콘텐츠 바로가기
로그인
컨텐츠
  • HOME
  • SEARCH
PLUS Text Size MINUS RESET
FACEBOOK TWITTER Linked In

Category Open

Themes

tutorial

Comprehensive one-stop references on key development issues of Korea

Print

Taxation Policy for Legalizing the Underground Economy

Sub-Theme1 | Credit Card Income Deduction Program


Basic Structure of Credit Card Income Deduction Program

The deducted amount is basically determined by the credit card spending amount and the total yearly wage of employee. At the beginning of this program the amount was defined as 10% of the domestic credit card total spending amounts which exceed 10% of yearly wage. In other words, the wage earner had to pay with their credit card at the amount of at least 10% of wage to get a tax benefit, and such spending had to occur within Korea. Any credit card spending outside Korea was not counted because it did not help reduce the underground economy of Korea.
At the same time the deducted amount could not be more than 3 million Korean won (₩3,000,000 which is approximately USD 2,500). So there was a limit to this tax benefit, set to prevent a high income earner from having excessive benefits because credit card spending is often positively associated with wage income.


Family Member Credit Card Usage 


Major Changes in the Program

The credit card income deduction program was established by a special tax law; and the law stipulated a sunset regulation after some time. Because of this regulation the government had to decide whether this program should be upheld or abolished at the time of the program’s expiration date. Usually the sunset comes every two or three years, which means it has been modified frequently so far. Some important changes are outlined below.

In 2001 the first amendment was made. The maximum deduction amount was increased up to 5 million Korean won (₩5,000,000 which is approximately USD 4,167). Further, the deduction rate was raised by double: it became 20% of credit card spending which exceeds 10% of yearly wage. In 2002 another amendment was announced for the debit card. If one used a debit card instead of a credit card, the deduction rate became even higher at 30%. The tax benefit of the credit card income deduction program was reduced by adjusting the deduction rate to 15% of credit card spending which exceeds 20% of yearly wage at the end of 2004. This change was related to a new program, the “Cash Receipt System,” which was introduced in 2005 and will be explained in the next section.

The maximum deduction amount was decreased to 3 million Korean won (₩3,000,000 approximately USD 2,500) in 2010. This modification was done based on the government’s judgement that the policy goal of expanding the tax base through the credit card transaction promotion was accomplished to the extent that the government desired initially.


Extension of Policy Objectives

This program was used for other policy objectives as well. As large discount stores have extended their branches in the country, traditional local markets composed of many small independent stores suffered from decrease in consumer demand. In 2012 the government assigned an extra deduction of up to 1 million Korean won (₩1,000,000 approximately USD 833) if one used a credit card at a traditional local market in an attempt to revitalize the economy of those local markets. The deduction rate for this extra deduction was set as 30% which is greater than the regular rate.

Starting in 2013 another deduction of up to 2 million Korean won (₩2,000,000 approximately USD 1,667) was made available if an individual paid their public transportation fare by credit card.

These two benefits are not directly related to the original policy objective of the Credit Card Income Deduction Program which was to expand the tax base through stimulation of credit card transactions. Rather, these examples show how credit cards can be utilized to achieve some other policy intentions. When policymakers think creatively it becomes possible to design an innovative credit card policy given that the necessary infrastructure is available to implement the policy easily.