NABO Estimates & Tax Issues (Issue 16)
Published on 31 August 2021
Published by Estimates and Tax Coordination Division of the Estimates and Tax Analysis Office
I. Estimations & Taxation Trends
· (Review of fiscal demands of bills approved in 2Q21) Among the 219 legislative bills approved in the second quarter of 2021, 81 (37.0%) have an impact on the finances of national and municipal governments. Regarding 18 bills of which an estimation can be made, enforcement of the bills is expected to result in an annual decrease of 25 billion Korean won in revenue and an increase of 78 billion won in expenditure on average, over the next five years (2022-2026).
· (Cumulative revenues and trends in 1H21) Cumulative revenues in the first half of 2021 totaled 298.6 trillion won, 72.6 trillion won (32.1%) higher than in the same period of the previous year (226.0 trillion won). This is mainly due to increased income tax, corporate tax and value-added tax collection incurred by the economic recovery since the second half of 2020; increased asset-related tax revenues due to the thriving asset market as well as investment returns from social security funds such as the NPS.
Ⅱ. Estimations & Taxation Analyses
· (Analysis of FY2020 total revenue‘s settlement of accounts) The total revenue in FY2020 reached 478.8 trillion won, 5.7 trillion won (1.2%) higher than the 473.1 trillion won recorded in 2019. This figure has surpassed the 4th supplementary budget of 470.7 trillion won by 8.1 trillion won (1.7%), which is mainly due to the increased investment returns from funds. Considering Korean society‘s structural issue regarding low-birth rates and aging as well as the uncertainties coming from the resurgence of the COVID-19 pandemic, sustainable government finances should be pursued by securing stable tax revenue sources.
· (Analysis of fiscal needs for COVID-19 related health insurance) In response to the spread of the COVID-19 pandemic, COVID-19 support measures were taken using the National Health Insurance (NHI) and government budget to reduce health insurance costs for those in the most vulnerable class and provide support for treatment costs. 646.9 billion won out of the total saved health insurance costs of 911.5 billion, and 769 billion 373 million won of COVID-19-related consultation fees were covered by NHI. Bearing in mind the possibility of a prolonged pandemic, clarification should be made on the entity responsible for covering expenditures incurred in each category as a result of government measures, while estimating the mid to long-term expenditure volume to incorporate in setting subscribers‘ insurance premiums and formulating the size of the government‘s support budget.
· (Family policy expenditures in major OECD countries and comparative analysis of indicators) A comparative analysis was made on the public family expenditures and family policy indicators of four OECD member countries – France, Germany, Sweden and Japan - that have witnessed a rebound in birth rates. Upon comparing their public family expenditures and policy indicators in each country by distinguishing between the periods of their birth rate declines and increases, it was difficult to find a direct correlation between birth rates and family policies incorporated in public family expenditures.
Ⅲ. Current Issues in Estimations & Tax
· (Summary of the 2021 Tax Act Revision) The Tax Act Revision submitted by the government includes support measures for the initiative to move towards becoming an economic trend-setter and assist with the economic recovery, supporting the low-income and vulnerable class, reinforcing the foundation for mutual growth and fairness, as well as rationalizing the tax system. The Tax Act Revision proposed by parliamentarians is similar to the government-proposed version, with additional content including the introduction of a carbon tax and a grace period for taxation on virtual assets.
· (Recent trends and taxation issues regarding virtual assets) The high volatility of virtual asset prices is giving rise to concern about investment risks. In March 2020, the government revised the Act on Reporting and Using Specified Financial Transaction Information to adjust the provision for protecting virtual asset holders. A revised Income Tax Act containing provisions on postponing the enforcement period for taxing virtual asset incomes is currently pending under the National Assembly.
· (Discussion trends on global corporate taxation system reform) As news of a multinational IT firm that has recently experienced strong growth became an international issue due to its tax evasion and discrepancy between the regions in which it reaped profits and its tax jurisdiction, the OECD began discussions on this matter. At the 12th Meeting of the OECD/G20 IF on BEPS, a framework agreement was reached on a new criteria for allocating taxation rights on multinational companies within the digital economy as well as on introducing a global minimum corporate tax rate. Moving forward, follow-up action is required to agree on concrete provisions and narrow gaps on conflicting views within the agreement.
· (Introduction of the mid-term fiscal forecasts of major economies: UK OBR) In March 2021, the UK Office for Budget Responsibility released a report on its 5-year (2021-2026) economic and fiscal outlook. The report suggested that GDP will grow by 3.8% each year based on the distribution of COVID-19 vaccines, relaxing of social distancing measures and economic forecast assumptions regarding the EU-UK trade agreement. In terms of fiscal outlook, the report estimated that by FY2025, public sector revenues will reach 1 trillion 37.8 billion pounds, total management expenses will reach 1 trillion 111.5 billion pounds, the fiscal deficit will reach 73.7 billion pounds and government debts will reach 2 trillion 804 billion pounds.
· (Public pension reform case study: Sweden) Sweden was world‘s first country to introduce a universal national pension scheme in 1913, and has since reformed the system to shape the country into a welfare state such as by introducing the basic pension in 1946 and special supplementary pension in the 1960s. However, after going through an economic crisis in 1991, structural reforms were taken to reduce pension expenditures since 1998.
Ⅳ. Tax and Fiscal Indicators at a Glance
This section consists of charts and tables visualizing tax and fiscal indicators including total expenditures and total revenues; a timeline of fiscal balance; national tax records; non-tax revenue records; the public’s burden ratio; tax burden ratio; income tax ratio; corporate tax ratio and value-added tax ratio.