■ Value Added Tax (VAT) Scheme
Taxpayer subject to the VAT
A person who engages in the supply of goods or services independently in the course of business, whether for profit or not, is subject to the VAT in Korea. Taxpayers, including individuals, corporations, national and local governments, associations of local authorities, any bodies of persons, and unincorporated foundations of any other organizations, are generally subject to the VAT.
The taxable period is divided into two:
- First period: January 1 through June 30
(Preliminary period: January 1 through March 31)
- Second period: July 1 through December 31
(Preliminary period: July 1 through September 30)
Tax Return and Payment
- Preliminary Return and Payment
A taxpayer is required to file a return on the VAT base and the VAT amount payable (or refundable) to the appropriate tax office within 25 days from the end of each preliminary return period; the first preliminary taxable period is from January 1 through March 31, and the second preliminary taxable period is from July 1 through September 30.
- Final Return and Payment
A taxpayer is required to file with the competent tax office a return on the VAT base and the VAT amount payable (or refundable) in respect of each taxable period within 25 days after the end of the taxable period concerned.
- Submission of a summary of the VAT invoices
A taxpayer is required to submit the summary of the VAT invoices classified by customer for both output VAT and input VAT at the time of filing the preliminary return and the final return.
A taxpayer who issued electronic VAT invoices is required to submit electronically an electronic VAT invoice list by the next day of issuing date.
- Filing and payment
Each business place should be registered with a district tax office, issue the VAT invoices, file the VAT return, and make VAT payment on a business place basis.
However, in the case where a taxpayer has two or more business places, the taxpayer may pay the entire VAT at the main business place with an application to the competent tax office having jurisdiction over the main business place.
Furthermore, if a taxpayer applies for the single taxpayer registration, its head office may register itself and its branches with its district tax office by a single tax registration number, and issue their VAT invoices with such single tax registration number. In this case, the head office will file the VAT return and make the VAT payment for itself and its branches.
■ Retirement Pension Plan in Korea
Under the Korean Labor Standards Act (LSA) and the Employee Retirement Benefit Security Law (ERBSL), an employer with five or more employees shall be allowed to convert the current lump-sum severance pay scheme to retirement pension scheme where an employee may receive retirement benefits in the form of pension. Under the retirement pension scheme, employees will receive pension benefits when they reach the age of 55 and certain amount of contribution has been deposited each month in a financial institution for 10 years or more.
In the case where a company changes from the existing severance pay scheme to the retirement pension scheme or makes changes in retirement pension scheme that are less beneficial to its employees, the company is required to obtain a consent from the majority of the employees in advance.
Retirement pension scheme is external funding schemes in which an employer deposits amount needed for severance payment to an external financial institution before employee's resignation or termination, and the external financial institution pays retirement benefits to resigned or terminated employees in a lump-sum or annuity.
Companies can select either Defined Benefit (“DB”) plans and/or Defined Contribution (“DC”) plans under the consent of the majority of employees. The following table summarizes the characteristics of DB and DC plans:
Required reserve amounts
more than 60% of the total employees' severance benefit
more than 1/12 of the latest annual salary
Risk bearer & beneficiary (*)
30 day average salary x service period
Varies depending on investment performance
annuity or lump-sum
(*) Bearing responsibility of fund operation results.
According to the Korean GAAP, to recognize expenses during service periods, statutory severance pay provisions should be fully accrued at the end of each fiscal year. On the other hand, under the CITL, the statutory severance pay provision can be deducted only up to a certain percentage of the estimated statutory severance pay, which was 10% of the estimated statutory severance pay for FY2014. This deductible limit will be decreased by 5% each year down to a zero % in 2016. From FY2016, the statutory severance pay provisions will not be allowed as deductible expenses’ for corporate income tax purposes. Therefore, to enjoy additional tax deduction, contribution to a retirement pension plan can be considered.
From corporate tax perspective, a company can minimize corporate tax payment by contributing towards the retirement pension plan and taking benefit of tax deduction for corporate income tax purpose. However, such benefit is only a timing difference, and over the span of whole employment period, the tax burden will eventually be the same as the disallowed severance pay provision will eventually be captured at termination of employee and allowed as deductible expenses for corporate income tax purposes.