1. Revision direction and assessment of Tax Revision Proposals
The ｢2014 Tax Revision Proposals｣ that the government submitted to the National Assembly on Sep. 22 set the basic directions of economic revitalization, public welfare stability, and tax system rationalization with a focus on realizing a “tax system that is competitive, fair, and based on principles.”
On this basis, we assessed the direction of tax revision based on the macro-economic environment. The ｢Tax System to Boost Household Income｣ is assessed to be a policy response to reinvigorate domestic demand, etc. However, there should be a more comprehensive policy response including linkage with other tax support plans, etc. to improve policy impact. For example, the “excess cash reserve tax” should aim to have companies with sufficient capacity contribute to the improvement of household income through investments, dividends, and wage increases, etc. rather than to increase the tax burden on companies, and it should be operated in such a way as to ensure that investments, dividends, and wage increases are not concentrated only in some companies with spare financial capacity.
Moreover, we assessed tax revision proposals in terms of mid-/long-term tax policy. The ｢Tax System to Boost Household Income｣ seems to follow the basic direction of the ｢Mid-/Long-term Tax Policy Operation Plan｣, which aims for the build-up of growth engines, by inducing a virtuous cycle where corporate profits flow to households. However, the impact of such a plan should be reviewed from the perspective of tax fairness. Moreover, with regard to non-taxable/exemption items, efforts to revise non-taxable/exemption items to secure tax revenue still has room for improvement, as only 7 out of the 53 items scheduled for sunset will expire this year, with 8 items being redesigned and the remaining 38 items being extended (including modification).
2. Analysis by major tax items
(1) Income Tax
This system, which was introduced to increase household income and revitalize consumption through promoting dividends, temporarily reduces the dividend income tax rate only for shareholders of listed companies that achieved dividend payout ratio / dividend yield above a certain level and increased dividends by more than 10~30%. The system, if executed, is expected to increase the annual dividend amount by up to 2 trillion won, leading to an increase of household income by up to 500 billion won, depending on the capacity of the company to increase dividends. However, the consumption increase impact is expected to be minimal as the marginal propensity to consume of the main class that receives dividend income is low (0.297) and the impact of increased dividends could be concentrated on a small number of people.
The administration abolished tax preferential savings that reached sunset and raised the non-taxable savings limit of the existing saving of livelihood (3 million won à 5 million won) and renamed it “non-taxable comprehensive savings.” As the tax cut benefits expanded as the non-taxable savings limit was raised, there should be tighter management of the target subscribers’ qualifications.
Regarding old-age income, the administration proposed a plan of expanding the limit of retirement pension payment to be paid by workers, which falls under the target of tax deduction. Second, the plan increased the tax burden on high retirement income earners and reduced the tax burden on the retirement income of the low income class, including through the introduction of a differential tax deduction based on retirement income level, etc. However, policies that can resolve the concentration of the tax burden on certain income classes and induce the annuitization of retirement income should be considered.
(2) Corporate tax
The excess cash reserve tax system, which is one of the ｢Tax System to Boost Household Income」 packages, imposes an additional 10% of tax on the gap amount that was not spent on investments, dividend payments, and wage increases, etc. among the profits of the term when a company fails to spend a standard ratio of its profits in such ways. An analysis based on companies’ financial data showed that the system can cause an average of 861.3 billion won in additional tax burden on 645 companies (1.34 billion won per company) based on their corporate performances in the period 2009~2013. If the economy continues to recover, there could be an expansion in investments, dividends, and wage increases. However, the system needs to be carefully designed, including on the setting of the standard ratio and investment scope, and there should be discussion on the fundamental reform of corporate tax rather than executing the system temporarily.
The tax system to increase earned income, which is also one of the packages of the ｢Tax System to Boost Household Income」, allows a tax deduction of 5% in the case of large corporations and 10% for middle-standing/SMEs with regard to the amount of wage increases in excess of a certain standard during 2015~2017. Although the impact of tax benefits for wage increases and a consumption improvement impact are expected, a plan that differentiates deduction rate based on revenue and total amount of wages as well as corporate size to prevent the concentration of tax benefits in top companies and a plan for applying the base year method instead of increments to simplify the tax system could be considered. The estimation based on corporate financial data showed that, when this system is introduced, a reduction of tax revenue by △682.8 billion won in 2015~2017, including △223.1 billion won in 2015, is expected.
With regard to tax deduction for job-creating investment, the deduction, which is scheduled to expire this year, will be extended by 3 years until the end of 2017. The basic deduction rate will be decreased by 1%p and the additional deduction rate will be increased by 1%p to improve the employment effect, and the additional deduction rate for the service industry and provincial investment will be increased by 1%p each. Although the employment inducement coefficient of investment has declined and employment improvement has become an important policy for the recovery of domestic demand, the analysis result of corporations’ capex investment and employment data showed that the tax deduction for job-creating investment has more “employment impact on capex investment companies” than capex investment does. This indicates that the system needs to be operated with a focus on additional deduction, particularly in the case of large corporations. The tax revenue impact by the sunset extension of deduction for job-creating investment and the change of the deduction rate is estimated to be total of △ 1.8618 trillion won in 2015~2017, including △593.7 billion won in 2015.
Special corporate taxation, including on association corporations etc., is a special taxation policy that imposes a lower tax rate (9%) than the general corporate tax rate with net profit during the term in business accounting as the tax base. The government proposed to extend the system’s sunset by 3 years until 2017 and apply a progressive tax rate of 17% on the section exceeding 1 billion won in net income to improve fairness through taxation normalization. Regarding this issue, it seems that the low taxation rate on net income should be normalized in the long-term and the progressive rate should be applied in consideration of the size of the association corporations.
The plan to tighten the deduction of indirect foreign tax is based on raising the bar for recognizing an overseas subsidiary subject to tax deduction to a 25% share ratio of the parent company, excluding overseas sub-subsidiaries which used to be included, and having only a
country-limit method recognized as the deductible limit calculation method. When this revision is executed, it is expected that the system will improve the taxation fairness issues between domestic investment (investment in domestic subsidiaries, etc.) and overseas investment (equity investment in overseas subsidiaries, etc.) and contribute to the securing of tax revenue. However, it is necessary to operate the system from a more mid-/long-term perspective by considering the securing of corporate competitiveness in the global market and policy credibility, etc.
(3) VAT
The administration announced the reduction of the VAT exemption scope of financial and insurance services through an enforcement ordinance. This plan is meaningful in terms of removing distortion by tax exemption and securing a new source of tax revenue, but there should be a review from a tax administration perspective on issues including the difficulties of setting the scope of taxation on supplementary financial/insurance services and the setting of the allocation index, etc.
Moreover, taxation on electronic services for purchases from the overseas open market is included. Under this system, open market businesses should register themselves as simple traders online through the National Tax Service website and pay taxes. In other words, the open market businesses pay taxes on behalf of overseas developers. The system is meaningful in that it laid the foundation for imposing taxes on overseas developers, etc. and promoted taxation fairness between overseas and domestic developers and app market businesses. However, there should be a review on the effectiveness of the tax collection method including the establishment of compulsory measures for the registration of online simple traders.
Realistically, it is challenging to convert the deduction of deemed input tax applied to used cars to a margin scheme. Therefore, it is necessary to adjust the current deduction rate of deemed input tax to ensure the same effect as a margin scheme and to consider improvement plans for improper deductions, etc.
(4) Others
The plan to expand the scope of family business succession in inheritance tax and gift tax laws and the mitigation of the follow-up management requirement concerns expanding the scope of family business succession to middle-standing enterprises with 500 billion won or less in revenue and dramatically easing the requirements and follow-up management obligations. The family business succession tax system has gone through an easing of requirements to be included in the scope and rises in the deduction amount every year since 2007. However, a careful approach is required, as the intention of introducing the system can be diluted as it is applied to a broader scope of companies and the system can encourage tax evasion, etc.
The government decided to raise the price of cigarette packages from 2,500 won to 4,500 won as part of its comprehensive non-smoking policy, to increase the tax burden related to cigarettes, and to newly impose a specific consumption tax. There was a gap between the government (2.8 trillion won) and NABO (5 trillion won) on the tax revenue impact of the raising of the cigarette price based on the elasticity of cigarette use in the estimation. It seems that there should be an additional adjustment of the taxation target after the establishment of the overall system improvement direction including on the taxation principles of the specific consumption tax, with regard to the establishment of the specific consumption tax, and a sufficient collection and review of opinions through compliance with the advance legislation notice based on the Administrative Procedures Act.
To make the residence tax, which has been frozen for the last 20 years, rational, it was decided to raise the personal and corporate uniform residence tax and property-based residence tax in a phased manner. Such a tax increase seems to be helpful in the expansion of local finance, but there are limitations in that the improvement was made only through the increase of some residence tax, instead of through the overall system of the complicated tax items of the existing residence tax system and the adjustment of similar/overlapping systems.
3. Analysis of tax revenue impact
NABO’s estimation shows that the tax revenue impact after considering sunsets based on ｢2014 Tax Revision Proposals｣ in the period 2015~2019 is △5.7 trillion won (△1.5 trillion won in 2015, △3.8 trillion won in 2016) in total. Unlike the above method, the tax revenue impact reflecting only institutional revisions other than sunsets, excluding the sunset extension impact (△18.9 trillion won), is expected to be an increase of 2.5 trillion won in 2015 and 13.2 trillion won in the period 2015~2019 based on the tax revision proposals, and among them, the specific consumption tax revenue is expected to increase the most by 10.7 trillion won. When examined by tax item, the tax revenue impact will be △800 billion won in income tax, 400 billion won in corporate tax, △300 billion won in inheritance/gift tax, 3.3 trillion won in VAT, and 10.7 trillion won in specific consumption tax, indicating that the tax revenue impact is generated more in indirect items (13.9 trillion won) than in direct items (△700 billion won). Moreover, although it was proposed to abolish 7 items and reduce 8 items among the 53 items that are scheduled for sunset this year, the exemption amount of the 7 items to be abolished is minimal and 11 new non-taxation/exemption items were proposed.
When compared with the baseline in terms of sunset, the gap between NABO and the administration on the tax revenue impact in the period 2015~2019 is 6.2 trillion won [NABO (△5.7 trillion won), administration (△11.9 trillion won)]. When compared with the baseline with sunset excluded, the gap in the tax revenue impact based on tax revision proposals between NABO and the administration in the period 2015~2019 is 3.2 trillion won [NABO (13.2 trillion won), administration (9.9 trillion won)].
The ｢2014 Tax Revision Proposals｣ that the government submitted to the National Assembly on Sep. 22 set the basic directions of economic revitalization, public welfare stability, and tax system rationalization with a focus on realizing a “tax system that is competitive, fair, and based on principles.”
On this basis, we assessed the direction of tax revision based on the macro-economic environment. The ｢Tax System to Boost Household Income｣ is assessed to be a policy response to reinvigorate domestic demand, etc. However, there should be a more comprehensive policy response including linkage with other tax support plans, etc. to improve policy impact. For example, the “excess cash reserve tax” should aim to have companies with sufficient capacity contribute to the improvement of household income through investments, dividends, and wage increases, etc. rather than to increase the tax burden on companies, and it should be operated in such a way as to ensure that investments, dividends, and wage increases are not concentrated only in some companies with spare financial capacity.
Moreover, we assessed tax revision proposals in terms of mid-/long-term tax policy. The ｢Tax System to Boost Household Income｣ seems to follow the basic direction of the ｢Mid-/Long-term Tax Policy Operation Plan｣, which aims for the build-up of growth engines, by inducing a virtuous cycle where corporate profits flow to households. However, the impact of such a plan should be reviewed from the perspective of tax fairness. Moreover, with regard to non-taxable/exemption items, efforts to revise non-taxable/exemption items to secure tax revenue still has room for improvement, as only 7 out of the 53 items scheduled for sunset will expire this year, with 8 items being redesigned and the remaining 38 items being extended (including modification).
2. Analysis by major tax items
(1) Income Tax
This system, which was introduced to increase household income and revitalize consumption through promoting dividends, temporarily reduces the dividend income tax rate only for shareholders of listed companies that achieved dividend payout ratio / dividend yield above a certain level and increased dividends by more than 10~30%. The system, if executed, is expected to increase the annual dividend amount by up to 2 trillion won, leading to an increase of household income by up to 500 billion won, depending on the capacity of the company to increase dividends. However, the consumption increase impact is expected to be minimal as the marginal propensity to consume of the main class that receives dividend income is low (0.297) and the impact of increased dividends could be concentrated on a small number of people.
The administration abolished tax preferential savings that reached sunset and raised the non-taxable savings limit of the existing saving of livelihood (3 million won à 5 million won) and renamed it “non-taxable comprehensive savings.” As the tax cut benefits expanded as the non-taxable savings limit was raised, there should be tighter management of the target subscribers’ qualifications.
Regarding old-age income, the administration proposed a plan of expanding the limit of retirement pension payment to be paid by workers, which falls under the target of tax deduction. Second, the plan increased the tax burden on high retirement income earners and reduced the tax burden on the retirement income of the low income class, including through the introduction of a differential tax deduction based on retirement income level, etc. However, policies that can resolve the concentration of the tax burden on certain income classes and induce the annuitization of retirement income should be considered.
(2) Corporate tax
The excess cash reserve tax system, which is one of the ｢Tax System to Boost Household Income」 packages, imposes an additional 10% of tax on the gap amount that was not spent on investments, dividend payments, and wage increases, etc. among the profits of the term when a company fails to spend a standard ratio of its profits in such ways. An analysis based on companies’ financial data showed that the system can cause an average of 861.3 billion won in additional tax burden on 645 companies (1.34 billion won per company) based on their corporate performances in the period 2009~2013. If the economy continues to recover, there could be an expansion in investments, dividends, and wage increases. However, the system needs to be carefully designed, including on the setting of the standard ratio and investment scope, and there should be discussion on the fundamental reform of corporate tax rather than executing the system temporarily.
The tax system to increase earned income, which is also one of the packages of the ｢Tax System to Boost Household Income」, allows a tax deduction of 5% in the case of large corporations and 10% for middle-standing/SMEs with regard to the amount of wage increases in excess of a certain standard during 2015~2017. Although the impact of tax benefits for wage increases and a consumption improvement impact are expected, a plan that differentiates deduction rate based on revenue and total amount of wages as well as corporate size to prevent the concentration of tax benefits in top companies and a plan for applying the base year method instead of increments to simplify the tax system could be considered. The estimation based on corporate financial data showed that, when this system is introduced, a reduction of tax revenue by △682.8 billion won in 2015~2017, including △223.1 billion won in 2015, is expected.
With regard to tax deduction for job-creating investment, the deduction, which is scheduled to expire this year, will be extended by 3 years until the end of 2017. The basic deduction rate will be decreased by 1%p and the additional deduction rate will be increased by 1%p to improve the employment effect, and the additional deduction rate for the service industry and provincial investment will be increased by 1%p each. Although the employment inducement coefficient of investment has declined and employment improvement has become an important policy for the recovery of domestic demand, the analysis result of corporations’ capex investment and employment data showed that the tax deduction for job-creating investment has more “employment impact on capex investment companies” than capex investment does. This indicates that the system needs to be operated with a focus on additional deduction, particularly in the case of large corporations. The tax revenue impact by the sunset extension of deduction for job-creating investment and the change of the deduction rate is estimated to be total of △ 1.8618 trillion won in 2015~2017, including △593.7 billion won in 2015.
Special corporate taxation, including on association corporations etc., is a special taxation policy that imposes a lower tax rate (9%) than the general corporate tax rate with net profit during the term in business accounting as the tax base. The government proposed to extend the system’s sunset by 3 years until 2017 and apply a progressive tax rate of 17% on the section exceeding 1 billion won in net income to improve fairness through taxation normalization. Regarding this issue, it seems that the low taxation rate on net income should be normalized in the long-term and the progressive rate should be applied in consideration of the size of the association corporations.
The plan to tighten the deduction of indirect foreign tax is based on raising the bar for recognizing an overseas subsidiary subject to tax deduction to a 25% share ratio of the parent company, excluding overseas sub-subsidiaries which used to be included, and having only a
country-limit method recognized as the deductible limit calculation method. When this revision is executed, it is expected that the system will improve the taxation fairness issues between domestic investment (investment in domestic subsidiaries, etc.) and overseas investment (equity investment in overseas subsidiaries, etc.) and contribute to the securing of tax revenue. However, it is necessary to operate the system from a more mid-/long-term perspective by considering the securing of corporate competitiveness in the global market and policy credibility, etc.
(3) VAT
The administration announced the reduction of the VAT exemption scope of financial and insurance services through an enforcement ordinance. This plan is meaningful in terms of removing distortion by tax exemption and securing a new source of tax revenue, but there should be a review from a tax administration perspective on issues including the difficulties of setting the scope of taxation on supplementary financial/insurance services and the setting of the allocation index, etc.
Moreover, taxation on electronic services for purchases from the overseas open market is included. Under this system, open market businesses should register themselves as simple traders online through the National Tax Service website and pay taxes. In other words, the open market businesses pay taxes on behalf of overseas developers. The system is meaningful in that it laid the foundation for imposing taxes on overseas developers, etc. and promoted taxation fairness between overseas and domestic developers and app market businesses. However, there should be a review on the effectiveness of the tax collection method including the establishment of compulsory measures for the registration of online simple traders.
Realistically, it is challenging to convert the deduction of deemed input tax applied to used cars to a margin scheme. Therefore, it is necessary to adjust the current deduction rate of deemed input tax to ensure the same effect as a margin scheme and to consider improvement plans for improper deductions, etc.
(4) Others
The plan to expand the scope of family business succession in inheritance tax and gift tax laws and the mitigation of the follow-up management requirement concerns expanding the scope of family business succession to middle-standing enterprises with 500 billion won or less in revenue and dramatically easing the requirements and follow-up management obligations. The family business succession tax system has gone through an easing of requirements to be included in the scope and rises in the deduction amount every year since 2007. However, a careful approach is required, as the intention of introducing the system can be diluted as it is applied to a broader scope of companies and the system can encourage tax evasion, etc.
The government decided to raise the price of cigarette packages from 2,500 won to 4,500 won as part of its comprehensive non-smoking policy, to increase the tax burden related to cigarettes, and to newly impose a specific consumption tax. There was a gap between the government (2.8 trillion won) and NABO (5 trillion won) on the tax revenue impact of the raising of the cigarette price based on the elasticity of cigarette use in the estimation. It seems that there should be an additional adjustment of the taxation target after the establishment of the overall system improvement direction including on the taxation principles of the specific consumption tax, with regard to the establishment of the specific consumption tax, and a sufficient collection and review of opinions through compliance with the advance legislation notice based on the Administrative Procedures Act.
To make the residence tax, which has been frozen for the last 20 years, rational, it was decided to raise the personal and corporate uniform residence tax and property-based residence tax in a phased manner. Such a tax increase seems to be helpful in the expansion of local finance, but there are limitations in that the improvement was made only through the increase of some residence tax, instead of through the overall system of the complicated tax items of the existing residence tax system and the adjustment of similar/overlapping systems.
3. Analysis of tax revenue impact
NABO’s estimation shows that the tax revenue impact after considering sunsets based on ｢2014 Tax Revision Proposals｣ in the period 2015~2019 is △5.7 trillion won (△1.5 trillion won in 2015, △3.8 trillion won in 2016) in total. Unlike the above method, the tax revenue impact reflecting only institutional revisions other than sunsets, excluding the sunset extension impact (△18.9 trillion won), is expected to be an increase of 2.5 trillion won in 2015 and 13.2 trillion won in the period 2015~2019 based on the tax revision proposals, and among them, the specific consumption tax revenue is expected to increase the most by 10.7 trillion won. When examined by tax item, the tax revenue impact will be △800 billion won in income tax, 400 billion won in corporate tax, △300 billion won in inheritance/gift tax, 3.3 trillion won in VAT, and 10.7 trillion won in specific consumption tax, indicating that the tax revenue impact is generated more in indirect items (13.9 trillion won) than in direct items (△700 billion won). Moreover, although it was proposed to abolish 7 items and reduce 8 items among the 53 items that are scheduled for sunset this year, the exemption amount of the 7 items to be abolished is minimal and 11 new non-taxation/exemption items were proposed.
When compared with the baseline in terms of sunset, the gap between NABO and the administration on the tax revenue impact in the period 2015~2019 is 6.2 trillion won [NABO (△5.7 trillion won), administration (△11.9 trillion won)]. When compared with the baseline with sunset excluded, the gap in the tax revenue impact based on tax revision proposals between NABO and the administration in the period 2015~2019 is 3.2 trillion won [NABO (13.2 trillion won), administration (9.9 trillion won)].