Foreign Tax Credit allows Korean residents to offset the tax paid or payable on foreign source income in a foreign country against their global income tax amount in the taxation period. This credit can also be included as necessary expenses when calculating the income amount accrued during the period, but this method is applicable only to business income.
Scope of Deductibility
Foreign source income refers to income earned outside Korea that is taxable under the Income Tax Act of Korea. It's important to note that foreign tax paid or payable for non-taxable income under the Income Tax Act of Korea cannot be used for foreign tax credit.
Amount of Tax Paid or Payable in a Foreign Country
The amount of tax paid or payable in a foreign country includes taxes assessed by the foreign government on an individual's income and additional taxes or charges. It also comprises taxes assessed on revenue other than income or equivalent items that fall under the tax item similar to individual income.
Foreign source income encompasses global income, retirement income, and capital income. For each type of income, foreign tax credit that is not taxed can be calculated separately.
Calculation of Foreign Tax Credit
To calculate the foreign tax credit, the foreign income tax amount should be deducted from the calculated global income tax in the corresponding year. The credit limit is determined using the following formula:
Credit Limit = Calculated income tax amount × (Foreign source income / Global income)
In cases where businesses have overseas locations in two or more countries, the credit limit is calculated separately for each country.
Foreign tax paid or payable amount must be converted into KRW using the basic rate or arbitrage rate under the Foreign Exchange Transaction Act, based on the date of payment (Article 60(2), Enforcement Rules of the Income Tax Act).
Tax Credit Carried Forward
If the foreign income tax paid or payable to a foreign government exceeds the credit limit amount for the relevant taxable period, the excess can be carried forward to the taxable period to be completed within 10 years from the taxable period following the relevant period. However, for the taxable period beginning on or after Jan. 1, 2021 (enforcement date of the amended tax law), the carry-over period for undeducted foreign income tax is extended to 10 years. For the period before this date, the carry-over period of tax credit remains five years.
Required Documents
To receive foreign tax credit for taxes already paid in another country, a resident must submit a foreign tax credit application (form no. 11 of the Enforcement Rules of the Income Tax Act) to the head of the tax office having jurisdiction or the withholding agent when filing for the year-end tax settlement or final return of the taxable period that includes foreign source income.
In cases where an application cannot be submitted promptly due to a delay in the notification of assessment on income tax by the foreign government or differences in taxable periods, it may be submitted within 3 months from the date of receiving such notification. The same applies to cases where the amount of foreign tax changes as the foreign government reassesses the income tax for foreign source income.
Conclusion
In conclusion, understanding Foreign Tax Credit is essential for Korean residents who earn income from foreign sources. By deducting the foreign income tax from the global income tax or including it as necessary expenses, individuals can benefit from tax relief. It's crucial to adhere to the specified rules and regulations, such as the scope of deductibility and the calculation of the credit limit, to ensure proper utilization of this tax benefit.