[2021 Tax Revision] Reduced Penalty Burden Even If Taxes Are Overdue... Collection of Delinquent Taxes Starts from 1.5 Million Won Instead of 1 Million Won

Ministry of Economy and Finance Announces '2021 Tax Law Amendment'

The entrance of a room soju bar in Sangmu District, Seo-gu, Gwangju Metropolitan City, which suffered significant business damage due to COVID-19. (Image source=Yonhap News)

[Sejong=Asia Economy Reporter Moon Chaeseok] The government has presented "tax support for the underprivileged and vulnerable groups" as the basic direction of this year's tax law amendment. Accordingly, it has decided to reduce the burden of additional taxes imposed when taxpayers pay taxes late. The threshold for imposing additional taxes on overdue payments has been raised. Self-employed individuals will also be given opportunities to receive tax credits even if they make errors in tax calculations.

To eradicate habitual tax avoidance practices by domestic and foreign corporations through establishing liaison offices or using Controlled Foreign Corporations (CFCs), regulations will be strengthened. Additionally, in line with the financial investment income taxation system to be implemented from 2023, taxpayers will be able to choose the most advantageous method among tax exemption, separate taxation, or financial investment income taxation when paying taxes on fund dividend income.

The Ministry of Economy and Finance announced the "2021 Tax Law Amendment" containing these details on the 26th.

Amid soaring prices... Regulations eased for underprivileged people who pay taxes late

On the afternoon of the 9th, when the government announced its plan to raise the 'social distancing' level to the highest stage 4 in the metropolitan area for two weeks starting from the 12th, a restaurant in Myeongdong, Jung-gu, Seoul is shown. A notice of scheduled electricity usage contract termination is posted. (Image source=Yonhap News)

Until now, the government imposed additional taxes if even 1 million KRW was overdue due to late tax payment. However, considering the hardships faced by the underprivileged due to the COVID-19 pandemic and soaring prices, the regulation has been relaxed to impose additional taxes starting from 1.5 million KRW in overdue amounts. According to the Ministry of Economy and Finance, the threshold for imposing additional taxes on national taxes was raised from 500,000 KRW to 1 million KRW in 2008, and for customs duties in 2010, and the "1 million KRW" rule has been applied for over 10 years. They judged that it is now time to change this.

Self-employed individuals who submit tax invoices with details different from actual transactions will be allowed to claim input tax credits. Although this was impossible under the principle, the law will be applied flexibly. If a tax invoice is issued later than the supply date of goods or services, input tax credit was allowed if the invoice was issued within 6 months after the final tax return deadline; this period will be extended to 1 year. Previously, input tax credits were allowed only when VAT was incorrectly paid during direct or consigned supply of goods between transaction parties; going forward, this principle will also apply to services.

Furthermore, when a tax invoice is incorrectly submitted due to an error, the deadline to correct the invoice will be extended from the final tax return deadline to one year after the deadline.

Eradicating habitual tax avoidance... Mandatory submission of liaison office data by foreign corporations

To eradicate habitual tax avoidance, the government has newly established regulations requiring foreign corporations to mandatorily submit status data of their domestic liaison offices. Many foreign corporations have disguised themselves as operating fixed establishments such as factories, branches, or garages domestically by setting up liaison offices in Korea to reduce tax burdens. Foreign corporations will now be required to submit information such as representative personal details, foreign headquarters status, domestic clients, and other domestic branch statuses to tax authorities.

Regulations on tax avoidance by domestic establishments will also be strengthened. There have been cases where CFC taxation was abused by accumulating excess profits in subsidiaries established overseas with low tax rates, then changing the subsidiary’s governance structure under the pretext of business restructuring to avoid taxes. This will be regulated. Tax avoidance using CFCs refers to actions where domestic corporations and related overseas investment corporations retain income such as interest, dividends, and royalties to evade taxation that should be paid domestically.

Fund dividend income tax can be paid by the most advantageous method

The current tax special system for fund dividend income, which operates through tax exemption and separate taxation, will be maintained even after the implementation of financial investment income taxation in 2023. Accordingly, the government will allow taxpayers to pay financial investment income tax if the tax amount is lower than that under tax exemption or separate taxation.

For example, if the financial investment income from a New Deal Infrastructure Fund is 2 million KRW, financial investment income taxation is more advantageous for the taxpayer. Under separate taxation, the tax amount would be 180,000 KRW, but under financial investment income taxation, the taxpayer would pay 0 KRW. Conversely, if the financial investment income from the same fund is 10 million KRW, separate taxation becomes more advantageous. The taxpayer would pay 900,000 KRW under separate taxation but would have to pay 1.5 million KRW if choosing financial investment income taxation.

This content was produced with the assistance of AI translation services.