PIT will be assessed for one year from 1 January to 31 December. If a resident should move out of the country, relocating the domicile or residence, the PIT shall be imposed for the period from 1 January to the date of departure from the country.
A resident with global income, retirement income and capital gains is required to file a return on the relevant tax base for the tax year. The return is required to be submitted even if there is taxable income but no tax base or a deficit in the particular year.
An individual income tax return is to be filed and the income tax paid during the period from 1 May to 31 May of the year following the tax year concerned except for certain specified cases. If a taxpayer fails to fulfil these obligations, a penalty tax shall be imposed.
Class A wage and salary earners who receive other income, such as interest, dividends, property or Class B salary income, which are not subject to periodic income tax withholding, must file a tax return on their composite income. For certain types of interest and dividends that are subject to tax withholding at source, the amount withheld is considered to be the final tax and the income may be excluded from total taxable income.
Expatriates who receive only Class A salary income and/or retirement income are not required to file a tax return prior to leaving Korea but to submit the documents necessary for the year-end settlement to their employer. However, expatriates who receive income other than Class A salary income shall file their tax returns prior to leaving Korea for the period from 1 January to the date of departure from Korea.
Payment of tax
A taxpayer who receives only Class A employment income and/or Class A retirement income is generally not required to file an annual individual income tax return. Employers are required to withhold income taxes at source on a monthly basis, finalise their employees' tax liability, and file the final tax settlement receipt with the tax authorities no later than 10th of March of the following year. On the other hand, the employers are not required to withhold Korean taxes at the time of payment of Class B income; however, the individual is required to declare this income annually and pay income taxes thereon on a voluntary basis.
Alternatively, the individual may elect to pay Class B income taxes through a licensed taxpayers’ association, which collects and remits such taxes on a monthly basis. Taxpayers who join such an association are eligible to receive a 10% credit of income tax payable. In case where an annual tax return is required, the relevant taxes shall be paid with the return due by 31 May of the following year.
Tax audit process
The tax authority in Korea is the National Tax Service (NTS). Audit targets are picked by random sampling. As part of the government’s commitment to identify and tax the underground economy, a continued focus and close watch is placed on offshore tax avoidance and evasion, hidden assets of high net-worth individuals or businesses under borrowed names, suspected wealth transfers, and shadow cash transactions.
Statute of limitations
The time limits to assess national tax are five years from the date when the national tax is assessable, unless otherwise are specified by the Basic National Tax Act. For example:
- Ten years with respect to an inheritance tax or gift tax.
- Ten years, if a taxpayer evades any national tax, or has it refunded or deducted, by fraudulent or other unlawful means.
- 15 years for fraud or unjustifiable means involving cross-border transactions. For this purpose, a 'cross-border' transaction means when a party or parties to the transaction include(s) non-resident(s) or foreign corporation(s) (excluding domestic business places of non-resident[s] or foreign corporation[s]).
- Seven years, if a taxpayer fails to file a written tax base by the statutory due date.
- 15 years, in case of the non-compliance with inheritance or gift tax return obligation or fraudulent or omitted filing or such tax or refund or deduction of such tax by unlawful means.
Topics of focus for tax authorities
- The NTS established the Offshore Compliance Enforcement Center (OCEC) in November 2009 to prevent and investigate offshore tax evasion. The importance for the exchange of information among nations has become a major issue for the individual income tax administration.
- Korea has participated in the global initiatives led by the Organisation for Economic Co-operation and Development (OECD) and G20 to tackle offshore tax evasion and avoidance by concluding agreements to exchange tax information with an increasing number of countries.
Since being introduced at the end of 2010 in a bid to tighten control of offshore income and prevent cross-border tax evasion attempts, the requirements for reporting offshore financial accounts have been tightened. The law requires Korean residents or domestic companies to report their offshore financial accounts if the aggregate balance of these accounts exceed KRW 1 billion at the end of each month during the year. For these purposes, offshore financial accounts mean not only bank accounts, stock brokerage accounts, but also bonds, derivatives, or fund transaction-related accounts.
Effective from reporting requirements in 2015, the penalty shall be raised. If the unreported or under-reported amount exceeds KRW 2 billion or less, a 10% penalty (up from 4%) will be charged on the amount. If the unreported or under-reported amount is more than KRW 2 billion and does not exceed KRW 5 billion, a 15% penalty (up from 7%) will be charged on the amount in excess of KRW 2 billion. If the unreported or under-reported amount exceeds KRW 5 billion, personal information (names, addresses, etc.) of the account holders (including company representatives) will be disclosed to the public or a two-year imprisonment will be imposed from 2014, in addition to penalties. In this case, penalties include 20% (previously 10%) of the unreported or under-reported amount in excess of KRW 5 billion. In addition to the penalty for non-reporting or under-reporting, a 20% penalty shall be charged in case the taxpayer cannot prove the source of fund or submits false information. For late reporting or revised reporting, 10% to 70% penalty reduction shall be available, depending on the report timing. The reward for whistleblowers of non-compliance has also increased from KRW 1 billion to KRW 2 billion.
Law for reporting of specified financial transaction information
Regulations of the Act on Reporting and Using Specified Financial Transaction Information were amended to tackle tax fraud and evasion through financial transactions in borrowed names and suspicious cash transactions.
Effective 14 November 2013, the amended regulations require financial institutions to report to the Korea Finance Intelligence Unit (KoFIU): (i) suspicious transactions where there are reasonable grounds to suspect that the assets received with respect to the financial transaction are illegal or that a customer conducting the financial transaction is involved in money laundering activities (suspicious transaction report or STR) and (ii) daily cash transactions by a trader totalling KRW 20 million or more (currency transaction report or CTR). In this case, transaction details must be reported within 30 days from the transaction date.
The amended regulations expand the rights of the NTS to access data held by the KoFIU in instances where there is evidence of alleged tax evasion and where KoFIU data is used to collect taxes in arrears. In instances that are deemed more closely related to alleged tax evasion, the Act also requires the KoFIU to disseminate information to the NTS and the Customs Service. In addition, the scope of KoFIU raw data disseminated to law enforcement agencies, including the NTS, is expanded to include CTRs in the amount of KRW 20 million or more. Before the amendment, the dissemination scope was limited to STRs as specified in the law and data obtained from foreign FIUs.
In a bid to prevent possible abuse of FIU data, the Act imposes the reporting requirement for the KoFIU to the concerned CTR traders with respect to CTR raw data disseminated to law enforcement agencies, including the NTS and the Customs Service. However, the reporting may be postponed for up to one year if there is a risk of evidence destruction, administrative proceeding, obstruction to progress, etc.