We summarized below some of the major tax law changes for 2013 to keep you updated. All of the tax law changes we discussed below came into force for the fiscal year starting, or income earned, on or after January 1, 2013.
1. Corporate Tax Law (CTL)
■ Reduction of tax limit on entertainment expenses for specially related parties (CTL-Article 25)
In an effort to discourage companies from incurring entertainment expenses for specially related parties, the applicable rate to the revenue (defined) from specially related parties to calculate tax limit on entertainment expenses is reduced from 20% to 10% of the tax limit for ordinary entertainment expenses.
2. Individual Income Tax Law (IITL)
■ Changes in formula for retirement (severance) income tax liability to increase tax burden (IITL-Article 55)
In order to promote receiving retirement pay in a form of pension payment rather than in lump sum for stable settlement and development of the retirement pension schemes, retirement income tax burden is increased to the level higher than the minimum tax rate on pension income.
□ Retirement income tax liability
(computed in the order below)
①tax base / years of service
②①xtax rates (6%~38%)
③②x years of service
①tax base x5/ years of service
③(②/5) xyears of service
■ Reduction in threshold of financial income for comprehensive taxation (IITL-Article 14)
In order to enhance effectiveness and fairness of taxation, the threshold of financial income (interests, dividends, etc) for comprehensive taxation is reduced from 40 million Won to 20 million Won. Any taxpayer whose financial income exceeds 20 million Won per year must file a global comprehensive income tax return together with necessary tax payment by the end of May in the following year.
3. Value-added Tax Law (VATL)
■ Expansion of input VAT deduction with regard to VAT exempt transaction (VATL-Article 17)
Before revision of the VATL, if a purchaser receives a regular VAT invoice (including 10% VAT) for a VAT exempt transaction, the input VAT therefrom may not be deductible, and a seller should issue a revised VAT invoice and file an amended VAT return for a refund of the output VAT.
However, under the revised VATL, such input VAT shall be deductible in the case where it is substantiated that the seller has fully paid out the output VAT. The seller does not need to issue a revised VAT invoice nor file an amended VAT return for a refund of the output VAT.
4. International Tax Coordination Law (ITCL)
■ Clarification of withholding tax rate on payment for the use of industrial, commercial or scientific equipment (ITCL-Article 29)
Under the provisions of CTL, a payment for the use of industrial, commercial or scientific equipment (the “payment”) is classified as rental income, whereas the payment is treated as royalty income under a majority of tax treaties. Before revision of the ITCL, the payment was subject to the lower of the withholding tax rate on rental income (2%) pursuant to the provisions of CTL and a reduced withholding tax rate (0~15%) under the relevant tax treaty according to the existing National Tax Service (“NTS”) ruling.
Through revision of the ITCL, if the payment is classified as royalty income under the relevant tax treaty, the payment shall be subject to the lower of the withholding tax rate on royalty income (20%) pursuant to the provisions of CTL and a reduced withholding tax rate (0~15%) under the relevant tax treaty.
5. Special Tax Treatment Control Law (STTCL)
■ Introduction of limit on total income deductions (STTCL-Article 132-2)
In order to prevent high income earner from receiving excessive income deductions, a limit on gross income deductions has been newly established.
□deduction limit :25 million Won
□deduction items subject to deduction limit :
Insurance premiums, medical expenses, education expenses, housing funds, designated donations, housing related savings, investments on employee stockholders association or venture capital association, and credit card expenditures
□ deduction items not subject to deduction limit :
Personal deductions, earned income deductions, four major social security insurance premiums, pension savings, statutory donations, and the “disabled” related expenses