Korea, Republic of
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 5% 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 (seven years in respect of cross-border transactions) 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, the term '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]); and transactions for offshore assets or offshore services between Korean residents.
- Seven years if a taxpayer fails to file a written tax base by the statutory due date (ten years in respect of cross-border transactions).
- 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) 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.
- In a bid to tighten control of offshore income and prevent cross-border tax evasion attempts, the law requires Korean residents or domestic companies to report their offshore financial accounts if the aggregate balance of these accounts exceed KRW 0.5 billion at the end of each month during the year. For these purposes, offshore financial accounts mean not only bank accounts and stock brokerage accounts, but also bonds, derivatives, fund transaction-related accounts, or cryptocurrency (or other virtual assets) trading accounts. A penalty will be imposed for each failure to comply with the reporting requirements. Where the under-reported or unreported amount exceeds a certain threshold (KRW 5 billion at present), up to two-year imprisonment or fines of no more than 13% to 20% of the under-reported or unreported amount will be imposed.
Law for reporting of specified financial transaction information
The Act on Reporting and Using Specified Financial Transaction Information is aimed at tackling tax fraud and evasion through financial transactions in borrowed names and suspicious cash transactions. Regulations of the Act 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 10 million or more (currency transaction report or CTR). In this case, transaction details must be reported within 30 days from the transaction date.
The regulations permit 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, includes CTRs in the amount of KRW 10 million or more.
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 6 months if there is a risk of evidence destruction, administrative proceeding, obstruction to progress, etc.