Guide to the Year-end Tax Settlement 2011 for Foreigners

Transcription

1 Q Guide to the Year-end Tax Settlement 2011 for Foreigners With the Year-end Tax Settlement 2011 underway, there is a growing interest in the details of the Year-end Tax Settlement, among foreign workers working in korea. * The number of foreigners who filed the Year-end Tax Settlement 344 thousand (attributable to the year 2008) -> 365 thousand (attributable to the year 2009) -> 403 thousand (attributable to the year 2010) As the schedule of the Year-end Tax Settlement 2011 is the same for both Korean natives and foreign workers, foreign workers need to familiarize themselves with various items for deductions and prepare for the Year-end Tax Settlement. Major schedule for Year-end Tax Settlement 2011 Prepares supporting documents for deductions (Employee) Jan. 15~Jan 25, 2012 Submits the final return of deductions(employee Employer) Jan. 25~Feb. 10, 2012 Issues a withholding tax receipt for Year-end Tax Settlement (Employer Employee) By the end of Feb Receives a refund from Year-end Tax Settlement(Employee) By the end of Mar Foreign workers are entitled to a special tax treatment including a 15% flat rate taxation, and foreign engineers tax exemption treatment, while they are not qualified for deductions for some type of expenses.

2 - So, foreign workers need to understand the different tax treatments between the Korean natives and foreign workers when they prepare for the Year-end Tax Settlement. The NTS is providing various taxpayer services to help foreign taxpayers who are not acquainted with Korean taxation and having a language barrier. The services available include Easy Guide for Year-end Tax Settlement which is offered both in Korean and English, and an exclusive consultation service for foreign taxpayers at a district tax office. Key Instructions for the Year-end Tax Settlement for Foreigners The way of conducting the Year-end Tax Settlement is the same for Korean natives and foreign workers with regard to general deduction items. However, foreign workers are not entitled to deductions for housing fund, interest payment of loans for long-term housing mortgage, and home purchase savings. For a non-resident foreign worker, the area of deduction is limited. For example, only personal deductions for the taxpayer

3 himself/herself such as basic deduction, and deduction for pension contributions are allowed. Special deductions for medical expenses, educational expenses, etc. and most deductions are not allowed for non-resident foreigners. * If a foreigner whose "domicile" is in Korea or whose occupation requires a "place of residence" in Korea of at least one year or more, he/she is deemed a resident of Korea. Otherwise, a foreigner is deemed a non-resident. Special tax treatment for foreign workers 15% flat rate : A foreign worker can choose to apply a 15% flat tax rate for his/her gross wage/salary (including nontaxable ). Foreign teachers : If a foreigner whose country of residence has a tax exemption provision for teachers/professors in its tax treaty with Korea meets the requirement for tax exemption, his/her paid for his/her teaching/research in the authorized school is exempt from tax for a certain period (usually not exceeding 2 years). Foreign engineers : If a foreign engineer who works on a technology-transfer contract or who works as a research worker

4 in a research institute provides his/her service in Korea, his/her wage/salary tax is exempted 50% for 2 years. * If a foreign engineer provides his/her first service in Korea, or provides service under the engineering technology license agreement on or before Dec. 31, 2009, the foreign engineer shall be fully exempt from taxation for five years. Services for Foreign Workers' Year-end Tax Settlement The NTS is providing various services for foreign taxpayers so that they may better understand the Year-end Tax Settlement. From this year, Easy Guide 2011 is revised and expanded, offered in Korean and English so that both foreign workers and their withholding agents may fully benefit from the book. * Resources Publication Easy Guide for Foreigners' year-end tax settlement 2011 The NTS offers the Automatic Calculation Service for the Yearend Tax Settlement at its English website. * Help Desk Quick Viewer Service Automatic Calculation Service for Year-end Tax settlement New English menu services are newly installed at the Year-end Tax Settlement website( to help foreign workers conducting the Year-end Tax Settlement conveniently

5 For foreigners with a language barrier, the NTS offers an exclusive consultation service for foreign taxpayers to help them take care of the Year-end Tax Settlement. Internet consultation : Help desk Q&A Tele-consultation service at the NTS Customer Satisfaction Center for Foreigners: Appendix 1. FAQ by Foreign Taxpayers on the Year-end Tax Settlement 2. Deduction Comparison between Resident & Non-resident 3. Calculation of Foreign Taxpayers Year-end Tax Settlement 4. Summary Table for the Year-end Tax Settlement 2011 Released on Thurs., Dec. 29, 2011 Drafting Division International Tax Resource Management Division, Director Jung, Kyung-suk Deputy Director Kang, Dong-hoon ( ) Appendix. 1 FAQ by Foreign Taxpayers on the Year-end Tax Settlement 1. If a foreign worker, who is a resident, has another source overseas, is he/she subject to the Year-end Tax Settlement for the aggregate of Korean source and foreign source?

6 For a foreign resident whose combined period of domicile or residence in Korea for the ten years immediately preceding the end of the relevant taxable period is five years or more, he/she is subject to the Year-end Tax Settlement for his/her combined earned. - For a foreign resident whose combined period of residing in Korea is less than five years, he/she will be taxed on his/her foreign-source only if the foreign-source has been paid in Korea or remitted to Korea. Relevant law : Article 3 and 20 of the Income Tax Act 2. Are medical expenses paid to an oversea medical institution deductible? Medical expenses paid to a medical institution located overseas are not deductible because medical institutions located overseas are not considered as a medical institution prescribed in the Article 3 of the Medical Service Act. Relevant law : Article 52 (1) 3 of the Income Tax Act and Article 110 of the Enforcement Decree of the Income Tax Act 3. If the medical expenses shown at the Simplified Year-end Tax Settlement website are less than the actual, how can a foreign worker claim deduction for the actual medical expenses?

7 If the Simplified Year-end Tax Settlement website ( does not show the full records of medical expenses spent by a resident worker, he/she can claim the deduction for his/her actual medical expenses by entering the omitted amount in line other record on the tax return for deductions and submitting supporting documents issued by hospitals or pharmacies. Relevant law: Article 52 (2) of the Income Tax Act 4. Are the education expenses deductible if a foreign taxpayer working in Korea paid educational expenses to a foreign education institution for children studying overseas? Educational expenses paid to a foreign education institution are not deductible because the foreign education institution located overseas is not qualified as private institution or sport facilities stipulated in the relevant Korean laws, such as the Infant Care Act, and the Act on the Establishment and Operation of Private Teaching Institutes and Extracurricular Lessons. Relevant law: Article 52 of the Income Tax Act, Article of the Enforcement Decree of the Income Tax Act 5. Are donations made by a resident foreigner to an overseas charitable organization deductible?

8 To get deduction for the donations a person made, the charitable organizations to which he/she made the donations should be registered in the charitable authorities in Korea or satisfy certain regulatory criteria. Relevant law: Article 34 of the Income Tax Act and Article 80 of the Enforcement Decree of the Income Tax Act 6. Can a foreign taxpayer claim a basic deduction for his/her lineal ascendents who do not live together? Deduction is allowed if the annual of a foreign worker s lineal ascendent meets the (gross annual not exceeding 1 million won) and age (60 years old or older) requirements for deduction, and the dependent is supported by the taxpayer. Relevant laws: Articles 50 and 53 of the Income Tax Act and Article 106 of the Enforcement Decree of Income Tax Act. 7. If a foreigner omitted some items for deduction in the Year-end Tax Settlement, can he/she get deduction thereof later? If items for deduction were omitted in the Year-end Tax Settlement, a foreign taxpayer can claim for correction of the originally filed tax return to the competent tax office in the filing period of global tax, May of the following year. They can

9 also claim for correction within three years since the period of earned wage/salary tax payment lapsed. Relevant law: Article 45(2) of the Framework Act on National Taxes 8. Can a foreign worker, who is a resident, claim deduction for his/her overseas credit card usage? Income deduction is not allowed for the foreign purchases made with credit cards. Relevant law: Article of the Restriction of Special Taxation Act 9. What are the general requirements for American teachers to be eligible for tax exemption? In general, the requirements for foreign teachers tax exemption differ by each tax treaty country. A foreign teacher needs to check the applicable tax treaty between Korea and US. For an American resident meeting the following requirements, he/she can be exempt from paying taxes on his/her wage and salary. - Inviting institution : Government, local governments or authorized educational institutions * Not includes private language institutions, English camps run by an English village, etc.

10 - Purpose of invitation : For the purpose of teaching/research at a university or an authorized educational institution - Purpose of visit : Primarily for the purpose of teaching or engaging in research, at a university or an authorized educational institution - Period of invitation : Not exceeding two years Relevant law: Article 20 (1) of the Korea-US Tax Appendix. 2 Deduction Comparison between Resident and Non-resident Foreigners Type Total wage & salary Resident Deductibility Including Foreignsource Non-resident Domestic-source Deductions for wage & salary Personal deductions Basic deductions (Self, spouse, dependent family) Additional deductions (Aged, disabled, qualified female, etc.) Additional deductions for multiple children Deductions for pension contributions, Special deductions etc. Insurance fees X Educational expenses X Medical expenses X Housing fund X X Note Article 119, Income Tax Act (Withholding Tax). 7 Self only Article 122, Income Tax Act Self-only Article 122, Income Tax Act X Article 122, Income Tax Act A foreigner is not deemed a householder.

11 Other deductions Tax credits, etc. Donations X Interest payment of loans for long-term housing mortgage Standard deduction X Pension savings, etc. X Membership fees for Small enterprises/small and micro businessmen association Home purchase savings X X Establishment funding of investment association Credit card usage X Long-term equity type savings X Workers in S./M enterprises which maintain X the same employment level Pension contributed by Emp- loyee stock ownership ass. Wage and salary Political funds X Deduction for members' withheld amounts by the taxpayer association Tax payment to foreign tax authorities X X X X X A foreigner is not deemed a householder. A foreigner is not deemed a householder. Deductible if joined in the association When joined and be withheld by the association Appendix. 3 Calculation of the Foreign Taxpayers Year-end Tax Settlement 1. Regular way of conducting the Year-end Tax Settlement Step 1 Gross wage/salary Annual wage/salary (-) non taxable = Gross wage/salary Non-table - Allowance for self-driving (\200 thousand/month) - Educational expenses related with job performance - Foreign source [\1 million(1.5million)/month] -Child care allowance for child aged 6 or under(\100 thousand/month), etc.

12 Step 2 Adjusted Wage/salary Step 3 Tax base Gross wage/salary (-) wage/salary deduction =Adjusted wage/salary Adjusted Wage/salary (-)Other deductions ㆍ Personal deduction ㆍ Pension premium deduction ㆍ Special deduction ㆍ Other deductions = Tax base Deductions for wage/salary Total wage/salary amount (\) Deduction 5 million or less Total wage/salary 80% More than 5 million and 15 million or less More than 15 million and 30 million or less More than 30 million and 45 million or less 4mio+(amount exceeding 5 mio 50%) 9mio+(amount exceeding 15mio 15%) 11.25mio+(amount exceeding 30mio 10%) More than 45 million 12.75mio+(amount exceeding 45mio 5%) Personal deductions - Basic deduction, additional deduction, deduction for multiple children Deduction for pension premium - Premium allotment paid by the taxpayer for National Pension, Public Officials Pension, etc. Special deduction and other deductions Special deduction 1Insurance premium 2Medical expense 3Educational expense 4Donation 5Standard deduction (\1 million) Other deductions 1Individual pension savings 2Pension saving 3Deduction for small enterprises and small commercial and industrial businessmen 4Investment amount of Small enterprises/small and micro businessmen association 5Credit card usage 6Deduction for employee stock ownership association contribution 7Long-term stock-invested savings 8Wage cut amount by small and medium enterprises which have maintained the same size of employment Max[(1+ +4),5] (1+ +8) Tax base (\) Rate Calculated tax amount Step 4 Calculated tax amount Tax base ( ) tax rate =Calculated amount tax Less than 12 million 6% Tax base 6% More than 12 million and 46 million or less 15% 720 thousand + (amount exceeding 12 million 15%) More than 46 million 24% 5.82 million + (amount exceeding 46 million 24%) and 88 million or less More than 88 million 35% 15.9 million + (amount exceeding 88 million 35%) Step 5 Determined tax amount Step 6 Tax payable/refundable Calculated tax amount (-)tax credit =Determined tax amount Determined tax amount (-)tax already paid =Tax payable/refundable Tax credit - EITC, taxpayer association tax credit, tax credit for political fund, etc. Tax already paid - Monthly withheld amount from wage/salary by the simplified tax withholding table or at a 15% flat rate 2. Year-end Tax Settlement by applying a 15% flat rate

13 Step 1 Annual wage/salary Step 2 Determined tax amount(=calculated tax amount) Step 3 Tax payable/refundable Including nontaxable Annual wage&salary ( ) 15% = Determined tax amt Determined tax amt (-)tax already paid =Tax payable/refundable -Allowance for self-driving (\200 thousand/month) -Educational expenses related with job performance -Foreign source [\1 million (1.5million)/month] -Child care allowance for child aged 6 or under(\100 thousand/month), etc. Tax already paid -Monthly withheld amount from wage & salary by the simplified tax withholding table or at a 15% flat rate Appendix. 4 Summary Table for the Year-end Tax Settlement 2011 Deduction Category Ceiling Criteria Basic deduction 1.5mio/person Taxpayer himself/herself, spouse and supporting family members who make a living together (whose annual is 1 million won or less) Supporting family members Linear ascendant Linear Descendant Age requirement 60 or older 20 or younger Sibling 60 or older, or20 or younger Fostered children Less than 18 None EITC recipient Personal Deduction Additional deduction Refer to the table Deduction subject Deduction amount Senior(aged 70 or older Handicapped Aged 6 or younger 1 million won 2 million won 1 million won Female taxpayer (head of family having dependants/married) Newly born/adopted 0.5 million won 2 million won Additional deduction for multiple children 1 mio for 2, 3 mio for 3 If the number of children is subject to basic deduction is 2 or more, you are eligible for additional deduction. 1 mio won + [(number of children subject to basic deduction - 2) 2 mio won] Pension premium National insurance and other pension premium Retirement pension Health, Employment Full amount Pension premium contribution paid by the taxpayer himself/herself for National Pension, Public Officials Pension, etc. Pension premium contribution paid by the taxpayer himself/herself for Up to 4 mio/year Employee Retirement Pension (Up to 4 million won including pension savings deduction) Full amount Taxpayer s National Health Insurance premium(including long-term Nursing Insurance premium), Employment Insurance premium Special deduction Insurance premium Security Up to 1mio Pension premium for Security Insurance, the insured of which are those entitled to basic deductions) Handicapped only security Up to 1mio Pension premium for Handicapped Only Security Insurance, the insured of which are those entitled to deduction for handicapped or beneficiaries of which are the handicapped, among those entitled to basic deductions

14 Medical expenses 1Taxpayer himself/herself 2Supporting family members Full amount Deductible if the amount exceeds 3% of the gross wage/salary (No age/ limit for dependant family members) 1 - (Gross wage/salary Up to 7mio/year Deduction amount 3% - 2) 2 < Gross wage/salary 3% 2 Gross wage/salary 3% 1+(2 - Gross wage/salary 3%) Kindergarten Elementary School, Secondary & High School Up to 3mio per person Educational Up to 9mio University/college expenses per person Taxpayer himself/herself Full amount No age limit (Lineal Child care fee, kindergarten fee, and tuition for private educational institutions and athletic facilities Tuition, meal costs, fees for textbooks, tuition for after-school ascendants are education, educational expenses paid overseas (only for those who meet overseas study requirements, uniform costs (up to 0.5 not subject to million won for middle/high school students) deduction) Educational costs (including costs for cyber universities and degree acquiring courses) and educational expenses paid overseas Tuition for one-semester long or longer courses in universities/post graduate schools and tuition for vocational training Special educational expenses for the handicapped Full amount Special educational expenses paid for rehabilitation of the handicapped who is entitled to basic deduction * No limit. Linear ascendants are also eligible for deduction. Donation Political/statutory Up to 100% of Special Designated (Religious) Up to 50% of Up to 10% of For political donations, up to 100 thousand won is credited. If the amount of political donation exceeds 100 thousand won, the exceeding amount is deductible. Special donations are abolished effective from July 1, Designated (Non-religious) Up to 30% of Pension savings Up to 4mio per year Up to 4 million won deduction per annum including retirement pension deduction if joined on/after January 1, 2001 For personal pension savings if joined on/before December 31, 2000, 40% of deposit amount is deductible (Up to 720 thousand won). Credit card usage Other deductions Long-term stockinvested savings Min [3mio, 20% of Gross wage/salary ] 3mio per quarter Deduction amount = Usage of credit cards, etc. (gross wage & salary x 25%) x 20%* * 20% for credit cards, cash receipts, tuition payment for private educational institutions through Giro transfer. 25% for Debit cards 20% for payments made in the first year, 10% for payments made in the second year, 5% for payments made in the third year. Deduction for small enterprises/small and Up to 3mio per micro businessmen year association Contribution amount paid to Yellow Umbrella Deduction of Korea Federation of Small and Medium Business NATIONAL TAX SERVICE(Dec. 29, 2011)