Korea’s tax revenue projected to fall short by $22.2 billion on plunging corporate taxes

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Korea’s tax revenue projected to fall short by $22.2 billion on plunging corporate taxes

Published: 26 Sep. 2024, 10:31 Updated: 26 Sep. 2024, 19:26

SHIN HA-NEE
shin.hanee@joongang.co.kr

Deputy Minister Jeong Jung-hoon, right, who is in charge of the Tax and Customs Office at the Ministry of Economy and Finance, speaks during a press briefing held at the government complex in Sejong on Wednesday. [NEWS1]

Korea’s tax revenue this year is projected to fall 29.6 trillion won ($22.2 billion) short of the initial target on weak corporate earnings and a sluggish property market, another major shortfall following a record deficit last year.

As the country is expected to miss its tax target by a wide margin for the second consecutive year, skepticism is growing over the government’s optimistic forecast of an economic rebound through the remainder of the year, as well as its drive for tax cuts.

The Ministry of Economy and Finance released a revised estimate for this year’s tax revenue on Thursday, adjusting its projection to 337.7 trillion won, down 8.1 percent, or 29.6 trillion won, from the previous tax target of 367.3 trillion won.

This is 6.4 trillion won or 1.9 percent less than the annual tax revenue of 344.1 trillion won last year, when Korea saw a record tax shortfall of 56.4 trillion won, a 14.1 percent deficit in the budget.

The ministry cited a drop in corporate taxes, driven by weak earnings last year, and a sluggish real estate market as reasons for the projected shortfall.

The extension of the fuel tax cut and a tariff reduction implemented to curb inflation also contributed to the lower tax revenue.

“The decline in corporate tax income — driven by last year’s global trading contraction and weak chip demand — is expected to be larger than initially anticipated, while property market-related taxes, such as the transfer income tax, also remain sluggish due to a continued slowdown in property transactions,” said Jeong Jung-hoon, a deputy minister in charge of the Tax and Customs Office at the Finance Ministry, during a press briefing Wednesday.

A sharp plunge in corporate tax income, in particular, is responsible for nearly half of the shortfall, as it is estimated to come up 14.5 trillion won short of the target to amount to 63.2 trillion won this year.

The projected income is down 21.4 percent, or 17.2 trillion won, from last year.

Corporate tax revenue was initially expected to rebound in the latter half of the year as companies typically make interim tax payments in August, which allow them to pay a portion of this year's tax obligation in advance.

However, the amount reported for the interim tax payments declined 1.9 trillion won compared to last year, according to the ministry.

Income tax revenue is also expected to miss the target by 8.4 trillion won, or 6.6 percent, to 117.4 trillion won, with comprehensive income tax revenue falling 4 trillion won short of the target and transfer income tax, 5.8 trillion won. The persisting slowdown in the real estate market is driving the slide, as both the land transaction volume and construction investment contracted from a year earlier.

The government has missed its tax targets by a growing margin since 2021, both with surpluses and deficits, which it attributed to rising external and internal uncertainties.

“Since the outbreak of the Covid-19 pandemic, the tax gap has been growing in other major economies as well, and it is particularly more difficult for Korea to estimate tax revenue such as corporate tax incomes amid rising external uncertainties due to a high reliance on exports,” the ministry said in a release.

Despite the huge discrepancy from the initial budget, the government has yet to provide any solid plans to fill the tax gap, unlike last year, only stating that possible solutions may include utilizing surplus funds, adjusting the amount of subsidies provided to local governments or suspending planned expenditures, which may further delay the economic recovery amid slumping retail sales and investments.

“There have been many complaints that the government should have communicated more with the National Assembly and local governments [before devising a plan to make up for the deficit],” said Kim Dong-il, a deputy minister of budget at the Finance Ministry, adding that the details will be decided after further discussion.

The consecutive tax deficits may hamper the Yoon Suk Yeol administration’s tax cut drive, especially with domestic demand remaining stubbornly weak despite export growth and slowing inflation.

The government announced its tax reform initiative in July with a plan to cut inheritance tax rates, which is expected to reduce Korea’s tax revenue by 4.35 trillion won through 2029.

Updated, Sept. 26: Updated the headline, added details about the estimated tax deficits by classes, and comments from government officials.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]