15/03/2016

The Current Status of the Earned Income Tax Credit in South Korea and the Implication to Japan―Earned Income Tax Credit or Reduced Tax Rate? ―

Social Improvement and Life Design Research Department Research fellow Kim Myoungjung 

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3Application Process of the EITC and Standard of Application  
Unit of the assessment for South Korean income tax is an individual, while the EITC evaluates whether a household is eligible or not. Recipients of the EITC were limited to employees, and the eligibility has been expanded to the individual proprietor since 2015; however, proprietors without business registration and professionals like lawyers, patent agents, certified public accountants, physicians, pharmacists and so on are excluded. In the initial phase, employees were the only beneficiary of the EITC as income-capture rate of individual proprietors is lower than the rate of employees.

There are two ways to apply for the EITC: submitting an application within a certain period and after the period. If people apply for the EITC between 1st of May and 1st of June every year, they can apply for the assistance within a certain period. On the other hand, if a person applies after the period, between 2nd of June and 1st of December, 10% reduced subsidies for the EITC and the Child Tax Credit (CTC) 11are provided. People who are eligible to apply for the EITC can apply for it by telephones12, mobile phones, mobile websites and the internet or visiting tax office13.
 
To apply for the EITC and the CTC, following four standards are needed to be fulfilled.
 
(1)Standard for Household
  • EITC: As of December 31 every year, the applicant has a spouse or a child under 18 to support, or the applicant is older than 60.
  • CTC:As of December 31 every year, the applicant has a spouse or a child under 18 to support.
A child to support needs to meet all of the requirements.
・A child whom a householder supports or an adopted child who lives with a householder. However, grandchild and siblings can be included in his or her dependents14.
・As of December 31 of the previous year, a child is younger than 18; however, there is no age requirement to the severely disabled.
・Annual gross income is 1 million won and less.
 
(2)Standard for Gross Income
  • EITC: To receive benefits, gross income of a married couple for the previous year is less than the base amount illustrated in Table 6.
 
Table 6  Base Amount of Gross Income for Households
・Business income= total revenues ⅹ adjustment rates for industries
・Working income= total salaries
・Other income= total revenues – necessary expenses
・Interest ・dividend・pension is included in total revenues
 
  • CTC: annual gross income of a married couple is less than 40 million won.
 
(3)Standard for Housing: Standards for the EITC and CTC are Equivalent.
As of June 1st of the previous year, all members of a household do not own a house, or in case of having a house, the market price of the house is less than 60 million won (only 1 house).
 
 
(4)Standard of Assets: Standards for the EITC and CTC are Equivalent.
As of June 1st of the previous year, total value of assets (a house, land, a building, savings, etc.) that all members of a household possess is less than 140 million won. Table 7 illustrates the scope of assets and evaluation methods in detail.
 
Table 7 Assets and Evaluation Methods
Besides the four standards, an applicant needs to be a South Korean citizen (including a person married with a South Korean citizen) and is not supported by other households.
 
 
11 Since fiscal year 2015, a new CTC to provide up to 500,000 won per child annually for applicants who have a child to support is introduced.
12 Households verified to receive the EITC or the CTC based on income of the previous year.
13 If a person is not informed to apply, he or she can apply only by internet or visiting tax office.
14 Grandchildren and siblings without a parent、In case a person supports grandchildren and siblings without a parent (including a case with only a father or a mother), annual gross income of a parent is 1 million won and less, or a parent is severely disabled under the Act on the Acceleration of Employment of the Disabled and Occupation Rehabilitation or is classified level 3 or higher under laws of compensation for ‘May 18 Democratic Uprising ’、In case a person supports grandchildren with a parent, the parent is younger than 18 and the parent’s annual gross income is 1 million won and less.
4EITC payment system and current situation for payment
The most important feature of the EITC payment system is that benefit amounts are divided into three parts based on working income level: phase-in range, flat range and phase-out range. In the phase-in range, the EITC benefits increase at a fixed rate as working income increases. In the flat range, maximum amount of benefits are provided regardless of increase in working income, and the EITC benefits decrease at a fixed rate as working income increases in the phase-out range. For example, up to 6 million won of annual gross income is in the phase-in range for single households, and the EITC benefits of single households increase as they work in this range. If single households earn 6~9 million won for annual gross income, they receive a fixed amount, 700 thousand won; if they earn 9~13 million won, the ETIC benefits that they receive a decrease as their annual gross income increases (Figure 4). Calculation method of the EITC for each type of households is described in Table 8.
 
Figure 4 Structure of the EITC in South Korea
In 2015, the CTC was introduced; applicants with dependent children can receive the maximum of 500 thousand won per child for a year as subsidies.

The number of households that receive the EITC increased from 522 thousand in 2010 to 846 thousand in 2013. The amount of benefits increased from 402 billion won to 774.5 billion won for the same period(Table 9), and the EITC has gradually been becoming a established system.
Table 8 Requirements to Receive the EITC and Calculation Methods for Households /Table 9 Changes in the Amounts of the EITC Incentives and the Number of Recipient Households

Social Improvement and Life Design Research Department   Research fellow

Kim Myoungjung

Research field

03-3512-1878

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