Tax overhaul proposed in Korea as Yoon charts a new course

Finance Minister Choo Kyung-ho explains the government tax reform at the government complex in Sejong on July 18. [YONHAP]

The tax system will be overhauled in Korea if a bill proposed by the Yoon Suk-yeol government is passed by the National Assembly.

Included in the package is a wide range of adjustments that will lower the effective tax rate for many people in the country, especially property owners. Corporations will also be getting a break as the top rate will be taken down to 22 percent from the current 25 percent.

The reforms are in part a repudiation of the previous administration's policies and in part a recognition of the economic reality in the country, where people are struggling to make ends meet as prices and interest rates rise.

It is also in part stimulatory, as the government works to keep the economy churning with breaks, incentives and cuts.

"People are facing increased difficulties due to inflation caused by overseas factors including the rising oil and grain prices, and we're facing a complex economic crisis as there are growing concerns over the economy slowing down due to global monetary rollbacks," Finance Minister Choo Kyung-ho said July 18 during a briefing on the tax reform. "To break through the economic crisis, we have decided to take bold measures in taxation that would help stabilize people's livelihoods and revitalize the economy."

Choo criticized the past government's taxation policies as being excessive and restrictive.

"It not only lowered business competitiveness but also distorted the efficient resource allocation," the Finance Minister stressed.

The Yoon government argues that Korea's corporate tax revenue has been higher than the average in the OECD. In 2019, corporate tax revenue to GDP was 4.3 percent while the OECD average was 3 percent. It's higher than Britain's 2.5 percent and the 1 percent in the United States.

It noted that the Korean government in 2017 was advised by the International Monetary Fund and in 2018 by the OECD to reduce taxation on businesses.

The government said it hopes that the changes will encourage the private sector to increase investments, which will also contribute to more hiring.

Yoon has stressed the government's role in leading the economy has to stop and it has to allow the private sector to take more responsibility by giving it more freedom.

With the changes, tax revenue from businesses is expected to shrink 10.8 percent. Last year, the government collected 60 trillion won in business taxes. That would mean 6 trillion won less.

To lower taxation on individuals, the bill proposes a changing in the income bands.

Currently, income between 46 million won and 88 million won is taxed 24 percent. The lower end will be raised to 50 million won. The six percent rate will be charged on incomes up to 14 million won, up from the current 12 million won.

The changes will lower tax revenue by 3.2 trillion won.

The threshold for the comprehensive real estate tax will go from the current 1.1 billion won to 1.4 billion won, and the rate will go from a range of 0.6 percent to 6 percent to a range of 0.5 percent to 2.7 percent, the level in 2018.

The same rate will be applied regardless of the number of apartments that a person owns. Currently, a higher rate is charged when people own more than one unit.

A financial investment income tax will be delayed. It was to be implemented in 2023. The goal is to encourage individuals to invest in local financial markets. A transaction tax, which was to be suspended with the implementation of the financial investment income tax, will remain in place.

The duty free good allowance will be raised from $600 to $800, and the one bottle limit will be raised to two.

Any proposed reforms could face challenges in the National Assembly, where the Democratic Party (DP) has a clear majority and might resist the lowering of the corporate tax and changes in the comprehensive real estate tax.

"The benefits are only focused on few large companies. We will do our absolute to block the corporate tax cut, which will only reduce government revenue," DP floor leader Park Hong-keun said.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]