[Income Tax in Korea] Understanding Penalty Taxes in the Tax System

Understanding Penalty Taxes in the Tax System

penalties are imposed to ensure compliance with tax regulations and discourage tax evasion. Understanding penalty taxes is crucial for individuals and businesses to avoid legal consequences and maintain financial stability.

 

Penalty Taxes in the Tax System

Penalty Tax on Non-filing or Incorrect Filing

Taxpayers who fail to submit their tax returns on time or inaccurately report their income may face penalty taxes. The penalty tax amount is calculated as follows:

• 1. Penalty Taxes on Non-Filing: The penalty tax is 20% of the tax amount that should have been paid due to non-filing. For entities using double-entry bookkeeping, the higher of 'tax amount due to non-filing × 20%' and 'gross revenue × 0.07%' will apply.
• 2. Under-reporting: If the taxpayer under-reports their income, they will be subject to a penalty tax of 10% of the under-reported tax amount.
• 3. Non-filing or Under-reporting or Unlawful Tax Reduction/Exemption: In cases of non-filing, under-reporting, or unlawful application for tax reduction/exemption, the penalty tax is 40% of the tax amount that should have been paid due to non-filing or under-reported tax. For unlawful acts committed in international trade, the penalty tax increases to 60%. For entities with double-entry bookkeeping, the higher of 'tax amount due to non-filing × 40%' and 'gross revenue × 0.14%' will apply.

Penalty Tax on Late Payment of Tax

Taxpayers who fail to pay their taxes on time or partially miss the payment will be liable for penalty taxes. The penalty tax amount is calculated based on the following formula:

Penalty Tax = Unpaid or Underpaid Tax Amount × Number of Days from the Next Day of the Due Date of Payment through the Voluntary Payment Date × 0.025%.

From Feb. 15, 2022, the penalty tax rate will be reduced to 0.022% for late payments.

 

Penalty Tax for Insincere Payment of Withholding Tax

Withholding agents who fail to pay the tax withheld within the due date will face a penalty tax. The penalty tax is calculated as follows:

Penalty Tax = (Amount of Unpaid or Underpaid Tax × 3%) + (Amount of Unpaid or Underpaid Tax × 0.025% × Number of Unpaid Days).

The penalty tax amount cannot exceed 10% of the unpaid or underpaid tax amount.

Penalty Tax on Incomplete Submission of Statement of Payment

Failure to submit a complete and timely statement of payment may lead to penalty taxes. The penalty tax is 1% of the unpaid amount for which the statement of payment was not submitted. If the statement is submitted within three months of the due date, the penalty tax is reduced to 0.5%.

Penalty Tax on Non-Collection of Supporting Documents or Collection of False Documents

Penalty taxes are imposed when official supporting documents (e.g., tax invoices, credit card sales slips) are not collected or when false supporting documents are used. The penalty tax is equivalent to 2% of the amount for which supporting documents are missing or falsely provided. Some businesses are excluded from this penalty, including newly established businesses, those with revenue below 48 million won in the previous year, and certain insurance agents and salespersons.

Penalty Tax on Incompliant Keeping and Entering of Books

Failure to maintain accurate books or under-recording income can lead to penalty taxes. The penalty tax is calculated as follows:

Penalty Tax = Calculated Tax Amount × Omitted (Under-recorded) Amount / Global Income Amount × 20%.

 

Penalty Tax on Non-Reporting and Non-Use of a Business Account

For entities subject to double-entry bookkeeping, not opening or using a business account on time incurs a penalty tax. The penalty tax is determined as follows:

• Failure to Use: Penalty Tax = Unused Amount × 0.2%
• Failure to Report: Penalty Tax = Larger of (Gross Revenue of Reported Period × 0.2%) or (Mandatory Usage Amount of Business Account × 0.2%)

Conclusion

Penalty taxes play a vital role in maintaining tax compliance. Understanding the various penalty tax categories is crucial for taxpayers to avoid legal complications and ensure a smooth tax process. Complying with tax regulations not only fosters a healthy business environment but also contributes to the overall economic well-being.