The Government released a proposed tax reform to cut 10 million won in tax for every new job

A new system of ‘the tax benefit for job creation investment’ will be temporarily in place from 2011 to 2012, to reduce tax for the employers offering more jobs. Instead, the 29 year-old ‘temporary tax benefit for investment’ which imposes less tax on the companies with more investment will be repealed. These changes are included in the Government’s tax reform for job creation and stable living which was released on August 23.

10 million won less in tax for every new job

According to the Government’s plan, the temporary tax benefit for investment, which provides a flat 7% tax cut for investment, will be repealed. Instead, the 7% cut in income tax or corporation tax will be incorporated into a new system of tax benefit for job creation investment which offers tax reduction for new jobs, within the limit coming from multiplying the number of new jobs by the given amount-10 million won per additional Korean national employee (in monthly average and on year-on-year basis, but 15 million won per younger employee (aged 15~29) and 5 million won per part-timer.

For example, in case a company invests 1 billion won more, it would benefit a tax cut of 70 million won even without employing any additional workers, under the current tax benefit system. However, starting from next year, the same company would receive the same amount in tax break only when it employs 7 more workers at the same time. The Ministry of Strategy and Finance expects that this new system will result in some 50,000 more jobs and a tax support of 500 billion won. By sector, the jobs reduced by 141,000 in the public sector from the corresponding month of the previous year, but grew by 455,000 in the private sector. Notable increases are found in manufacturing (181,000), health and social welfare (175,000) and business facility management and support service (80,000).

Other tax benefits for low-income people and social enterprises

The Government’s tax reform also contains lower income tax rates for daily jobs: the withholding tax, which is presently rated 8%, will be reduced to 6%, with a view to increasing their real income. The Ministry estimates that, based on the tax amount collected last year, daily workers will pay approximately 25 billion won less in tax this year.

In addition, a more generous tax benefit will be given to social enterprises that are to provide jobs for disadvantaged people. The social enterprises which are not small or medium sized are obliged to pay a corporation tax amounting to 10~14% of their sales this year, but the tax rate will be fixed at 7% (the floor for SMEs) in 2011. The model businesses for people with disabilities which meet the given requirements, including the quota of 10 or more employees with disabilities, will benefit a 50% reduction in income tax or corporation tax for the following four years.

New tax support for U-turned domestic companies

The domestic companies which dispose with their oversea operations and create a new business or workplace will benefit an exemption of income tax or corporation tax for the first three years, and a 50% reduction for the following two years. The requirements for eligibility of this tax break are that they have operated the oversea business for two years or longer and the new domestic business is not located in the Seoul Area.

“Employment-friendly” (Government) vs “Deceptive only” (Labor)

The Ministry of Strategy and Finance explains that “this tax reform is intended to further promote job creation and provide support for a stable living of disadvantaged people, and more generous tax benefits are included to increase the growth potential of the Korean economy and the competitive advantage of Korean companies.” The Government plans to release a public notice of legislation, make intra-governmental discussions and reach a resolution in the Cabinet meeting within September to come, so that the bill may be submitted to the National Assembly no later than the end of September. In the meantime, the labor community raises concern about the effectiveness of the proposed tax reform, saying that “the Government is obsessed with the ‘employment performance’ in quantitative, not qualitative, terms.” By contrast, the business community is concerned about the abolition of the temporary tax benefit for investment.

Possible controversy over tax disadvantage against time-off violation

The Government also proposes that tax disadvantage should be made against the employers and full-time unionists who violate the time-off system, starting from next year, which is likely to arouse a controversy.

According to the Government-drafted ‘2010 tax reform’, beginning January 1, 2011, in case an employer who pays wage to full-time unionists in violation of the Trade Union and Labor Relations Adjustment Act, the amount paid shall not be admitted as financial loss (cost) for the purpose of tax law. Moreover, the unfair wage paid to full-time unionists by the employer shall be treated as other income, not labor income, so that they may not enjoy a range of year-end tax deductions. At present, the wage which a company pays full-time unionists is acknowledged as financial loss (cost) on the part of the company, and as labor income on the part of the unionists, pursuant to the collective agreement.