[Asia Approach] Anxious Companies "Hope This Opportunity Reduces Quasi-Tax Burden"

[Asia Economy, Lee Kyungho, Head of Editorial Planning Team] In response to the COVID-19 pandemic, the government is implementing relief measures such as reductions in social insurance premiums and electricity bills, in addition to direct financial support for low-income groups, small and micro enterprises, and self-employed individuals. Among companies, there are growing calls to reduce unnecessary or excessively burdensome quasi-taxes (including levies) that act as direct or indirect burdens on businesses. Most companies are requesting reductions in environmental improvement charges, traffic inducement charges, and waste disposal charges. Particularly, the refining industry, which is incurring losses the more petroleum products it sells due to the sharp drop in oil prices and refining margins, hopes for adjustments to petroleum import levies. In response, central and local governments are currently extending the payment deadlines for various levies.

Quasi-taxes refer to monetary burdens imposed compulsorily outside of taxes or without a direct benefit or causal relationship. Broadly (in a wide sense), they include all monetary burdens that citizens are compelled to bear. Narrowly (in a strict sense), they exclude monetary burdens that have a causal relationship with benefits or causes from the broad quasi-taxes, mostly representing corporate burdens. For example, the corporate portion of social insurance premiums is included in the narrow quasi-taxes because companies do not receive benefits in return for these premiums, thus lacking a causal relationship with benefits. Conversely, fines are excluded from narrow quasi-taxes because the payer caused the reason for payment, establishing a causal relationship.

Requests to reduce quasi-taxes and levies have been consistently raised by the business community. According to an analysis by the Korea Economic Research Institute in 2017, the broad quasi-taxes amounted to approximately KRW 138.6 trillion in 2017, representing 7.5% of nominal GDP and 40.1% of total taxes. Looking at the composition, the total health insurance premium was KRW 50.4 trillion, accounting for 36.4% of broad quasi-taxes. The national pension was KRW 39.6 trillion, making up 28.6%, and the total of the four major social insurances was about KRW 108.8 trillion, constituting 78.5% of quasi-taxes. Various levies accounted for 14.5%, followed by fines, donations, and others.

*Source=Korea Federation of SMEs 'Survey on SME Burden Charges' (December 2016)

In 2017, narrow quasi-taxes were estimated at about KRW 58.3 trillion. Among these, health insurance accounted for KRW 21.2 trillion (36.4%), and the national pension KRW 17.6 trillion (30.2%), with the total of the four major social insurances comprising about KRW 52.4 trillion (89.9%).

The narrow quasi-taxes primarily borne by companies (KRW 58.3 trillion) represented about 31% of the total net profit of all companies during the same period, which was KRW 188.7 trillion. Among the four major social insurances, the premiums paid by workplace employees increased from about KRW 41 trillion in 2016 to about KRW 43.5 trillion in 2017, a 6.1% rise, exceeding the wage growth rate of 3.3% (real 1.3%) during the same period.

According to the 'Small and Medium Enterprise Levy Survey' conducted in December 2016 by the Korea Federation of SMEs targeting 500 small manufacturing companies, the average number of levies paid per company was 2.7, with some companies paying up to seven levies. Analysis of levy payment status showed that 'environmental improvement charges' (81.2%), 'electric power industry infrastructure fund charges' (77.2%), and 'water usage charges' (51.6%) were generally borne by many companies in relation to production activities.

The total amount of levies paid in 2016 averaged KRW 8.123 million, with the highest proportion (32.2%) in the 'KRW 0.5 million to less than KRW 2 million' range, followed by 'KRW 2 million to less than KRW 10 million' (28.8%), 'less than KRW 0.5 million' (23.4%), and 'KRW 10 million or more' (15.6%).

*Source=Korea Federation of SMEs 'Survey on SME Burden Charges' (December 2016)

Regarding the appropriateness of levy levels by category, the highest percentage of respondents who considered them excessive was for the 'electric power industry infrastructure fund charge' (48.4%), followed by 'traffic inducement charge' (48%), 'waste charge' (39.5%), and 'safety management charge' (35.5%). In 2016, the levy with the highest expenditure was the 'electric power industry infrastructure fund charge' (61.4%), followed by 'environmental improvement charge' (17.4%) and 'waste charge' (13.2%).

The electric power industry infrastructure fund charge accounts for 3.7% of electricity bills. It ranked highest in terms of ▲excessiveness by category (48.4%), ▲expenditure amount, ▲increase in burden rate over the past three years, and ▲the need for improvement (or abolition) in a survey question, making it the most burdensome levy for small manufacturing companies for the second consecutive time since 2014. Outside of electricity, "environmental" and "waste" charges were noted for high expenditure and burden increase rates and were identified as levy items needing improvement.

As a result, 31.2% of small and medium enterprises reported feeling burdened by the total levies they currently pay. Among them, 71.1% experienced actual financial difficulties such as 'economic burden due to levy payments' (25%), 'additional borrowing due to lack of funds' (22.4%), 'delayed payment of transaction amounts' (9%), and 'late payment penalties due to non-payment' (8.3%). Reasons cited for the need to improve or abolish levies included 63.8% of respondents stating that the expenditure amount was excessive, followed by the need for rate adjustments by industry (9.8%), unclear reasons and standards for payment (9.2%), and the existence of similar levies (5.5%).

With welfare demands continuously increasing, it seems inevitable that quasi-taxes will sharply rise in the future. However, unnecessary or excessive quasi-taxes only increase the burden on companies and citizens. Accordingly, the government needs to establish management mechanisms for the total amount of quasi-taxes after the COVID-19 crisis or to reorganize levies that burden small and medium enterprises.