Addressing Revenue Shortfalls Should Begin by Closing Tax Loopholes

Recently, many forecasts have been released predicting a significant shortfall in tax revenue going forward. According to the government, national debt in 2022 stood at approximately 1,069 trillion won, or 49.4% of GDP, and with that figure expected to exceed 1,100 trillion won this year, the problem of insufficient tax revenue is bound to carry even greater weight.

Reflecting growing awareness of the tax shortfall, some voices in society have called for raising national taxes such as the corporate tax, as well as local taxes such as the local corporate income tax. Of course, it would be possible to increase the rates of various existing taxes to make up for the shortfall.

Before that, however, there is one point that deserves consideration. We should ask whether we may be overlooking the fact that, by properly closing loopholes in the current tax system, we could fully collect taxes that ought to be collected without omission. Solving such problems would not, of course, eliminate the entire tax shortfall all at once, but there is no doubt that it would make a meaningful contribution and would also be necessary for enhancing the credibility of the system.

For example, one could consider closing the loophole in the current tax system that fails to accurately identify foreign nationals acquiring multiple homes. Under the current tax system, Korean nationals are subject to heavier acquisition tax based on the total number of homes held by each household, but foreign nationals who do not live in Korea can avoid the current heavy taxation rules because it is impossible to determine whether they are members of the same household and therefore impossible to distinguish whether they belong to a multi-home household.

Not only does this mean taxes that should be collected are not being collected, but as cases of foreign nationals purchasing homes increase, particularly in the Seoul metropolitan area and other large cities, concerns are also growing over inequity between Korean nationals and foreign nationals in the acquisition tax on housing. The current reality—where many foreign nationals can acquire multiple homes in Korea yet, unlike Korean nationals, remain in a blind spot where proper tax assessment is difficult—can reasonably be seen as a substantial loophole in the tax system.

For instance, even if a foreign national living overseas purchases three apartments in Korea in the names of himself and his family members, it may still be possible to be treated as a one-household, one-home owner, which ultimately amounts to reverse discrimination against Korean nationals.

According to a 2022 report by the Korea Institute of Local Finance, in the case of foreign nationals, one household is determined based on the Registered Foreigner Record Card and the Foreigner Registration Card. However, the family information recorded on those documents may differ from the person’s actual family relationships, and the family information entered on the two documents may also differ from each other, creating confusion in accurately identifying households.

The report also states that even where a Korean household head and a foreign-national household member are living together as family at the same resident registration address, if no application has been made to record the foreign family member, or even if the family member was recorded but an application for deletion was later made, the record is erased. As a result, the foreign-national family members of the Korean household head cannot be properly identified on the household-based resident registration record, contrary to reality. These are aspects in which loopholes appear in the fair implementation of the heavy taxation system on the acquisition of multiple homes within households that include family members with foreign nationality under the current legal framework.

Although this article uses as an example cases in which the heavy acquisition tax on one-household owners of multiple homes cannot be properly applied because determining the number of homes within a foreign national’s household is difficult or prone to error, a closer look would likely reveal many such loopholes in the tax system. It is necessary to address these deficiencies through improvements to the tax system. By conducting multifaceted reviews and preparing coordinated measures, I believe it will be possible to pursue an approach that helps resolve the tax shortfall problem that we must watch closely.

Wonje Heo, Research Fellow, Korea Institute of Local Finance

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Original title: 세수부족 해결, '세제 틈새 메꾸기'로 시작해야

Author: Won-je Heo

Date: 2023-07-20

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25897