25th January 2019
As we’ve mentioned many times before, global taxation laws are constantly getting more complex, and contractor compliance in South Korea is the latest to follow suit. As the fourth largest economy in Asia and the 11th largest in the world, this destination is fast becoming a hotspot for contractors worldwide. Famous for its spectacular rise from one of the poorest countries in the world to a high-income country in just a few generations, South Korea still remains one of the fastest growing developed destinations in the world following the Great Recession. In fact, it forms part of the Next Eleven group of countries that are expected to dominate the global economy by the middle of the 21st century. Home to tech giants Samsung, LG, and Hyundai, and a destination which is pouring money into AI, demand for experts looks set to increase rapidly in these fields, making it a prime location of choice for tech and IT contractors.
So, what do you need to know about contractor compliance in South Korea?
South Korea will beef up its efforts to crack down on overseas tax fraud this year by delivering heavier fines to firms or individuals that fail to submit their overseas financial statements. This is part of the 2019 tax revisions unveiled by the Ministry of Economy and Finance which are set to take effect in February.
Under the changes, holders of overseas financial accounts which contain 500 million won (£400,000) or more in countries where Korea has no tax treaties will no longer be able to avoid regular tax filings. Previously only corporate entities in Korea with overseas accounts were required to file reports, making it far harder to identify the real owners of these accounts, and enabling these individuals to dodge scrutiny by tax authorities.
Private individuals who fail to report their assets will be liable to fines up to five million won with the figure doubling to 10 million won for corporate entities. A ministry of finance official commented on the revisions, stating:
‘‘These revisions seek to strengthen government monitoring to better identify taxable assets in a fair manner. The assets in overseas accounts should be equally subject to tax duty as those in Korea. We are trying to close this loophole that has been long exploited by owners of overseas assets’’
The ministry will identify someone as an owner of one of these accounts even if part of it is held by immediate family members, or executives or employees at a firm of which they are an owner. This is to address criticism over a long-held practice whereby financial assets can be held under ‘borrowed names.’
Finally, the revision stipulates that those who profit from derivatives investments will no longer be able to avoid capital gains tax. The gains made through domestic and overseas investment will be equally subject to tax duty.
In addition to the above, large tax deductions, up to 40 percent, will be granted to small-and medium-sized enterprises for research and development costs spent on blockchain technologies, wearable robots, electric vehicles, efficient charging and fine dust reduction. For larger corporations, this same deduction will sit at around 20-30 percent.
This measure is part of efforts to boost innovation-led growth and the Fourth Industrial Revolution, a signature policy held by the Moon Jae-in administration that seeks to identify new growth engines. The country has been keen to expand its AI and tech sector as much as possible, with recent reports showing that the Korean government plans to create at least six new AI schools by 2020, and educate more than 5,000 high quality Korean engineers.
What does it mean for contractors?
As countries worldwide move toward stricter tax systems, failing to remain compliant will result in harsher penalties than ever. This has been illustrated time and time again, with contractor compliance in South Korea the latest to continue the trend. Schemes such as the Common Reporting Standard – which now has gained 100 members, and is described ‘the most powerful multilateral treaty against offshore tax evasion and avoidance’ – are ensuring that this is not just rhetoric and countries are truly taking action. Therefore, contractors looking to work abroad must be absolutely certain that they are in line with local legislation in the country their destination of choice. Due to the uncertain nature of global tax laws, you could be heavily punished for simple, innocuous mistakes in tax calculation. Judging by the harshness of punishments being handed out by authorities worldwide, this is a risk not worth taking. To mitigate the possibility of this, and to ensure you can work in thriving global economies, we advise contingent workers to consult with an international contractor compliance expert to put your mind at ease.
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