1. Overview of tax expenditure
The ｢2015 Tax Expenditure Proposal｣ submitted to the National Assembly on Sep. 22 shows that the national tax exemption amounts of 2014 and 2015 are 32.981 trillion won (tentative) and 33.548 trillion won (forecast), respectively. The national tax exemption rate is expected to decrease to 13.0% in 2015, down 0.2%p from 2014 (13.2%), which is lower than the 14.4% set as the legal limit based on the ｢National Finance Act｣. The tax expenditure on the top 20 items in 2015 is 26.1 trillion won, accounting for 78.9% of the total exemption amount (33.1 trillion won). Among those, 12 items are not subject to sunset clauses and the other 8 items’ sunset schedules have been continuously extended.
2. Current status of tax expenditure modification in 2014
According to the ｢2015 Tax Expenditure Proposal｣, the number of items was reduced by 1, as 6 items were newly introduced and 7 items were abolished, and 8 items are planned to be improved. The subsequent tax revenue impact is 123.1 billion won per year, which is substantially lower than the 3 trillion won modified in 2013. In particular, among the 52 items that are scheduled to expire in 2014, 7 will expire and 8 will be extended in a reduced scale, and the remaining 37 items are expected to be extended in an expanded form. The consequent tax revenue impact in 2015~2019 is expected to be 800 billion won (abolition 7.1 billion won, reduction 1.9 trillion won, expansion △1.1 trillion won).
3. Analysis of tax expenditure items scheduled to expire in 2014 The analysis of the tax expenditure items scheduled to expire in 2014 is as follows.
The tax deduction on job-creating investment should be extended to support the recovery trend of investment/employment and should be operated based on additional deduction with a focus on inducing employment improvement. The zero rate of VAT on equipment for agriculture/livestock/forestry should be reviewed for gradual reduction in consideration of the broad direct/indirect budget support for the agricultural industry. Income deduction based on credit card use should be considered to be converted to a tax credit considering that the calculation method of the income deduction system is complicated, the system has more of a focus on a policy-wise promotion of credit card use than on necessary expenses, and that income deduction has a regressive element, etc. While extending the expiration schedule of special tax exemption for SMEs, the target of exemption should be narrowed to focus on micro enterprises. In the case of special cases on VAT deduction on input tax on used cars, there should be a careful approach in converting it to a margin scheme, and improvement plans including the adjustment of deduction rate etc. should be considered. With regard to non-taxation on the interest/dividend income of saving of livelihood for the elderly/disabled, there should be a stronger qualification check on the subscribers, and it should be considered to add income/property standards on subscriber qualification in the mid-/long-term. Special cases on tax withholding on tax preferential savings is assessed not to be substantially effective, as it is practically overlapping with saving of livelihood and the saving limit is low (10 million won) for those other than target subscribers for saving of livelihood. A limited application of special cases of taxation on earned income by foreign workers is needed in consideration of the industrial sector and the level of skills etc. In the case of special cases of corporate taxation on association corporations including the National Agricultural Cooperative Federation, taxation on large-scale association corporations should be normalized in consideration of tax fairness, etc.
Although the extension of sunsets are needed for the tax support system, including corporate tax exemption and special cases for inclusion of reserve funds for proper purpose businesses in deductible expenses regarding the relocation of companies to provincial areas for the reinvigoration of regional economies, the system should be changed to a “positive list-based” one where the income items to be exempted from tax in the case of relocation of the HQ are listed to prevent excessive support, and follow-up management should be strengthened including through efforts to prevent the reporting of false relocation and the overstatement of the number of workers in provincial areas, etc. Special cases for inclusion of reserve funds for proper purpose businesses in deductible expenses should be improved or abolished as there is not sufficient management/supervision over whether the reserve fund, which is the target for special cases, is properly used and as there is an overlap of support with the annual expenditure budget.
4. Analysis of new tax expenditure items
The following are the new tax expenditure items.
The tax system to boost earned income should be reviewed to have a differentiated deduction rate based on revenue amount or total wage amount rather than on the size of a company, and it should be reviewed based on the base year method rather than on incremental amount. The tax system to promote dividend income should be carefully introduced in consideration of its small impact on increasing individuals' household income and minimal effect of increasing consumption. In the case of the conversion of the monthly rent income deduction to a tax credit and the mitigation of total wage requirements, while support on monthly rent is necessary as the form of housing has rapidly changed to be based on monthly rent etc., there should be a careful approach to the mitigation of wage requirements given that the income bracket of workers with a total wage of 50~70 million won is relatively high at the top 11~21%.
5. Issues and improvement plan on the Tax Expenditure Proposal
First, issues that have been pointed out every year, including on items with substantial errors between the tentative figure of tax expenditure in the previous year’s Tax Expenditure Proposal and the actual figure in this year’s proposal, and mismatches between the cost estimation report in the tax law revision bill submitted by the administration this year and the cost estimation in the Tax Expenditure Proposal have not been resolved. Second, as it is challenging to identify the impact of direct tax, on which the tax revenue impact of the tax law revision bill will be generated mostly in 2016 and afterwards, as the tax expenditure amount is aggregated only in periods of three years (2013~2015) based on the ｢Restriction of Special Taxation Act｣, it is necessary to extend the estimation period to 5 years or more. Third, as the Earned Income Tax Credit (ETIC) and Child Tax Credit (CTC), currently managed as tax expenditure items, have characteristics of spending as grants, are expected to be substantially expanded in size of expenditure, and are categorized and aggregated as annual expenditure in the US, they should be considered to be changed to and managed as annual expenditure items.
6. Ex-ante assessment of tax expenditure and improvement of the performance management system
The performance evaluation system on “ex-ante evaluation of new special taxation” and “special taxation scheduled to expire” will be introduced from 2015. Therefore, first, there should be a basic evaluation foundation including the setting of the performance target, evaluation guidelines and standards by individual system or category, the development of quantitative performance indicators and models if needed, and the establishment of an evaluation method in consideration of the characteristics by system for an effective and systematic evaluation. Second, it is necessary to expand the establishment/offerings of tax payment-related data to evaluate specific contents including “calculation ground for special taxation amount and expected impact, contribution to income redistribution, and level of target achievement, etc.”
7. Stronger control on the non-taxation/exemption of local taxes
In the period 1981~2012, the local tax exemption amount (growth of 16.4% per year) has increased faster than the local tax collection amount (14.0%), and the local tax exemption rate was 22.3%, which is higher than the national tax exemption rate (14.2%), as of 2012. To manage ex-ante/ex-post control of the non-taxation/exemption of local taxes, the control over the non-taxation/exemption of national and local taxes can be strengthened by each government agency, while the overall aggregation and management can be conducted by the Ministry of Strategy and Finance. Moreover, the submission of the “Local Tax Expenditure Report,” “Local Tax Exemption Proposal,” and “Local Tax Exemption Assessment” that the heads of each local government are currently submitting to the Ministry of Security and Public Administration should be mandatorily submitted to the National Assembly.
The ｢2015 Tax Expenditure Proposal｣ submitted to the National Assembly on Sep. 22 shows that the national tax exemption amounts of 2014 and 2015 are 32.981 trillion won (tentative) and 33.548 trillion won (forecast), respectively. The national tax exemption rate is expected to decrease to 13.0% in 2015, down 0.2%p from 2014 (13.2%), which is lower than the 14.4% set as the legal limit based on the ｢National Finance Act｣. The tax expenditure on the top 20 items in 2015 is 26.1 trillion won, accounting for 78.9% of the total exemption amount (33.1 trillion won). Among those, 12 items are not subject to sunset clauses and the other 8 items’ sunset schedules have been continuously extended.
2. Current status of tax expenditure modification in 2014
According to the ｢2015 Tax Expenditure Proposal｣, the number of items was reduced by 1, as 6 items were newly introduced and 7 items were abolished, and 8 items are planned to be improved. The subsequent tax revenue impact is 123.1 billion won per year, which is substantially lower than the 3 trillion won modified in 2013. In particular, among the 52 items that are scheduled to expire in 2014, 7 will expire and 8 will be extended in a reduced scale, and the remaining 37 items are expected to be extended in an expanded form. The consequent tax revenue impact in 2015~2019 is expected to be 800 billion won (abolition 7.1 billion won, reduction 1.9 trillion won, expansion △1.1 trillion won).
3. Analysis of tax expenditure items scheduled to expire in 2014 The analysis of the tax expenditure items scheduled to expire in 2014 is as follows.
The tax deduction on job-creating investment should be extended to support the recovery trend of investment/employment and should be operated based on additional deduction with a focus on inducing employment improvement. The zero rate of VAT on equipment for agriculture/livestock/forestry should be reviewed for gradual reduction in consideration of the broad direct/indirect budget support for the agricultural industry. Income deduction based on credit card use should be considered to be converted to a tax credit considering that the calculation method of the income deduction system is complicated, the system has more of a focus on a policy-wise promotion of credit card use than on necessary expenses, and that income deduction has a regressive element, etc. While extending the expiration schedule of special tax exemption for SMEs, the target of exemption should be narrowed to focus on micro enterprises. In the case of special cases on VAT deduction on input tax on used cars, there should be a careful approach in converting it to a margin scheme, and improvement plans including the adjustment of deduction rate etc. should be considered. With regard to non-taxation on the interest/dividend income of saving of livelihood for the elderly/disabled, there should be a stronger qualification check on the subscribers, and it should be considered to add income/property standards on subscriber qualification in the mid-/long-term. Special cases on tax withholding on tax preferential savings is assessed not to be substantially effective, as it is practically overlapping with saving of livelihood and the saving limit is low (10 million won) for those other than target subscribers for saving of livelihood. A limited application of special cases of taxation on earned income by foreign workers is needed in consideration of the industrial sector and the level of skills etc. In the case of special cases of corporate taxation on association corporations including the National Agricultural Cooperative Federation, taxation on large-scale association corporations should be normalized in consideration of tax fairness, etc.
Although the extension of sunsets are needed for the tax support system, including corporate tax exemption and special cases for inclusion of reserve funds for proper purpose businesses in deductible expenses regarding the relocation of companies to provincial areas for the reinvigoration of regional economies, the system should be changed to a “positive list-based” one where the income items to be exempted from tax in the case of relocation of the HQ are listed to prevent excessive support, and follow-up management should be strengthened including through efforts to prevent the reporting of false relocation and the overstatement of the number of workers in provincial areas, etc. Special cases for inclusion of reserve funds for proper purpose businesses in deductible expenses should be improved or abolished as there is not sufficient management/supervision over whether the reserve fund, which is the target for special cases, is properly used and as there is an overlap of support with the annual expenditure budget.
4. Analysis of new tax expenditure items
The following are the new tax expenditure items.
The tax system to boost earned income should be reviewed to have a differentiated deduction rate based on revenue amount or total wage amount rather than on the size of a company, and it should be reviewed based on the base year method rather than on incremental amount. The tax system to promote dividend income should be carefully introduced in consideration of its small impact on increasing individuals' household income and minimal effect of increasing consumption. In the case of the conversion of the monthly rent income deduction to a tax credit and the mitigation of total wage requirements, while support on monthly rent is necessary as the form of housing has rapidly changed to be based on monthly rent etc., there should be a careful approach to the mitigation of wage requirements given that the income bracket of workers with a total wage of 50~70 million won is relatively high at the top 11~21%.
5. Issues and improvement plan on the Tax Expenditure Proposal
First, issues that have been pointed out every year, including on items with substantial errors between the tentative figure of tax expenditure in the previous year’s Tax Expenditure Proposal and the actual figure in this year’s proposal, and mismatches between the cost estimation report in the tax law revision bill submitted by the administration this year and the cost estimation in the Tax Expenditure Proposal have not been resolved. Second, as it is challenging to identify the impact of direct tax, on which the tax revenue impact of the tax law revision bill will be generated mostly in 2016 and afterwards, as the tax expenditure amount is aggregated only in periods of three years (2013~2015) based on the ｢Restriction of Special Taxation Act｣, it is necessary to extend the estimation period to 5 years or more. Third, as the Earned Income Tax Credit (ETIC) and Child Tax Credit (CTC), currently managed as tax expenditure items, have characteristics of spending as grants, are expected to be substantially expanded in size of expenditure, and are categorized and aggregated as annual expenditure in the US, they should be considered to be changed to and managed as annual expenditure items.
6. Ex-ante assessment of tax expenditure and improvement of the performance management system
The performance evaluation system on “ex-ante evaluation of new special taxation” and “special taxation scheduled to expire” will be introduced from 2015. Therefore, first, there should be a basic evaluation foundation including the setting of the performance target, evaluation guidelines and standards by individual system or category, the development of quantitative performance indicators and models if needed, and the establishment of an evaluation method in consideration of the characteristics by system for an effective and systematic evaluation. Second, it is necessary to expand the establishment/offerings of tax payment-related data to evaluate specific contents including “calculation ground for special taxation amount and expected impact, contribution to income redistribution, and level of target achievement, etc.”
7. Stronger control on the non-taxation/exemption of local taxes
In the period 1981~2012, the local tax exemption amount (growth of 16.4% per year) has increased faster than the local tax collection amount (14.0%), and the local tax exemption rate was 22.3%, which is higher than the national tax exemption rate (14.2%), as of 2012. To manage ex-ante/ex-post control of the non-taxation/exemption of local taxes, the control over the non-taxation/exemption of national and local taxes can be strengthened by each government agency, while the overall aggregation and management can be conducted by the Ministry of Strategy and Finance. Moreover, the submission of the “Local Tax Expenditure Report,” “Local Tax Exemption Proposal,” and “Local Tax Exemption Assessment” that the heads of each local government are currently submitting to the Ministry of Security and Public Administration should be mandatorily submitted to the National Assembly.