contents

3. Tax Base and Deduction

a. Basic Rules for Calculating the Tax Base

(1) Substance over form

The provisions governing the calculation of taxable income are applicable based on

the actual economic substance rather than upon merely formal distinctions.

(2) Classified calculation

The tax base shall be separately calculated with respect to each class of income

earned by the taxpayer, namely, global income, retirement income, timber income,

and capital gains.

(3) Global income tax base

The global income tax base is the amount remaining after deducting personal

exemptions from the aggregate of taxable global income, including such items

discussed above as interest income, dividends, rents from real estate, business

profits, wage and salary income, temporary property income, pension income, and

other income.

(4) Non-inclusion in global income

The following items of income are not included in global income but are either

assessed separately or are non-taxable:

(a) non-taxable income,

(b) wages of daily workers,

is eligible for withholding rates (See, 7. a. (1) (a) Interest income),

(d) interest income and dividend income less than 40 million won,

(e) income categorized as other income, up to 3 million

won per year, and

(f)

pension income up to 6 million won per year.

(5) Schedular taxation

Retirement income, timber income, or capital gains are subject to schedular taxation

as independent income categories.

(6) Taxable year to which gross income is attributable

Gross income is attributed to the taxable year in which it is settled. The time for

attributing amounts of global income to global receipts is shown below.

(a) Interest: the date payment is received

(b) Dividends:

i) Dividends on bearer shares: the date payment is received

ii) Dividends made under the disposal of surplus: the

date on which a resolution on appropriation of surplus is made by the

company concerned

iii) Deemed distribution: the date of decision of

redemption of stocks, the date of decision on the decrease of capital or

transfer into capital, or the date of the registration of merger or of final

determination of the value of residual assets, or the date of receiving

consideration

iv) An amount appropriated as dividend by the

Corporation Tax Law: the date on which accounts are settled

contract or the date of payment if the contract does not exist

(d) Business profits

Sales of merchandise or products: the date of

delivery or of the products reaching a deliverable state

ii)

Consignment sales of merchandise or products:

the date of sale by the consignee

iii)

Sales of merchandise or products on a long-term

installment or deferred payment basis: the date of delivery, subject to the

matching principle in case of expenses being incurred after the sale

iv) Performance of personal services: the date of completion of services

v) Sales or transfers of other assets: the date the

consideration is received, or, if earlier, the date of registration or delivery

(e) Wage and salary income:

i) Ordinary wage and salary income: the date of services provided

ii) Bonuses given as a result of an appropriation of surplus:

the date of the resolution by the Board of Directors to disposal of the surplus

iii) An amount regarded upon as bonus by the tax

authorities under the Corporation Tax Law: the date of furnishing services in

the relevant business year of the corporation

(f) Retirement income: the date of termination of employment

(g) Temporary property income: the earlier of the date of

final payment or the date of transfer of the property

(h) Capital gains: the date of receiving the consideration giving rise to the gain

(i) Timber income: to be determined in the same manner as used for business profits

(j) Other income: the date of receipt

(7) Taxable period:

(a) General rule: individual taxpayers use the calendar

year as tax year; January 1 through December 31

(b) January 1 through the date of death, in case of a resident's death

country, in case of a resident who becomes a non-resident

b. Calculation of Taxable Income

Taxable income is computed as the sum of the following items of income:

(1) Interest:

amount of income as determined above

(2) Dividends

(a) Dividend income actually distributed to the amount of income as determined above

(b) Deemed distribution

i) The value of stocks or investments acquired by transferring surplus or

reserves into capital, except the following:

transferring gains on retirement of treasury stock into capital more than 2

years after the retirement

transferring asset revaluation reserve into capital (in case of a listed corporation)

ii) The amount in excess of the investment received

by an investor through the liquidation of a corporation or through a reduction of capital

iii) The amount received by an investor upon the merger or consolidation of a

corporation more than his investment

iv) The value of stock dividends or additional investment interests acquired by an

investor as a result of another investor renouncing his preemptive right to acquire an

allocated portion of stock or investment interest following a capital increase of a corporation

(3) Rents from real estate

(a) Taxable income:

the total amount of income in each taxable period remaining after the deduction from gross

receipts of allowable expenses and losses carried-over within 5 years

(b) Gross receipts:

i) Total revenue arising from the lease of real estate

ii) If a resident who leases real estate or the title thereto receives a deposit, key deposit, or an

amount of a similar nature (an amount calculated as provided by the Presidential Decree

shall be counted in gross receipts)

Aggregate of expenses required to produce the total amount of income earned during the

taxable period

(4) Business profits

The total amount of income in each taxable period remaining after deduction from gross profits

of allowable expenses and losses carried-over from the previous 5 years

(5) Wage and salary income

The total amount of income remaining after the deduction of the following amount: used to

calculate the tax base for wage and salary income after the deduction described herein has

been made for that taxable period

(6) Pension Income

The total amount of income remaining after the deduction of the following amount with the deduction

ceiling of 6 million won

Pension income

Deduction

Not more than 2.5 million Won

Total amount

2.5 million Won ~ 5 million Won

2.5 million Won + 40% of pension exceeding 2.5 million Won

5 million Won ~ 9 million Won

3.5 million Won + 20% of pension exceeding 5 million Won

more than 9 million Won

4.3 million Won + 10% of pension exceeding 9 million Won

(7) Retirement income

The total amount of income remaining after deduction of the following amounts in each case:

Service year

Deduction

Less than 5 years

300,000 Won per year

5 ~ 10 years

1,500,000 + 500,000 x (service year - 5)

10 ~ 20 years

4,000,000 + 800,000 x (service year - 10)

more than 20 years

12,000,000 + 1,020,000 x (service year - 20

(8) Capital gains

Income arising from the transfer of land, buildings, or rights thereon, stocks, and other assets

specifically enumerated in the Income Tax Law shall be taxed separately from global income. This

separation was created to stabilize real estate prices and for tax purposes.

Capital gains may be classified into the following categories:

(a) Income arising from a transfer of land, buildings.

(b) Rights to real estate such as surface rights, leaseholds, or rights to acquire real estate; or

i) Gain on transfer = Selling price - Necessary expenses

ii) Amount of capital gains =

Gain on transfer

- Special deduction for long-term possession of land and buildings

- Capital gains deduction

"Necessary expenses" includes acquisition costs, costs of installations or improvements, and

other capital expenditures. The special deduction for long-term possession of land or real

estate is as follows: 10% of the capital gain if the possession period is longer than three years

but does not exceed five years, 15% of the capital gains if the possession period exceeds five

years but does not exceed ten years, and 30% of the capital gain if the possession period is

over ten years. A capital gains deduction of 2.5 million won per year is given without regard to

the amount. However, the special deduction for long-term possession or capital gain deduction

is not allowed for unregistered real estate.

Capital gain

Tax rate

Not more than 10 million Won

10 million Won ~ 40 million Won

17%

40 million Won ~ 80 million Won

26%

more than 80 million Won

35%

ㅇ property held more than one year and less than 2 year : 40%

ㅇ property held less than one year : 50%

ㅇ house falling into the category where a household holds three

houses under the Presidential Decree : 60 %

< house designated by the presidential decree>

① house located within metropolitan and megalopolis areas

② house transferred at 300 million won or more among houses located other than

metropolitan and megalopolis areas.

* house with 18 pyong or less and house whose tax standard value is 40 million won or less

are excluded from 60% of heavy tax.

ㅇunregistered transferred property : 70%

(9) Timber income

The aggregate amount of income remaining after subtracting forestation, acquisition, management,

and lumbering expenses from the gross receipts of each taxable period, a deduction of 6 million

won per year, and a deduction for losses carried over from the previous 5 years

(10) Other income

The aggregate amount of income of this category less necessary expenses; remuneration from an

independent lecture allows a deduction of 80% thereof as necessary expenses

c. Calculation of Business Income

(1) Taxable business income is the aggregate amount of

income in each taxable period remaining after the deduction from gross receipts of necessary

expenses and losses carried-over from the previous 5 tax years.

(2) Gross receipts

(a) Gross receipts of a business are the aggregate of

money or property receivable in connection with the activities of a business in the tax year.

If anything other than money is received, the income amount is calculated as the

monetary value thereof prevailing at the time of transaction.

ii)

The value of returned goods and a discount on sales is offset in the calculation of gross

receipts for the year.

iii)

Sales discounts in case of early settlement of an account receivables are deducted

from gross receipts

iv)

Bounties and other similar sums received from sellers are included in gross receipt.

If tax amounts counted in necessary expenses are refunded, the amount of refund is

included in gross receipts.

vi)

A decreased amount of liabilities due to exemption or the lapse of a liability is accounted

for as gross receipts; however, such an amount used for keeping carried- over deficits

in balance are not counted in gross receipts.

vii)

Such other amounts of receipts related to the business as have been reverted or are to

be reverted to the businessperson in question are counted in gross receipts.

(b) Non-inclusion in gross receipts:

The following items are not covered in gross receipts:

amount of income tax or inhabitant tax

refunded or to be refunded, used for the payment of other tax amounts

ii)

value of assets received without compensation

and amount of decrease in liabilities due to exemption or lapse of debts, used for

balancing carried-over deficits,

iii)

value of products used by businesses: self-produced raw materials or fuels,

iv)

amount of indirect taxes, such as the Value

Added Tax, collected from customers to be turned over to the tax authorities, and

interest on the refund of overpayments of national taxes or local taxes.

(3) Necessary expenses

(a) Necessary expenses are the aggregate of expenses

incurred in relation to the accrual of gross receipts for each taxable period and include the

following:

purchase price of raw materials or goods corresponding to products or goods sold for

the year concerned/ Discounts on purchases and purchase discounts are deducted

from purchase price.

ii)

book value of transferred assets at the time of the transaction (in the case of a real

estate sales business),

iii)

salaries and wages,

iv)

cost of repairing business assets, including management and maintenance expenses,

depreciation of fixed assets of the business,

vi)

rent of business assets,

vii)

interest on borrowings,

viii)

bad debts (including VAT thereon),

ix)

loss on revaluation of assets,

mine exploration expenses including development costs,

xi)

advertisement expenses and sales promotion expenses,

xii)

public contributions, designated donations and entertainment expenses within the

prescribed limit, and

xiii)

deferred expenses such as start-up costs or experimental and research expenses

counted in necessary expenses.

(b) Tax free reserve

Contributions to the following reserves are considered necessary expenses, within the

prescribed limits.

Reserves for retirement of up to 10% of total wages paid to employees who have served

for one year or more: the accumulated amount of the reserve is limited to 40% of the

estimated retirement allowances payable to all employees at the closing date of the year

ii)

Reserves for bad debts up to an amount equal to 1% of aggregate sales on credit or

accounts receivable and VAT thereon, as of the closing date of the respective year: the

amount remaining after offsetting the actual bad debts is included in the gross receipts

in the following year

Gains on insurance claims of a resident used for acquisition of the same kinds of fixed

assets as the lost or broken fixed assets, and those used for improvement of the

acquired fixed assets or the damaged fixed assets (must be within 2 years from the

beginning day or the year following the year in which the gains fall)

ii)

Amount of subsidy actually used for acquisition or improvement of fixed assets

(d) Non-inclusion of necessary expenses

The following losses and expenses are not counted as necessary expenses in the

calculation of the income of a resident.

Income tax (including foreign income taxes), inhabitant tax, and tax paid or payable as a

result of delinquency in the payment of tax owed (including penalty taxes thereof)

ii)

Fines, minor fines, penalty taxes, and expenses for disposition of taxes in arrears

iii)

Public imposts, other than those which a taxpayer has an obligation to pay under the

law

iv)

Losses from revaluation of assets other than inventory or short-term investment assets

Expenses deemed by the government not to have any direct connection to the business

vi)

Unpaid amounts of liquor tax or other excise taxes on inspected or carried out products

not yet sold

vii)

Interest on borrowing incurred by a resident and used to fund construction, and interest

on private loans of which the sources are unknown

viii)

Depreciation amount of the fixed assets allocated for each year, exceeding the amount

allowed as necessary expenses

ix)

Household expenses and prepaid expenses

Value added tax paid on inputs

(e) Non-inclusion in necessary expenses of designated donation

If a taxpayer makes donations other than that designated below, or makes donations in

excess of 10% of the taxable income (excluding public contributions and carried-over loss),

the amount is not treated as a necessary expense (the amount in excess of such a limit

may be carried over for 3 years).

Donations to public interest entities, social welfare organizations, and religious

organizations

ii)

Donations and scholarships for academic research, technical development, and athletic

skill development

iii)

Other donations to public entities prescribed by the Presidential Decree

The following contributions are always treated as necessary expenses in computing

taxable income (but may not be carried over).

Value of money and goods donated to government agencies and local governmental

bodies without compensation

ii)

Contributions for national defense and war relief

iii)

Value of money and goods donated for the relief of victims of calamities

(f) Non-inclusion in necessary expenses of entertainment expenses

i) If a taxpayer's entertainment expenses exceed the aggregate sum of the following amounts,

the amount in excess thereof is not to be counted as a necessary expense. (Note:

Entertainment expenses are allowed only when supported by recognizable regular invoices

such as credit card invoices if the one-time expenditure is over 50,000 won.)

- an amount calculated by multiplying 12 million won (18 million won in the case of a small or

medium size enterprise) by the number of months in the respective tax period, divided by 12

- an amount calculated by multiplying the total amount of revenue for the business year by

the rates listed in the table below

Revenue amount

Rate

10 billion Won or less

0.2%

over 10 billion Won but not more than 50 billion Won

20 million Won + 0.1% in excess of 10 billion Won

more than 50 billion Won

60 million Won + 0.03% in excess of 50 billion Won

(g) In the case of transactions between related persons which result in an unreasonable

reduction of the tax burden, the government may adjust the income amount for each year of

said taxpayer, regardless of activities or calculation of the taxpayer.

(4) Depreciation

Depreciation cost is calculated as necessary expenses in computing income, and is

determined in accordance with the useful life of fixed assets.

(a) Methods of calculating depreciation

Depreciation of fixed assets is calculated according to the following methods.

i) Fixed percentage method or straight-line method for tangible fixed assets (only the

straight-line method may be used for buildings, but either method may be chosen for

machinery and equipment )

ii) Straight-line method used for intangible fixed assets

iii) Unit of production method or straight line method for mining rights: Under the unit of

production method, the actual output extracted in a tax year is compared to the estimated

total amount to have been extracted, and the ratio is applied to the book value of the mineral

rights to determine the size of the depreciation deduction allowed.

iv) Unit of production method, fixed percentage method, or straight line method for tangible

fixed assets used in mining

(b) Acquisition value of fixed assets

In case of fixed assets purchased, it is the price quoted at the time

of purchase (including registration tax, acquisition tax, and other incidental costs, but

not Value Added Tax).

ii) In case of fixed assets acquired by means of one's own construction, fabrication, etc., it

is the aggregate costs of raw materials, labor, freight, loading and unloading cost,

insurance premiums, fees, public imposts (including registration tax and acquisition tax),

installation expenses, and other incidental costs.

iii) In the case of fixed assets other than those referred to in i) and ii), it is the normal price

quoted at the time of acquisition.

Refer to the chapter covering the corporation tax law.

(d) Residual value

The residual value of a fixed asset is zero, but becomes 5% of the acquisition value in case

of depreciation when using the fixed percentage method. This amount is claimed as an

expense in the final year of depreciation.

(e) Revenue expenditures and capital expenditures

i) Repairing expenses disbursed by a taxpayer either to restore his assets to their original

state or to maintain their efficiency are regarded as revenue expenditures.

ii) Repairing expenditures spent either to extend the useful life or to increase the actual

value of fixed assets are regarded as capital expenditures.

(5) Accounting for inventory

(a) A taxpayer may select one of the following methods of inventory accounting. The accounting

method utilized for filing the tax return shall be reported by the due date for the year in which the

business is begun.

Cost method

ii)

Lower of the cost or the market method

(b) If the cost method is applied, one of the following conventions must be used.

Specific identification method

ii)

First-in, first-out ("FIFO") method

iii)

Last-in, first-out ("LIFO") method

iv)

Weighted average cost method

Moving average cost method

vi)

Cost of sales rebate method

business, in accordance with the following classes of assets.

Products and merchandise

ii)

Semi-finished goods and work in process

iii)

Raw materials

iv)

Goods in stock

(d) In any of the following cases, the head of a tax office may value inventory assets according

to the FIFO method (weighted average cost method in case of securities, specific identification

method in case of real estate held for sale).

A taxpayer fails to report his method of accounting for inventory within the time required.

ii)

A taxpayer accounts for inventory using a method other than that reported.

iii)

A taxpayer changes the accounting method used for inventory without filing a report of

such change.

d. Exemptions and Deductions Related to Global Income

There are four (4) exemptions or deductions related to global income.

(1) Basic Exemption

Residents with global income are entitled to annually deduct an amount equivalent to 1 million

won multiplied by the number of persons in the taxpayer's family, as determined below.

(a) A resident taxpayer

(b) A spouse with annual income of less than 1 million won

the taxpayer

* A dependent is a lineal ascendant aged sixty or older (fifty-five for females), a lineal

descendent of the resident aged twenty or less (there is no age restriction for a

handicapped person), a sibling aged under twenty or over sixty, and all other members of

the household supported by the resident.

(2) Additional Exemption

A resident eligible for a Basic Exemption and who belongs to any of the following classes may

also deduct 1 million won (a: 1.5 mil. won per year for those 70 years of age or older, b: 2 million

won, c: 500,000 won) per year from his/her global income:

(a)

a person who is 65 years or older,

(b) the handicapped, as prescribed by the Presidential decree or

(d)

anyone with a lineal descendant not more than 6 years of age.

(3) Additional Exemption for smaller Basic Exemption

A resident with wage and salary income, if the number of persons eligible for basic exemption

is one or two, may deduct 1 million won or 0.5 million won respectively.

(4) Special Deduction

Wage and salary income earners may deduct an amount equal to the sum of the following from

their wage and salary income, during the taxable year.

(a) Insurance premiums paid, up to 1,000,000 won: This limit does not apply to amounts paid for

medical care insurance.

(b) Insurance premiums of insurance exclusively offered for handicapped persons, up to one

million won

The deduction ceiling does not apply to expenses paid for the rehabilitation of handicapped

dependents, senior citizens and residents.

(d) Domestically incurred educational expenses of an employed taxpayer including graduate

students and educational expenses by a taxpayer on behalf of his descendants pursuant to

(1). The deduction for education expenses of descendants is limited to the following amounts: 2

million won annually per student for kindergarten and nursery school expenses, 2 million won

annually per student for elementary-, junior-and high school expenses, and 7 million won

annually per student for college education expenses. Educational expenses incurred overseas

by lineal descendants are eligible for deduction, subject to the following limits (annually, per

student): 2 million won for kindergarten, 2 million won for elementary, junior, and high schools,

and 7 million won for college. Education expenses for the taxpayer himself maybe deducted

without a ceiling.

(e)

Special education cost for the disabled: No ceiling

(f)

40% of deposits of an account earmarked for purchasing a house, which is held by a

person who does not own a house during the year concerned or a person who owns only

one house that is smaller than prespecified size in the presidential decree.

(g) Forty percent of the loan interest (for a total of up to three million won per year)

allotted to the lease of a house of appropriate size paid by a person without

housing or owning only one house which is no more than 85 square meters, who

is subscribed to a qualifying savings program for home ownership

(h) Interest up to 10 million won per year of a mortgage loan with the duration of more than 15

years

(i) Deduction for donations; amounts donated to qualified institutions, up to 10% of the

taxpayer's salary and wage income for the year: This limit of deduction does not apply to the

donations to specific welfare facilities.

(5) Standard Deduction

Alternatively, a taxpayer may elect to choose an annual standard deduction of 600,000 won (one

million won for wage and salary earners), if he or she fails to claim deductions in question or

accrues only global income without any wages or salaries earned.

e. Scope of Persons Eligible for Personal Exemptions and Determination of Eligibility

Persons eligible for spousal exemption, dependent exemption, or exemption for handicapped or

aged persons must be (i) a spouse and/or unmarried lineal descendant and (ii) family members

who are listed on the registration card of the resident actually living at the domicile or residence. A

person who has temporarily left the taxpayer's domicile or residence for reasons of schooling,

medical treatment, business, or work may still be entitled to an exemption. The determination of

eligibility shall be made based on the existing conditions at the closing date of the tax period

concerned.