income required to receive income support being raised by 2 million Korean won (USD 1,700), with the new thresholds being 22 million Korean won (USD 18,800) for a household consisting of one unmarried person living alone, 32 million Korean won (USD 27,300) for a household consisting of a married couple only one of whom works, and 38 million Korean won (USD 32,400) for a double income household. Value-added tax (VAT) exemption is going to be applied to housework and childcare services. For amounts less than 500,000 Korean won (USD 430), mid-term VAT payments are going to be abolished.
On a similar theme, various measures are being implemented to promote fairness within the tax system. In particular, increased punishments (in the form of monetary penalties) are proposed for failures to file tax returns or filing tax returns containing false information. Limits are being imposed on income tax deductions for business losses transferred from former owners. Finally, strict limits are going to be imposed on capital gains tax exemptions which apply to the sale of new apartment purchase rights. This last measure is one of many measures proposed by the current administration to address the over-heated residential housing market in Korea generally, and Seoul in particular, which has become a very contentious political issue in domestic Korean politics in recent years.
Improving the taxpayer experience
Several measures are being implemented to improve the taxpayer experience. Firstly, tax penalties for minor cases of taxpayer negligence are being reduced or waived entirely. For late tax payments worth less than 1.5 million Korean won (USD 1,300), late payment penalties are being waived altogether. In addition, the amount of late payment penalties is going to be reduced, in line with prevailing market interest rates.
Currently, taxpayers are allowed to claim input tax deductions if a VAT invoice is issued within six months of the due date of the VAT return for the period in which the relevant supply was made. This time limit is going to be extended to twelve months.
R&D
R&D tax credits are also being expanded under the revision bill. Tax credits for R&D, currently ranging from 20-40% depending on the size of the business and particular industry sector, are going to be increased by 10% across the board, so the new range of tax credits will be 30-50%.
The sectors and technologies covered by the tax credits will also be expanded, to include, amongst others, certain technologies for reducing carbon emissions and clinical trials for pharmaceuticals.
Projected tax revenues
The package of measures being proposed is very extensive, and, of course, will come at a cost. The Korean government predicts that as a result of these measures, tax revenues will drop by approximately 1.5 trillion Korean won (USD 1.3 billion) per year, for the next five years. However, with the challenging economic conditions and increasingly unequal society which has been exacerbated by the COVID-19 pandemic, the tax revision bill for this year represents an ambitious attempt by the Korean government to grow the economy and promote fairness and equality.
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