This report covers several tax-related changes introduced in South Korean legislation currently under parliamentary review that affect particularly individuals with high income.
The 2017 Tax Law Amendment Bill (“the Bill”) announced by South Korea’s government on 2 August 2017, is currently under review in the National Assembly and is expected to be finally approved toward the end of year.
In this GMS Flash Alert, we provide a summary of the key features of the Bill
that could impact international executives and their multinational employers.
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.
Additionally, employers may need to make the necessary payroll adjustments and update hypothetical taxes for tax equalized assignees.
In order to mitigate surprises and risks, the changes we describe in this newsletter with respect to tax rate changes, withholding tax rates, and foreign account financial reporting should be taken into account when evaluating international assignments both into and out of South Korea.
Currently, one of the criteria for tax residency is having a domicile in South Korea for 183 days or more starting from two years before the end of the relevant year. However, effective from 1 January 2018, this rule is to be loosened to 183 days or more in one tax year with a view that this will induce more investment in the country from South Korean nationals residing abroad.
Effective from 1 January 2018, the new top marginal income tax rate of 42 percent (46.2 percent including local income tax) will be applied to taxpayers with an income tax base in excess of KRW 500 million and the second top income tax rate of 40 percent (44 percent including local income tax) will be applied to tax bases in excess of KRW 300 million up to KRW 500 million. This step is intended to improve income redistribution in the country by asking those with higher incomes to pay a greater share of taxation.
Currently, the highest marginal income tax rate is 40 percent (44 percent including local income tax) which is applicable to tax bases in excess of KRW 500 million and the second highest marginal income tax rate is 38 percent (41.8 percent including local income tax) which is applicable to tax bases in excess of KRW 150 million 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, according to the Bill, 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 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
(currently, KRW 3 billion).
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-added industries, 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.
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 1 billion on the last day of the month during the year. However, effective from 1
January 2018, the balance that triggers the reporting obligation is being reduced to KRW 500 million. Penalties can be imposed for non-compliance.
A foreign resident who has or had his/her domicile or place of residence in the Republic of Korea for not more than five years in total starting from 10 years prior to the end of the relevant year is exempt from South Korean FBAR reporting.
KRW 1 = EUR 0.00074
KRW 1 = USD 0.00088
KRW 1 = GBP 0.00676
KRW 1 = AUD 0.0011
KRW 1 = JPY 0.096
The information contained in thisnewsletter was submitted by the KPMG International member firm in South Korea.
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