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Taxing times for expat earners

Along with a new year, January heralds a new nuisance – end-of-year tax settlements.

The Korean tax year is the same as the calendar year, and for most employees, tax is deducted from monthly pay based on estimates, and the end-of-year settlement is used to make corrections to that estimate.

However, some deductions are not available to foreign taxpayers, and what counts and does not is not always obvious to expats.

(123RF)
(123RF)

Exemptions are available for recorded cash and card spending, dependents without an income and spending on education, health care and pensions, among other things. Cash spending must have been registered beforehand.

To access these, taxpayers can get a digital certificate (“gongin injeungseo”) from a local district office or bank, and log in to hometax.go.kr.

Some foreign taxpayers may face some complications, however. Overseas income is exempt for the first five years of residence in Korea, but taxable after that. This figure includes any investment income, and other extra income must also be reported.

Christie Lee, a tax consultant who runs www.taxinkorea.com, said tax paid overseas on this income could be deducted.

She added that overseas-based pension plans are not deductible.

“There is no Korean tax advantage for pensions held overseas. It is not a deductible expense when you calculate your payable Korean taxes,” said Lee.

“However, I saw many cases in which expats come to Korea to work and continue to pay into it while they are here, so they can get the full benefit (if they maintain regular payments) when they are back in their home country.”

The National Tax Service offers several services to help expatriates file their taxes, including “The Easy Guide for Foreigners Year-end Tax Settlement” – a guide on tax calculations, exemptions and deductions available in English and Korean.

There is also an English-language help line and online consultation service, and an online tax settlement calculator to help foreign taxpayers understand what to expect.

Korean income tax is calculated by totaling up all income, to which certain allowances are applied, and reducing the total taxable amount. For example, there is a personal allowance of 1.5 million won, and a certain portion of salary income is discounted, depending on earnings.

This taxable amount is then taxed using a progressive rate – the more you earn, the higher percentage you pay.

The tax calculations are only applicable to income tax, for which severance pay, or “toejikgeum,” does not apply. Severance pay is taxed separately, and at a typically lower rate, according to Lee.

“There is tax on severance pay called ‘toejik sodeukse’ which is usually much lighter than normal salary income tax,” she said.

On an 8 million won monthly salary, related salary taxes are 1,111,010 won, which is a 13.8 percent tax rate, she explained. But on 8 million won in severance pay after working for around five years, related severance income taxes are 217,800 won, which is a 2.72 percent tax rate.

The NTS was keen to stress that the rules on tax residency had changed since last year. While a full year of working or residence in Korea was required to be considered a tax resident in 2014, the law had changed to consider those who had spent 183 days or more of 2015 living and working in Korea as resident.

The organization also pointed out that there were some tax benefits for foreign taxpayers, such as a 17 percent flat tax rate and two-year exemptions for teachers and engineering-related professionals.

However, these benefit relatively small numbers of people. The flat tax rate only benefits very high earners – for example, with salaries well over 100 million won. Teachers who are from Canada or have been in the country more than two years are not eligible for the exemption.

In addition, some tax benefits not are available to foreigners.

The biggest of these is rent payments, 10 percent of which is deducted from many Koreans’ tax bills. This is because the benefit is only available to people with status as “sedaeju” – often translated as “head of the household.” Under Korean law, foreign residents cannot be considered the head of their household, even if they are the only people in it.

Consequently, many expat taxpayers pay hundreds of dollars more in tax than they would if they were Korean.

Asked for clarification, the NTS said it was the executor of tax policy, and therefore not in a position to explain why these exemptions are not available to foreign residents.

Meanwhile, the Finance Ministry said foreign residents are not given the rent deduction because they are a lower priority than Koreans.

“The law (granting those paying monthly rent tax deduction) is designed to ease ordinary people’s financial burden and give aid to those with low income. The law puts Korean suffering financial problem to top priority,” said Cha Hyun-jong, an official at the Finance Ministry.

The Easy Guide for Foreigners Year-end Tax Settlement and other NTS support is available at www.nts.go.kr/eng.

By Paul Kerry (paulkerry@heraldcorp.com)
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