S. Korea mobilizes extensive tax actions for economic momentum in 2020

In line with its all-out efforts to revitalize the economy by any means in the upcoming year, South Korea will introduce a set of new tax rules to reinforce sanctions for delinquent taxpayers and expand tax reduction benefits for innovative small-sized businesses, the Ministry of Economy and Finance said Monday.

In a pan-government policy brochure titled “Things to change in 2020,” the government listed key policy changes that will take shape in 2020, many of them slated to take effect starting Jan. 1.

Seeking to improve the tax administration and maximize the nation’s fiscal revenues, the Finance Ministry has revised the tax law to allow the physical detention of high value or habitual tax evaders. Under the new rule, delinquent taxpayers may be kept in detention, should they default on paying national tax more than three times and when the total amount reaches 200 million won ($172,340) or more.

The Ministry of the Interior and Safety showed Sunday that the average collection rate for five key tax criteria came to 76.3 percent last year, down 4.2 percent from a year earlier. The total amount in arrears stood at 527.9 billion won, up 6.7 percent from a year earlier.

In a move to create jobs and support innovative growth momentum, the government will drastically extend the range of corporate and income tax relief for small and medium-sized enterprises.

Whereas such benefits were mostly confined to the manufacturing sector, most service businesses will henceforth qualify, starting Jan. 1. The measure, however, will exclude specific designated industries such as the overcompetitive retail and wholesale, high-income professional jobs including lawyers and medical doctors, and gambling business.

For companies that invest in improving their production capacity, the tax deduction period will be expanded for two additional years and the rate will temporarily be increased, depending on the size of business.

In the case of SMEs, the maximum deduction may be as high as 10 percent, up from the current maximum 7 percent.

To encourage cash to flow into the stalled market and to help investors generate returns, the government has also decided to introduce tax benefits on dividend incomes made from real estate investment trusts, or REITs.

A separate 9 percent tax is to be applied on REIT dividend income for the first three years, within the ceiling of 50 million won, according to the ministry. The given taxation favors are to last until Dec. 31, 2021.

“We expect that the global economy will improve next year, compared to this year, and that our economy will also seize the rebounding opportunity,” said Deputy Prime Minister and Finance Minister Hong Nam-ki last Friday in a meeting with business leaders.

As potential positive points, the fiscal policymaker cited the recovery of the semiconductor industry, improvement in global trade, and the lately clinched “phase one” trade deal between the US and China. But persisting uncertainties, the adjusting phase of the local construction business, and regulation hurdles could act as risk factors, he added.

Earlier this month, the Finance Ministry forecast that Asia’s fourth-largest economy would grow 2.4 percent next year, up from this year’s estimated 2 percent.

By Bae Hyun-jung (tellme@heraldcorp.com)