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South Korea: South Korea's Tax Policies Under Fire

Tuesday, 13 August 2013   (0 Comments)
Posted by: Author: Mary Swire
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Author: Mary Swire

The Park Geun-hye Government has issued its framework for South Korea's middle to long-term tax policies, through which it hopes to "normalize" the country's tax system, but has already become embroiled in criticism over its individual income tax measures in the recently-issued 2013 Tax Revision Bill.

Over the next five years, the Government will look to make tax burdens "more equitable," while also raising the total burden marginally (from 20.2 percent of gross domestic product (GDP) in 2012 to an expected 21 percent in 2017) in order to raise the funds required for implementing President Park's promised increased welfare spending.

It is planned that additional revenue will be generated by broadening the tax base, such as through modifying tax exemptions and reductions, and exposing the underground economy, but not through any increases to tax rates.

It has been noted, for example, that South Korean individual income tax revenue was only 3.6 percent of GDP in 2010, ranking 30th out of the 32 OECD countries, and only about 37 percent of earned income is taxed due to various tax exemptions and deductions. Therefore, to impose the optimal tax burden according to a taxpayer's income, and to expand the tax base, income tax will be reformed by modifying tax deductions and taxing income that has been tax-exempt.

Similarly, while South Korea's overall consumption tax revenues were around average, its value added tax rate (VAT), at 10 percent, was lower than the OECD average of 18.7 percent. Nevertheless, rather than increasing tax rates, the consumption tax base will be expanded by modifying tax exemptions, reductions and deductions within both VAT and individual consumption tax.

South Korea’s corporate tax revenue was 3.5 percent of GDP in 2010, the 5th highest in the OECD. In the future, it is intended to construct a more growth-friendly tax system to boost corporate competitiveness and to tailor it according to corporate size and stage of development, by adjusting non-taxable items, tax exemptions, reductions and deductions.

Finally, South Korea's property tax revenue was 2.9 percent of GDP as of 2010, the 7th highest in the OECD, and the gift and inheritance tax's highest bracket, at 50 percent, tied with Japan for the highest rate in the OECD. The Government will promote the lowering of taxes on property transactions, together with the optimization of taxes on the real estate holdings, and will improve the gift and inheritance tax, in order to rectify imbalances and boost economic efficiency.

However, the Government's initial changes to individual income tax in the 2013 Tax Revision Bill, whereby it is proposing to apply tax deductions to taxes owed instead of income, and to restructure tax thresholds, have come in for some criticism.

The Government has been accused of designing the changes so as to extract additional revenue from salaried workers, said to be an easy target with ascertainable taxable earnings. It is calculated that around 4.34m people, 28 percent of workers, will see their tax burden increase next year under the proposals.

For example, those individual taxpayers with annual earnings from KRW40m (USD36,000) to KRW70m will have to pay an average KRW160,000 more in taxes, and the figure will rise to KRW330,000 and KRW980,000 for the income brackets of KRW70m-KRW80m and KRW80m-KRW90m, respectively. The highest annual incomes, above KRW300m, will pay some KRW8.5m more.

The Government has stressed that the measures are structured to reinforce tax revenues while promoting equality in taxation and enhancing income redistribution, as low income families with earnings below KRW40m will pay less tax. However, with the Bill requiring parliamentary approval, opposition parties are looking to attack it on the grounds that it breaks Park Geun-hye's promise not to raise taxes made during her presidential campaign.



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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