Comparing Taxation Systems in South Korea & the USA   Term Paper ID:34869 Click to get this paper

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Paper Abstract: This paper compares the indiviual and corporate taxation systems in South Korea (Reapublic of Korea) and the USA. The approach of each country to taxation. The theoretical and political orientations of the tax systems also are addressed. Paper Introduction: comparing the taxation of the republic of korea and the united states ofamerica Introduction This research compares tax systems of the Republic of Korea SouthKorea and the United States of America USA Both individual andcorporate taxes are included in the comparison as is the underlyingapproach to taxation in the two countries Comparing the Approach to Taxation The income tax is the primary revenue source at the federal level inboth South Korea and the USA The income tax in both countries is leviedon Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. The preceding information illustrated the greater dependency in SouthKorea than in the USA of a reliance on corporate income tax collections.The total tax burden in South Korea is approximated five-percent higherthan it is in the USA - the difference between approximately 24 percent andapproximately 29 percent. The supplier, however, may collect the VAT from the receiver of the goods, but that right does not exempt the supplier of the goods from collecting the tax (or paying it) and remitting the proceeds to the government promptly. If a policy following market principles had been implemented to dealwith the corporate loans, the banks and corporations involved would havehad to declare bankruptcy, which according to the Korean government wouldhave led to the collapse of the Korean economy. The Korean tax system incorporates both national and local taxes, thelatter of which are imposed by provinces and municipalities. The rate increases to 28 percentfor taxable income in excess of US$26, 5 but not exceeding US$67,2 , andto 31 percent for taxable income exceeding US$67,2 . A corporation having its head office or its main office in South Koreais subject to the South Korean corporation tax. Between 1986 and 2 , corporate income tax rate in the USA fell 11percent. An education tax is levied as a surcharge on most national andlocal taxes paid by both individuals and corporations. Economist.com. With respect to theincome from domestic sources of a foreign corporation that has no domesticplace of business, the full amount of corporation tax withheld thereon atsource is payable to the government (Ernst & Young, 2 2). The standard corporate income tax rate in South Korea is 3 percent -approximately the midpoint in the range. The rate increases to28 percent for taxable income in excess of US$19,45 but not exceedingUS$47, 5 , and to 31 percent for taxable income exceeding US$47, 5 (Section 1(a)(b)(c)(d), United States Internal Revenue Code, 1999). Reimbursement for personal expenses, entertainment expenses and other allowances not considered proper business expenses . Corporate income tax. The Economist [London] reportsthat the effective standard corporate income tax rate in South Korea is4 .9 percent (Economist Intelligence Unit, 2 2). With respect to determining taxable income for corporations, the USAexempts to first US$5 , in profits from higher rates of corporate incometaxation, limiting the tax on such taxable income to 15 percent. The rateincreases to 28 percent for taxable income in excess of US$16,225 but notexceeding US$39,2 , and to 31 percent for taxable income exceedingUS$39,2 (Ernst & Young, 2 2b). (2 2b). The income tax in both countries is leviedon the incomes of individuals, partnerships, corporations, estates, andtrusts. The comparable tax level in SouthKorea is 42 percent (KPMG, 2 3). > Property Tax: Property tax is assessed yearly by local tax authorities on the value of buildings, land, mining rights, aircraft, and vessels. Property tax rates vary by property class. R., Montador, R. (2 3). OECD in Washington. Incontrast, South Korea provides no comparable incentive or relief. Basic income tax rates for individual in South Korea are presented inTable 1. The acquisition tax is a one-time tax assessed at the rate of two-percent of the value of the acquired property. New York: Ernst & Young.Ernst & Young. The Organization for Economic Cooperation and Development(OECD) average is 2.6 percent with a low of 1.4 percent in Germany. This policy means that the costs of restructuring will bepaid for by the individual taxpayers, rather than by either thecorporations that cause the currency crisis or other corporations.Simultaneously, the Korean government provided no assistance for workerswho lost jobs during the currency crisis. The highest effective tax rate oncorporate income in the USA (including the mean federal level tax and thehighest state level tax) is 4 percent. Other commercial property is taxed at the rate of .3 percent of the assessed value of the land and improvements. The bond debt will be repaid over time through the collection ofindirect taxes. Unmarried heads of household are taxed at the rate of 15 percent ontaxable income not exceeding US$26, 5 . New York: Ernst & Young.Hagemann, R. Although subsidiary-level governmental taxation varies widelywithin each country, the variation in the corporate income tax burden inthe two countries remains approximately five-percent favoring USAcorporations in relation to South Korean corporations. The municipal taxes on corporate income inSouth Korea vary but generally not to the extent that corporate incomestaxes vary by state in the USA. These incentives are as follows (Ernst & Young, 2 2): > Corporations are eligible for a deductible reserve for development of technology and human resources in the range of 15 percent (depending upon the size of the corporation in terms of total revenue, a corporation may be eligible for an additional 1.5 percent to four-percent of revenue deduction) > Corporations that establish and operate an in-house technical college are eligible for a 1 percent tax credit > Small- and medium-sized enterprises (SME) are eligible for a five-percent tax credit for investment in industrial equipment or advanced office equipment Corporate tax returns must be filed within fifteen days from the datewhen a company's books are closed for an operating year. Tax reform in OECD countries: Motives, constraints, and practice. OECD Economic Studies (1 ), 211-222.Heady, C. Corporate income tax collections, thus, fulfill a larger rolein South Korea than in the United States. Country Briefing: United States. There also is a variable inhabitant tax that is determined by the location of the corporation. For cities with a population of five million or more, the variable tax rate is 4 , won, and proportionately less for smaller cities. C.: United States Government Printing Office.World Bank Group. Doing business in the United States. other than the | |won || |above: 36%-to-37.5% | | | In addition to the general corporation taxes, other taxes are leviedon corporations in specific instances. For non-residents who have no domestic business place, income taxis collected at the source of the income (Ernst & Young, 2 2). Comparing Individual Taxation Taxes are imposed on individuals in both South Korea and the USA.Employment income, commissions, interest, dividends, rental income, andself-employment income account for most of the taxable income forindividuals in both countries. SouthKorea does not allow such an exemption (The World Bank Group, 2 2).Through this structuring of the income taxation of corporations, the USA(a) provides incentives for many new firms and small firms, while (b)providing some relief to firms in periods of economic decline. Asa percentage difference, however, 12.9 percent is 55.4 percent greater than8.3 percent. The tax is assessed on the higher of Standard Values established by the national government are the actual market value of the property rights. Individuals are subject to a minimum income tax system. Thus, while the maximum potential level of corporateincome tax is higher in the USA than in South Korea, the probability isthat the mean level of corporate income taxation will be higher in SouthKorea than in the USA, assuming no major differences in economic conditionsin the two countries. Class B income is earned income received in foreign currency onwhich the payer is not obliged to withhold South Korean taxes at payment.The individual recipient is responsible for declaring the income in acomposite income tax return or through a taxpayer association, and isentitled to a tax credit in the amount of 1 percent of tax liabilities(Ernst & Young, 2 2). When viewed in this context, total corporate income taxcollections in South Korea account for 4.3 percent of GDP and 2.3 percentin the USA. Global taxation and separate taxation are applied toindividual non-residents. Country Briefing: South Korea. The supplier of goods is required to collect the VAT and remit the proceeds to the government. Retrieved from the Internet 2 3-11-23 at: http://www.economist.comEconomist Intelligence Unit. > Registration tax: At the time of officially registering the acquisition, transfer, creation, or lapse of certain property rights, a registration tax is levied. Individual income tax rates in the USA vary in relation to bothmarital and filing status. Through a tax treaty, corporations based in each country areallowed to deduct corporate income taxes paid by subsidiaries in the othercountry (Ernst & Young, 2 2b). In some cities, the acquisition tax rate is increased to 1 percent. Corporate income tax rates in the USA range from 15 percent to 35percent. Class A income is earned income received in South Koreancurrency, subject to withholding by the payer on a monthly basis.Recipients of Class A income are entitled to an annual tax credit of up toW 6 , . Doing business in Korea. The present VAT rate is 1 percent. The research found that corporate income tax collections play a largerole in to total tax structure in South Korea than in the USA. Corporations based in South Korea are taxed on both the income earnedin South Korea and the income earned in operations in other countries.Subsidiaries of foreign corporations in South Korea are taxed only on SouthKorean-source income (Ernst & Young, 2 2). The Korean government,thus, absorbed this debt through the use of public funds by issuing bonds. Partnerships are taxed at individual rates in both South Korea and theUSA on the basis of the income shares of the individual partners.Corporations, however, are taxed at rates differing from individual incometax rates. A joint-venture company established in South Korea with a Koreanpartner, a wholly owned Korean subsidiary, or a South Korean branch of aforeign company is treated as domestic corporations for Korean tax purposes(Ernst & Young, 2 2). Any taxes stillowed at that time must be paid within filing period for the corporation'stax return. The inhabitant tax is a local tax, administered by provincial authorities. This debt makes was inthe form of insolvent loans made by and held by banks. oecdinwashington.orgUnited States Internal Revenue Code. Summary and Conclusion Tax rates for individuals in South Korea tend to compare favorablywith tax rates for individuals in the USA. South Korea does not levy a tax on the liquidationincome of a foreign corporation. A second approach for comparing the role and importance of corporateincome taxation in the total tax structure in different countries is tostate corporate income tax collections as a proportion of total income taxcollections. Corporation tax rates forgeneral corporations (both pre-revision and post-revision) are presented inTable 2, which may be found below on this page.Table 2: Corporate Income Tax Rate for General Corporations|Pre-Revision |Post-Revision ||Tax Base |Tax Rate |Tax Base |Tax Rate ||(won) | |(won) | ||8 million or|2 %-to-24% |1 million |2 % ||less | |or less | ||Over 8 |Unlisted Large-scale |Over 1 |2 million won ||million won |Corp.: 39.6%to-41.25% |million |+ || |Non-Profit Corp.: | |34% of amount in || |32.4%-to-33.5% | |excess of 1 million|| |Corp. (2 3). Corporate income tax collectionsas a proportion of total collections are 4.6 percent higher in South Koreathan in the USA - the difference between 12.9 percent and 8.3 percent. Washington, D. Manufacturing facilities are taxed at the rate of .6 percent of the assessed value and land and improvements. Both South Korea and the USA levy taxes on the bases of both residenceand source income. Unmarriedindividuals other than heads of household are taxed at the rate of 15percent on taxable income not exceeding US$19,45 . In contrast, married couples filing separate returns are taxed at therate of 15 percent on taxable income not exceeding US$16,225. At the same time - 2 , the total tax burden in the USA approximated 24percent, while the total tax burden in South Korea approximated 29 percent(Heady, 2 2). A residencesurcharge of 1 percent of income tax liability is also applied (Ernst &Young, 2 2; Ernst & Young, 2 2b). The effective corporateincome tax rate in the USA is 34.5 percent (Economist Intelligence Unit,2 2b). For non-residents in South Korea who do not have a domesticbusiness place, the withholding tax method is applied on each source ofincome derived from South Korea (Ernst & Young, 2 2).Table 1: Basic Tax Rates for Individuals|Tax Base ||Tax Rate || ||Over (won) ||No More Than (won) ||Tax Amount ||+% ||of an amount in excess of ... (2 1, April). In South Korea, the corporate income tax rates range from 25percent to 34.5 percent. The variations in subsidiary governmenttaxes on corporate income in both South Korea and the USA, however, lead toa situation where the mean effective income tax on corporations remainslower in the USA - 34.5 percent - than in South Korea - 4 .9 percent(Economist Intelligence Unit, 2 2; Economist Intelligence Unit, 2 2b). Economist.com. Among the morerelevant of these specific taxes levied on corporations are the following(Ernst & Young, 2 2): > Inhabitant tax: Inhabitant tax is a universally applicable and fixed tax of 7.5 percent of the income tax payable by a corporation. P., Jones, B. When corporate incomes taxes at all levels of government areconsidered, the difference in the corporate tax burden between South Koreaand the USA shrinks to just two percent (considering the highest level ofstate corporate income taxes). The latterincomes of a non-resident are taxed on the same basis as that applied to aresident. SouthKorea's proportion is the highest among OECD member countries (Hagemann,Jones, & Montador, 1998). Capital gains are taxed separately from global income for individuals. With respect to the structure of taxation types levied at thefederal level, the major difference between the two countries is therelative tax burdens of individuals as a class versus corporations as aclass. The average for OECD member states in 8.8 percent. > Property acquisition tax: In the business year in which a corporation acquires real estate, a motor vehicle, heavy equipment, or a vessel, a property acquisition tax is assessed. Thisdifference, on average, provides an advantage to American corporations inthe ability to reinvest profits and reward shareholders. (2 2). National taxes include an internet tax, custom duties,an education tax, and income taxes on both individual and corporations. Capital losses may not be carried forward. Both countries levy a variety of tax types. Retrieved from the Internet 2 3-11-23 at: http://www.us.kpmg.com/ microsite/Global_Tax/TaxFactsTax rates are falling. Atthe corporate level, tax applied to taxable income is almost 87 percenthigher in South Korea than in the USA. OECD Observer. Subsidiary governments in both South Korea and the United States alsotax corporations in income. Over the same period, corporate income tax rates in South Koreafell by 16 percent ("Tax Rates Are Falling", 2 1). Retrieved from the Internet 2 3-11-23 at: http://www. Retrieved from the Internet 2 3-11-23 at: http://www.oecdobserver.orgKPMG. The corporation tax isassessed on the income accruing in each business year, the liquidationincome, and capital gains. Allowances for family, position, housing, health, overtime, and other similar expenses; and Insurance premiums paid by the company on behalf of the employee Salary and wage income is classified as either Class A income or ClassB income. With respect to the non-resident who has adomestic business place and who has real estate income (excluding the caseof capital gains from transferring land or building), the global taxationmethod is applied on the aggregate South Korea-source income except forretirement allowance, capital gains, and timberland income. Using the proportion of GDP approach to comparing and contrastingcorporate income taxation across countries, South Korea relies to a muchgreater extent than does the USA on corporate income tax collections. The tax reform in 199 was intended to strengthen the competitivenessof the manufacturing sector, as well as to finance education and localgovernments. In contrast, totalcorporate income collections account for 8.3 percent of total income taxcollections in the USA. As a percentage difference, however, 29 percentis 2 .8 percent greater than 24 percent. B. The provisions of tax laws with respect to calculation of taxableincome and tax amount, assessment, collection tax withholding and reportingfor domestic corporations are applicable to foreign corporations having adomestic place of business. In South Korea, total corporate income collections accountfor 12.9 percent of total income tax collections. Considering only national level taxation, the corporate incometax burden in the USA is approximately five-percent lower than in SouthKorea. Retrieved from the Internet 2 3-11-23 at: http://www.economist.comErnst & Young. Comparing Corporate Taxation One approach to comparing the role and importance of corporate incometaxation in the total tax structure in different countries is to statetotal corporate income tax collections as a proportion of gross domesticproduct (GDP). Nonresidentsare subject to income tax on South Korean-source income only. Corporation tax on income from domesticsources of a foreign corporation is assessed and collected in the samemanner as that applied to a domestic corporation. Further, both the lower terminusof the corporate income tax range and the higher terminus in the USA areoutside the range of corporate income taxation in South Korea (The WorldBank Group, 2 2). Similar provisions apply inthe USA. The table may be found below on the following page. Title 26, United States Code (26 USC), 2 2. Social security andunemployment insurance benefits in the USA, however, tend to be superior tothose in South Korea. (2 3). Married couples filing joint returns are taxedat the rate of 15 percent on taxable income not exceeding US$32,45 . Corporate income taxation in both countries is a combination ofnational-level government taxation and subsidiary-level governmenttaxation. Corporate tax survey. Non-residents in South Korea are liable for tax only on South Korea-source income. The amount of corporation tax on the income of a domesticcorporation for each business year is determined by applying tax rates tothe amount of tax base (Ernst & Young, 2 2). The types of property rights subject to this tax include real estate, vessels, aircraft, corporations, branches, trade names, trademarks, copyrights, patents, and commercial permits. The minimumtax for individuals is five-percent for any income in excess of 1 , won. Payments of VAT collected by suppliers must be made quarterly, together with a VAT return, which must be filled within twenty-five days of the end of each fiscal quarter. Both individual andcorporate taxes are included in the comparison, as is the underlyingapproach to taxation in the two countries. Examples oflocal taxes include property tax, automobile tax, license tax, andregistration tax. The range of corporate income tax rates is muchnarrower in South Korea than in the USA. Personal income is divided into the following separate categories(Ernst & Young, 2 2): > Global income (including wages, salaries, interest, dividends, temporary property income, rents, business income, pension income and other worldwide income) > Severance pay > Forestry income > Capital gains > Employment income: Salary and wage income includes the following amounts in addition to basic monthly payroll . Domestic corporations are required to publish a copy of theirbalance sheets in a local daily newspaper within the same time period(Ernst & Young, 2 2). (2 2). Retrieved from the Internet 2 3-11-23 at: http://www.worldbank.org Comparing the Approach to Taxation The income tax is the primary revenue source at the federal level inboth South Korea and the USA. Similarly,in both countries, taxes are levied by both the federal government andsubsidiary governments. won || || ||4, || ||5 || || ||4, ||1 , ||2 ||16 ||4, || ||1 , ||25, ||1,16 ||27 ||1 , || ||25, ||5 , ||5,21 ||38 ||25, || ||5 , || ||14,71 ||5 || || || || | A non-resident is required to pay income tax at the domestic businessplace. There are many specific taxes levied in South Korea. The weakness of the Korean economy that led to the currencycrisis in 1997, however, altered some of the 199 reforms and objectives.The cause of the currency crisis has been identified as excessive corporatedebt that totaled approximately 1 trillion won. A residentis a person who maintains a domicile or residence in Korea longer than oneyear. (1998). ReferencesEconomist Intelligence Unit. > Value-added tax: Value-added tax (VAT) is a tax applied to the supply of goods or services or the import of goods into South Korea. Capital gains are taxes at regular income taxrates. A foreign corporation is liable to pay corporation tax only on SouthKorean-source income. These special corporate tax leviesare as follows (Ernst & Young, 2 2): > An unlisted large-scale corporation (paid-in capital of over five million won or shareholders equity of 1 million won), which has accumulated 4 percent or more of its distributable income within the corporation is liable for the accumulated earnings tax at the rate of 25 percent > A withholding tax of 25 percent is levied on gross royalties, fees, and other payments (tax treaties with specific countries reduce this rate for some foreign corporations) > All corporations are subject to a minimum income tax (the minimum income tax rate for corporations is 12 percent of tax base before considering tax incentives or the tax amount reflecting such incentives, whichever is larger) Corporate tax law in South Korea also provides tax incentives for somecorporations. The truth about tax burdens. > Education tax: An education tax is levied as a surcharge on most national and local taxes. comparing the taxation of the republic of korea and the united states ofamerica Introduction This research compares tax systems of the Republic of Korea (SouthKorea) and the United States of America (USA). Corporations in the USA on averagetherefore, are able to (a) reinvest a greater proportion of earnings, (b)provide a higher level of dividends, or (c) a combination of the two thanis possible on average among South Korean corporations (Hagemann, Jones, &Montador, 1998). (2 2, March 1). Therate increases to 28 percent for taxable income in excess of US$32,45 butnot exceeding US$78,4 , and to 31 percent for taxable income exceedingUS$78,4 (Ernst & Young, 2 2b). Residents are subject to income tax on worldwide income. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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