This report covers several important changes to South Korea’s individual income tax system, including top rates, a new flat rate for service fees paid, and offshore asset reporting.
South Korea’s National Assembly approved the 2018 Tax Law Amendment Bill early this year.1 The Bill (hereinafter, “revised law”) had been announced by the government on 2 August 2017.2
In this GMS Flash Alert, we provide a summary of the key features of the revised law that could impact international executives and their multinational employers, including changes to:
Notwithstanding the loosening of the criteria for tax residency, tax costs and budgeting for assignments to and from South Korea could be affected by the modification in income tax rates (which we discuss further below). Employers may need to make the necessary payroll adjustments and update hypothetical taxes for tax equalized assignees.
Under domestic income tax law, one of the criteria for tax residency was having a domicile in South Korea for 183 days or more that started from two years before the end of the relevant year. However, effective from 1 January 2018, this rule is loosened to 183 days or more in one tax year. The aim is to encourage more investment in the country.
Effective from 1 January 2018, the new top marginal income tax rate of 42 percent (46.2 percent including local income tax) is to be applied to taxpayers with an income tax base in excess of KRW 500 million.
The second top income tax rate of 40 percent (44 percent including local income tax) is to be applied to tax bases in excess of KRW 300 million and up to KRW 500 million. This step is intended to improve income redistribution in the country by imposing higher taxation on those with higher incomes.
Until 2017, the highest marginal income tax rate was 40 percent (44 percent including local income tax) which was applicable to tax bases in excess of KRW 500 million. The second highest marginal income tax rate was 38 percent (41.8 percent including local income tax) which was applicable to tax bases in excess of KRW 150 million and up to KRW 500 million. (For prior coverage of changes to the rates, see GMS Flash Alert 2017-006, 12 January 2017.)
Under certain conditions, a South Korean company is required to file a payroll withholding tax return at a flat rate of 17 percent (18.7 percent including local income tax) on the service fee payable to a foreign entity dispatching its employees. (For prior coverage, see GMS Flash Alert 2016-057, 6 May 2016.) However, with the new legislation, the withholding tax rate is to be increased to 19 percent (20.9 percent including local income tax) effective from 1 July 2018.
In addition, the conditions that apply to South Korean companies that must comply with the rules are being extended since the government wishes to exercise greater fiscal control over expatriates subject to tax in the country. The conditions are:
1) The annual service fee payable to the foreign entity exceeds KRW 2 billion (KRW 3 billion until 30 June 2018).
2) The business of the South Korean entity falls under one of the following “mandatory” industries: aviation transportation, construction, professional, scientific or engineering services and the following newly-covered industries effective from 1 July 2018, ship-building and financial services.
3) Prior year’s gross sales of the South Korean entity are KRW 150 billion or more, or the prior year’s total assets are KRW 500 billion or more.
Effective from 1 January 2018, tax residents in South Korea that have financial accounts opened with foreign financial institutions are required to file a Report of Foreign Bank and Financial Accounts (FBAR) by 30 June if the aggregate balance in those foreign financial accounts (securities, derivatives, or other financial instruments) exceeds KRW 500 million (it used to be KRW 1 billion until 2017) on the last day of the month of the year.
1 To see “Main Contents of the Revised Tax Act to Be Enforced in 2018, and Key Areas of Deliberation,” (in English), click here.
[KRW 1 = GBP 0.000672 | KRW 1 = USD 0.0009245 | KRW 1 = EUR 0.0007566 | KRW 1 = AUD 0.0019]
The information contained in this newsletter was submitted by the KPMG International member firm in South Korea.
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