We will delve into the details of income tax in Korea, focusing on the calculation of the tax base (taxable income) and different types of income. Understanding these concepts is crucial for individuals and businesses operating in Korea. So, let's get started!
Calculation of Tax Base (Taxable Income)
Taxable income, also known as the tax base, is an essential factor in determining the amount of income tax an individual or business needs to pay. The calculation of the tax base involves considering various sources of income and allowable deductions. The formula for calculating the tax base is as follows:
Taxable Income = Total Income - Allowable Deductions
Calculation of Interest Income
Interest income refers to the total amount of interest earned within a taxable year. It includes interest earned from various financial instruments, such as savings accounts, fixed deposits, and bonds. To calculate interest income, sum up all interest earnings from these sources.
Calculation of Dividend Income
Dividend income encompasses the total amount of dividends received during the relevant taxable year. This includes dividends from stocks and shares held in companies. To calculate dividend income, sum up all dividends received.
Deemed dividend
A deemed dividend is the amount below deemed to be distributed to shareholders and investors.
- Where a shareholder acquires monetary assets and other assets due to retirement of stocks or capital decrease, the amount of such assets in excess of the shareholder's investment amount
- The value of stocks or stake acquired by a shareholder through the transfer of a corporation's surpluses to capital or financing, excluding capitalization of capital reserves or revaluation reserves, etc.
Calculation of Business Income
Business income pertains to the total revenue generated from business activities during the taxable period, after deducting necessary expenses and losses carried forward within the allowed period (usually 15 years). Non-taxable income should not be aggregated in this calculation.
For losses incurred in real estate lease businesses, these losses can be deducted only from the business income of real estate lease businesses. The formula for calculating business income is:
Business Income = Gross Revenue - Necessary Expenses – Loss Carried Forward
Gross Revenue
Gross revenue is the total amount received or expected to be received from business activities in the relevant taxable year. For non-monetary transactions, the revenue is calculated based on the monetary value at the time of the transaction. It also includes income from advance rents for leasing real estate or establishing an easement or superficies, divided by the number of months in the contract period.
The following are included in the amount of gross revenue:
- The total amount of income of advance rents received for leasing of real estate or establishing or leasing of an easement or superficies thereon shall be the total amount of the amount calculated by dividing such advance rents by the number of months of the contract period in each taxable period. In such cases, when calculating the number of months, if the month to which the first day of the contract period begins is less than one month, it shall be deemed one month. If the month to which the last day of the contract period belongs is less than one month, it shall not be included.
- Gross revenue Advance rent / No. of contract months × No. of rented months during the taxable period
- Deemed rental income ‒ Sales returns and allowances are not included in gross revenue.
- Sales discounts for early settlement account receivables are deducted from gross revenue.
- Incentives received from a business counterpart and other amounts of a similar nature
- Tax recognized as necessary expense that is refunded or will be refunded, such as customs drawback
- The amount of business-related assets gratuitously received and the amount of liabilities decreased due to the exemption or acquittance of liabilities
- The amount of other revenue related to business that has been or will be reverted to the relevant business operator
Non-Inclusion in Gross Revenue
Certain items are not included in the gross revenue calculation. These include specific types of income or transactions that are exempt from taxation.
The following are not included in gross revenue:
- The amount of income tax or local income tax refunded or to be refunded
- The amount of assets received gratuitously and the amount of liabilities decreased due to the exemption or acquittance of liabilities, which are appropriated for set-off of deficit carried forward
- Where products such as raw materials are produced and used for one‘s own business, the value of such products
- The amount of output VAT
- The amount of additional dues on refund of national tax, etc
Calculation of wage and salary income
Wage and salary income is calculated as follows:
Wage & salary income = Total pay (Annual pay ‒ Nontaxable pay) ‒ Amount of deduction of wage & salary income
Calculation of pension income
Pension income shall be the amount remaining after subtracting the amount of deduction of pension income from the total pension amount.
Pension income = Total pension (excluding pension income subject to separate taxation) － Amount of deduction of pension income
Calculation of other income
Other income is calculated by deducting necessary expenses from gross revenue.
Other income = Gross revenue ‒ Necessary expenses
Calculation of retirement income
Retirement income is a lump-sum payment paid by an employer to an employee where employment relations are terminated by an employee’s retirement after a considerable period of service, and is a post-payment of part of an employee’s wages accumulated during his/her service period (post-paid wages).
Tax obligations on retirement income are fulfilled when the payer withholds taxes at the source. In other words, if a resident with only retirement income pays income tax by withholding, he/she is not obligated to file a finalized return of tax base. Retirement income is the sum of retirement benefits excluding non-taxable retirement benefits.
Retirement income = Gross retirement benefits ‒ Non-taxable retirement benefits
Conclusion
Understanding the calculation of the tax base and different types of income is vital for complying with income tax regulations in Korea. By properly calculating taxable income and considering allowable deductions, individuals and businesses can ensure accurate and fair taxation. It is essential to keep track of various income sources and consult with tax professionals to optimize tax planning.
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