Hey Teachers,
A lot of you are having trouble with the concept of taxation, so I thought I would post on how it works in Korea. I hope this ends all complaining about getting taxed, if you have any questions please be specific and I will do my best to answer for you.
The tax rate:
Firstly, let's kill the myth that 'the tax rate in Korea is only 3~6%'. This myth has been floating around due to peoples misunderstanding of how tax is calculated, and this simply isn't the case. In fact, the base tax rates in Korea are 8%~35%. I will explain how it appears to be lower in a worked example later.
Tax exemption
Yes, you are entitled to be tax exempt for 2 years under certain conditions. To become tax exempt you need to provide a tax residency certificate from a qualifying jurisdiction. This certificate should be obtained preferably before you come to Korea, and handed to your administration office in your school. For those that did not get a tax residency certificate prior to leaving for Korea, you still can apply for one from your tax authority. Submitting it to the Korean NTS will allow you to claim back tax that may have already been paid retroactively. Please be aware that tax doesn't get handed back to you in a wad of won, it will most likely come in the form of a tax credit at the end of the financial year.
I will provide a list of where to apply for tax residency certificates shortly
Double taxation
Fortunately all ESL teachers come from countries with double tax agreements (DTA's) between Korea and their home countries. This agreement or treaty effectively means that you only have to pay tax in the country of residency. Generally to become a resident for tax purposes you need to be residing in the country or likely to (by way of contract or tie) for 183 days consecutively. To become a nonresident for tax purposes generally you need to not reside in the country for 183 days consecutively. There are some exceptions to this general rule, Korea, and Canada which I will touch on.
A resident for tax purposes in Korea is someone who has a domicile in Korea for more than 1 year, or someone who has occupation that requires them to live in Korea for 1 or more years. Signing a 1 year contract makes you a resident for tax purposes in Korea from the day the contract commences, and all global income then is to be taxed in Korea.
Canadas tax authority makes it difficult to become a nonresident for tax purposes. Most ties such as family, a bank account, length of domicile will make you a resident. However, if taxes are paid in Korea the DTA is enforceable you will not be liable for tax on Korean income to the Canadian authority.
Even paying tax in Korea or if you are on the 2 year exemption, you still need to complete tax returns in Korea and your home country at the financial year end.
Why are we getting taxed on Allowances now?
All allowances and benefits given to employees in lieu of cash are income from that employment agreement. It should have never been tax free in the first place. Perhaps it was done to entice teachers to Korea, but the total value of any fringe benefit is taxable, and as such should be added to your total annual income. Some fringe benefits that are taxable are;
-Flights allowances
-Settlement allowance
-Renewal bonuses
-anything else given in lieu of cash
What about sending money home?
You are entitled to send 100% of your Korean earned income + any foreign amount of money declared when you enter korea to your home off shore
What else is taxable?
Pension, retirement, interest, capital gains (selling cars, property)
Why am I being asked for receipts?
There are 2 reasons. The first being that Korea is a largely cash economy and they want to make sure what you are claiming as deductions actually exist. Secondly, because the main taxation method in Korea allows items of expenditure to be deducted from your total income liable for tax. That means, the more you spend on medical, charitable donations, credit card purchases, education for your dependants (to name a few), the less tax you are liable for.
Methods to calculate tax liability
Korea has two ways income tax can be calculated.
1. The flatrate method. This taxes total income at 15%
2. The progressive method. This taxes progressively related to income and expenditure, and is the method that would be most beneficial to all ESL teachers in Korea
Example: a young chap named Waygook earns 2,200,000 W a month. Annually that is 26,400,000 W in salary. Waygook gets two flights paid at 1,300,000 W each, and 300,000 settlement
Waygooks total annual income is 26,400,000 + (1,300,000 x 2) + 300,000 W = 29,300,000 W
In the flatrate method Waygook has to pay 4,395,000 W (29,300,000 W x 15%) in withholding tax. I will skip the tax credit as it isn't necessary just now.
Using the progressive method
29,300,000 W [total income including salary and allowances]
(11,145,000) W [equivalent necessary expenditure] (9,000,000 + (14,300,000 x 15%)) [this is a deduction for expenses]
18,155,000 W [adjusted total income (29,300,000 - 11,145,000), this is the amount in which is liable for taxation]
(1,500,000) W [Basic deduction allocated to tax payer, as per tax law]
(1,000,000) W [standard deduction, as per tax law]
15,655,000 W [taxable income] (18,155,000 - 1,500,000 - 1,000,000)
Okay, so now, our total taxable income is 15,655,000 in which we apply the tax rate to which gives the appearance that we are actually being taxed 3~6% (because our total income is halved, and we haven't applied income tax credits yet)
Tax liability on the taxable income:
1,268,250 W (720,000 + (15% x (15,655,000 - 12,000,000)))
Total tax credits:
500,000 W (275,000 + (30% x (1,268,250 - 500,000)))
Since the tax liability is over 500,000 W we must use the preceding formula which has a maximum credit of 500,000 W
Total tax for Waygook: 845,075 W
768,250 W [to be paid to the national tax office]
76,825 W [to be paid to the local tax office] (national tax x 10%)
This is the total tax figure, if waygook had been making tax payments on the monthly salary, those prepaid tax payments would be deducted from the liability to the national office.
Also, there were no deductions for other special expenses like credit cards, and medical.
