Tax & Accounting Issues in Korea’s Publishing Industry
Recent trend in the Korean publishing market
Looking at the overall trend in the history of the Korean publishing market, paper books had been taking the center for a long time. However, e-books or the “e-book market” emerged, and today, publishers are having a greater interest in exporting copyrights of publications. This phenomenon has led to reduced demand for physical facilities, spurring the establishment of single-person publishers and small-sized publishing companies.
This article covers tax and accounting issues related to the publishing industry in Korea.
Tax structure related to publishing in Korea
The types of tax imposed on publishers running a business in Korea are as follows:
1. Value-Added Tax (VAT)
Publishing companies are primarily VAT-exempt business entities. However, more publishers are expanding their business to selling products related to books or promoting educational programs on top of publishing books. If a publisher is engaged in both tax-free business and taxable business, it must be registered as a taxable business entity.
Businesses are largely divided into taxable and tax-exempt entities depending on whether they are obliged to pay VAT. Those that are exempt from paying VAT are called tax-exempt or tax-free business entities. In other words, these businesses have no obligation to report and pay VAT. Meanwhile, businesses with the tax liability to pay VAT are classified as taxable entities and thus have the duty to report and pay VAT. Taxable businesses are subdivided into general taxpayers and simplified taxpayers. Individual businesses that do not meet a certain amount of sales set by the tax law are classified as simplified taxpayers, and legal entities are not eligible to become a simplified taxpayer. Also, for new businesses, if their sales volume for the first year is expected to be below 48 million won, they can be classified as simplified taxpayers. It is not a common case, but simplified taxpayers can choose to apply the general tax rate.
2. General Income Tax & Corporate Tax
If an individual business or a corporate business has a certain level of income, it is subject to pay tax corresponding to the amount. To be specific, “corporate tax” is imposed on the income earned by corporate businesses such as an incorporated company, and individuals who make profits should report and pay “income tax.”
3. Tax Withholding (Monthly Wage, etc.)
As a certain amount of tax is deducted from the monthly wage of company workers, the actual amount they get in their bank accounts differs from the notified total wage. Such pre-deduction of tax by companies is called “tax withholding.” Businesses are primarily obliged to withhold tax for earned income and social insurance fees such as the national pension from wages before paying their employees.
Tax Benefits for Publishers
There is an array of tax benefits that publishers running a business in Korea can enjoy. Representative tax credits are as below:
First is the “Tax Credit for Design Fees.” This credit deducts tax for expenses spent to develop designs for the business from 25% to a maximum of 50%. The “design fees” include wages paid to hired designers, outsource designers, the rental fee for design/plan equipment, design/plan fees, and expenses for purchasing samples, components, and raw materials used for studies. Therefore, publishers should note that the expenses for design works such as editing and organizing papers, the common kind of work done in the publishing process, are not eligible for the tax deduction.
Next is the “Tax Credit for Enterprises Increasing Jobs.” This benefit is given to companies that have increased the number of full-time employees compared to the previous year. Once the number falls for the next two years of the tax deduction, the tax credit will no longer be provided.
Publishers can also benefit from tax credits such as “Special Tax Reduction or Exemption for Small or Medium Enterprises” or “Tax Reduction or Exemption for Small or Medium-sized Startups.”
Tax Issues Related to Copyright Exports
Exporting copyrights of publications is indeed an exciting thing that yet not many have tried or are doing. However, it is quite different from traditional exports, and as it is affected by tax treaties and international taxation on top of the general tax law, it is easy for publishers to experience failure due to lack of knowledge.
To understand copyright export, publishers should be fully aware of related keywords. The first keyword to look at is “the difference between general exports and copyright exports.”
Regarding general exports, where completed products of paper books or general industrial products are sold to other countries, it is not mandatory to pay tax for export-related profits to the counterpart country. Indeed, tariffs or expenses during the process may occur, but basically, for general exports, you only need to pay export-related tax in Korea. However, things are different when you export copyrights. The international tax law classifies any income related to copyrights as “Royalty Income” and allows the importing country to impose tax to a certain extent.
Copyright export is attractive indeed, but considering its different nature compared to traditional exports, thorough understanding is a must.
The next keyword is “Tax Withholding Overseas.”
I have mentioned above that publishers must pay a certain amount of tax in the importing country when exporting copyrights. However, in such cases, you don’t report and pay the tax directly to the tax authority in the counterpart country, but pay it in the origin country in the form of tax retention where you are paid the deducted amount. As paying tax in the destination country following the respective tax law may hinder the facilitation of international trade, a low tax rate called “limited tax rate” is imposed on copyright exports between countries that sign a tax treaty.
Paying tax in another country while paying tax again in Korea as corporate tax or income tax would be double taxation made for the copyright export. Therefore, under the double tax avoidance regulation, which is one of the basic principles of international taxation, “foreign tax credit” is in place to prevent a business from paying tax twice for their export.
If the copyright export has been successfully completed, the business should make an appropriate tax report and corresponding payment. Individual businesses and corporate businesses should report how much tax they paid, reflecting export-related conditions through the general tax report and corporate tax report, respectively. You must not forget to apply for the foreign tax credit so that you can have the tax paid overseas deducted.
Last but not least, it is necessary to pay attention to the point at which you will confirm the export of the copyright and how much sales you will record in the book. For copyright exports, the export is considered complete when the copyright is handed over to the other side. Therefore, the sales must be confirmed properly in accordance with the date of the handover written on the contract.
Written by Kim Hyun-Joon (Tax Accountant at Tax Consulting Firm With Plus)