Predictable tax regime for foreign talents

By Ahn Choong-yong

Korea offers a set of incentives to attract foreign direct investment(FDI). They include exemptions or reductions of both corporate income tax and tariffs for imported capital goods for a specified time period and reduced rent with the establishment of factories in complexes in foreign investment zones. Though enticed by such incentives, global talent, such as CEOs of multinational companies in industries like manufacturing and finance, tend to consider the personal income tax regime of host economies one of the most important factors when choosing a work site overseas.

Given the rapidly increasing demand for public welfare expenditures, the Korean government has been mobilizing all possible means to raise state revenue by exploring new tax sources, closing tax loopholes, charging higher taxes to higher income earners and cracking down on underground economic activities. However, a sudden, and often inconsistent, change in personal income tax deviating from an already publicly notified tax regime for the purpose of increasing tax revenue may turn out to be short-sighted or even counterproductive.

For example, the personal income tax act has been revised numerous times. About seven years ago, the foreigner flat income tax regime, which is currently at a rate of 17 percent plus a resident surcharge tax of 1.7 percent, was introduced to attract foreign talents to Korea, competing with the lucrative tax systems of Singapore and Hong Kong, which elevated both as highly preferred destinations for FDI. Under the latest amendment, which went into effect on Jan. 1, 2013, the flat income tax of 17 percent was not supposed to sunset for two years, until Dec. 31, 2014.

On Aug. 9, 2013, however, the Ministry of Strategy and Finance (MOSF) announced new legislation to allow the flat rate for only five years from the date a foreigner started working in Korea, to narrow the scope of foreign workers who may be eligible for the rate and for the flat rate to sunset a year earlier than planned. Fortunately, the National Assembly and the MOSF honored the original sunset date of the tax law, which was the end of 2014, rather than the end of 2013 after receiving active appeals from the Foreign Investment Ombudsman and foreign companies.

It should be recognized that prior to the introduction of the foreigner flat tax law, foreigners were allowed a 30 percent deduction from gross income to compensate for their pension and health insurance, and overseas educational expenses for their children. But under the present regime, they are not all tax deductible in Korea. As a consequence, long-term foreign residents ― those residing longer than five years in Korea ― are likely to be discriminated against by Korean taxpayers, who can deduct social security payments and tuition expenses from the gross taxable income.

The abolishment of the flat tax regime for long-term foreign residents in Korea may unwittingly send the message that long-term foreign talents are no longer needed or welcome here.

As there are not many long-term foreign residents in Korea, the additional tax revenue through a new tax law must be marginal. Foreigners who choose to extend their stay in Korea beyond five years are usually those who love Korea and act as goodwill ambassadors and eternal friends of the country. They could be very effective for promoting foreign investment and new wisdoms into Korea.

Foreign talents have many choices when deciding where to work. Those with much professional experience in Asia prefer Singapore and Hong Kong due largely to low and predictable tax rates and an international working environment. But Korea has its advantages.

We’ve got four distinct seasons, not to mention, many beautiful and easily accessible mountains to hike. Add to this a consistent, predictable, long-term and competitive tax regime for foreign talents, regardless of their length of stay in Korea, and Korea should be able to clearly convey how serious it is about attracting foreign talents and FDI.