Tax changes to deter charity donors

On the first floor of the Community Chest of Korea, handprints of members of the Honor Society, a mega donors club, are on display. By Kang Jung-hyun

Na Won-ho, a 17-year-old student at Suncheon Hyocheon High School in South Jeolla, entered the school a year ago on a scholarship and was supposed to be free from tuition payments for three years.

But Na, now an 11th grader, is worried that his scholarship may end next year because his patron may be cutting back on the financial assistance he gives.

His patron is Bae Jeong-cheol, owner of a sushi restaurant in Gangnam District. Bae realizes that a new set of proposed tax reforms will reduce how much of his charitable donations can be deducted from his taxes. As a result, Lee could pay an extra 40 million won ($36,531) in taxes next year.

Bae currently makes charitable donations of over 200 million won per year. “If the new law is put in place,” he said, “the amount of money I can donate will be limited.”

The proposed tax reforms will definitely deter large private donors like Bae.

As part of the Park Geun-hye administration’s push to raise more revenue to pay for welfare programs, a cap on charitable tax exemptions of 25 million won was implemented in January. Going further, the amount of the donation you can deduct is being cut. Currently, donors to international organizations and most schools can deduct 100 percent of their charitable contributions.

Donors to local nonprofit organizations and religious organizations can deduct 30 percent.

The tax reforms will slash both deduction rates to 15 percent.

And income taxes are going up too. People whose income tax rate is above 15 percent and who have annual incomes of more than 60 million won will see a 9 to 23 percent increase in taxes if the reforms are passed.

Lawmakers, donors and the organizations that live on donations are unhappy with the changes.

A group of institutions, including the Community Chest of Korea, Seoul National University Hospital and the National Council of NPO, a network of 31 local nonprofit organizations, are jointly expressing their concerns to the Ministry of Strategy and Finance. “I am not sure how much new revenue the government can generate under the new tax rules,” said an official at the Community Chest of Korea, “But the amount of donations that will be lost will be larger.”

Lawmakers Won Hye-young and Kim Young-hwan of the main opposition Democratic Party proposed amending the reforms to protect charitable giving. The new rules are riling up the Honor Society, an association of mega donors who donate 100 million won or more every year.

“If the government increases the tax burden in proportion to donations, donors are discouraged from making big contributions,” said Ryoo Shi-moon, a member of the club.

In April, 205 organizations sent a letter to the National Assembly calling for an amendment to the tax reforms.

The concept of donating money to charity is just gaining traction in Korea, with the number of members of the Honor Society rising from six in 2008 to 346 this year.

The size of donations by private donors surged from 850 billion won in 1999 to 7.9 trillion won in 2011, an eightfold increase in ten years.

But Korea’s donations still lag behind international standards.

Korea ranked 45 out of 160 countries around the world in terms of charity, according to the 2012 World Giving Index compiled by Charities Aid Foundation.

BY Special Reporting Team [ejpark@joongang.co.kr]