Tax Reform in 2010
The 2010 revision is aimed at creating jobs and supporting the low-income class. Although the Korean economy posted a 7.6 percent growth in the first half of 2010, the fruit of the economic performance has not trickled down enough to the real economy. Against this backdrop, the Korean government prioritizes creating jobs and supporting the working class in revising the tax system in 2010: Corporations creating jobs are given tax incentives, and non-essential tax exemptions and reductions are lifted to improve fiscal situation as there have been worries over narrowing tax base and increasing welfare spending with the coming of an ageing society. In addition, the government revises the tax system in a way to avoid tax evasion.
Highlights of Tax Reform in 2010 are as follows:
(a) Supporting job creation
i) Temporary Investment Tax Deduction system is abolished and is replaced by a tax policy that facilitates job creation. Tax incentives to investment is given on the basis of the number of people hired rather than on the basis of the amount of money invested.
ii) Ceilings on tax support for regional special districts and foreign investment companies are set at around 50percent~70percent of the investment amount. In the cases where those districts and companies increase employment, the ceilings increase up to 20 percent additionally.
iii) Industries with high employment inducement effect including cleaning, security, market and public opinion survey, and personnel supply services are added to the list of SMEs eligible for tax support.
iv) Companies that close down business in foreign countries and return to Korea to establish a new business receive income and corporate tax deductions of 100percent for the first 3years and 50percent for the next 2years.
(b) Supporting low & middle income class
i) Withholding tax rate for day laborers is lowered from 8percent to 6percent to increase their real income.
ii) To stabilize the income of elderly and retired agricultural workers and to support farm growth, the expiration of transfer tax deduction for self-owned farmland that is eligible for Management Transfer Subsidy is extended from the end of 2010 to the end of 2012.
iii) The expiration of the additional tax deductions for sales by credit cards is pushed back from the end of 2010 to the end of 2012 to reduce the tax burden on small-to-medium businesses including accommodations and restaurant businesses. And, the expiration for the additional tax deduction for deemed input VAT in restaurant businesses is also extended until the end of 2012.
iv) To encourage mutual support between large enterprises and SMEs and support stability of SMEs, a new tax deduction system (7percent) for contributions to the Mutual Support Guarantee Fund is created.
(c) Supporting sustainable growth
i) Investment tax deductions for R&D in the fields of new growth engines and fundamental technologies, including LED applications, biopharmaceuticals, and medical instruments are expanded to a level much greater than general R&D investment.
ii) Tariff rate for 46 primary raw materials and components related to new growth engine industries is reduced, while the 50percent tariff rate deduction for digital TV broadcast equipments imported by broadcasting businesses is extended from the end of 2010 to the end of 2012.
iii) Tax support for low carbon, green growth technologies is increased, with related technologies including carbon reduction and environment-friendly vehicles becoming eligible for foreign investment tax deduction.
iv) The expiration of tax support for corporate structural reform is pushed back 2years to the end of 2012 from the end of 2010 to enhance the competitiveness of the private sector through structural reform.
v) Additional tax deductions for multiple children are expanded to encourage child birth, where families with two children receive a tax deduction of 1 million won (previously 500,000 won), and an extra two million won per child in excess of two (previously 1,000,000 won).
vi) Tax benefits concerning retirement pension increase, with pension exemptions being increased from 3 million won to 4 million won.
(d) Improving fiscal situations
i) Tax exemptions and reductions are lifted or revised when their purposes have been achieved, or their effect is proved not satisfactory.
ii) Individual consumption tax exemption for luxurious restaurants is abolished.
iii) Tax exemptions for dividend yields from stocks owned for more than three years expire by the sunset provisions.
iv) VAT is newly adopted to aesthetic plastic surgeries, veterinarian treatment, and private educational institutions for adults.
Korean Taxation 2013. Ministry of Strategy and Finance, 30 Sep. 2013. Web.