[Tax Story] Revised Housing Acquisition Tax System and Munjilbinbin (文質彬彬)

Baek Jeheum, Lawyer at Kim & Chang

Interest in acquisition tax, the main component of the July 10 real estate measures, is higher than ever. According to the revised Local Tax Act, the previous housing acquisition tax rate ('basic rate') of 1% to 3% has been raised to 8% for owning two or more houses in designated areas such as Seoul ('specific areas'), and 12% for owning three or more houses or acquisitions by corporations. Therefore, the basic rate applies only to one house in specific areas or up to two houses in non-specific areas. Furthermore, acquisition tax on gifts has been significantly strengthened; when gifting a house worth over 300 million KRW in specific areas, the tax rate surged from the previous 3.5% to 12%. In cases where a person temporarily owns two houses due to moving or employment, the basic rate can be applied to the new house on the condition that the previous house is disposed of within one year in specific areas and within three years in non-specific areas; failure to dispose within this period results in additional acquisition tax being imposed. Although pre-sale rights and occupancy rights are not houses themselves, they are included in the calculation of the household's 'number of houses.' The revised acquisition tax system, as one pillar of the three real estate laws, joined the comprehensive pressure on multi-homeowners and was proactively enacted and implemented simultaneously just one month after the announcement of the measures within the year.

The origin of acquisition tax dates back to the early 17th century in the Netherlands with the stamp duty. At that time, the Dutch government officially recognized acquisition acts in the private sector by law and provided property rights protection and certification services in the form of 'stamps,' charging citizens for the associated costs. In modern times, stamp duty has evolved into a property transaction tax levied on the transaction price of tangible assets. Regarding the nature of acquisition tax, Western perspectives vary: some view it as a benefit tax paid for public services provided by the government or as a membership fee to local governments, while others point out that acquisition tax increases the economic burden on demanders, causing a freezing effect and resulting in social welfare loss. Nevertheless, acquisition tax has been maintained as a tax because taxpayers pay it as a means to obtain official confirmation of ownership transfer, leading to relatively high tax compliance; tax authorities find it relatively easy to detect property transactions, reducing administrative costs; and acquisition tax benefits from the periodic increase in the taxable property value, resulting in significant revenue growth.

Korea's acquisition tax traces its roots to the Local Tax Act promulgated in April 1909 during the Korean Empire, initially imposed on land and house ownership acquisition and mortgage acquisition. During the Japanese colonial period, it was renamed real estate acquisition tax in 1926 and was included in the Local Tax Act enacted in December 1949 after liberation. Initially, acquisition tax was limited to real estate, but in September 1952, during the Korean War, it was renamed acquisition tax to raise war expenses and expanded to include 'safes' and 'small vessels.' Acquisition tax on houses was maintained at 5% until 2004, after which it fluctuated between 1% and 4% until the July 10 real estate measures. According to the 2020 Local Tax Statistical Yearbook, acquisition tax accounted for 26.4% of the total local tax revenue of 90.4604 trillion KRW in 2019, amounting to 23.9147 trillion KRW, steadily increasing from 21.7016 trillion KRW in 2016, 23.4866 trillion KRW in 2017, and 23.8135 trillion KRW in 2018, making it a reliable pillar of local tax revenue.

The United States traditionally has low taxes at the acquisition stage and relatively high taxes at the holding stage. Although it varies by state, acquisition tax is generally not imposed when buying a house in the U.S.; instead, a fee of about 100 to 300 dollars is paid as compensation for administrative services. In Germany, a 'real estate acquisition tax' of about 3.5% to 5.0% is levied on houses according to state law, and since it is considered a consumption tax, value-added tax is not imposed. In France, which levies a real estate wealth tax, a 'registration tax' of about 5.09% to 5.8% is imposed on housing acquisition based on the property value. Japan operates a 'real estate acquisition tax' similar to Korea, adopting a simple proportional tax rate structure with a standard rate set at 4%. Singapore, cited as a country with high acquisition tax, imposes a progressive tax rate structure of 1% to 4% acquisition tax and 12% to 15% on multi-homeowners; however, it should not be overlooked that Singapore has no capital gains tax if held for more than three years and holding tax is below 1%, making acquisition tax a major tax item.

Acquisition tax is a traditional tax that has accompanied human economic activity for over four centuries. Transaction taxes aim to simplify the tax system by excluding personal elements, but the revised housing acquisition tax system, which imposes heavy taxes on multi-homeowners and manages temporary two-homeowners post-factum, seems far from the essence of acquisition tax. There are claims that the imposition of up to 12% acquisition tax leads to a reversal of priorities where transactions themselves are prohibited due to excessive tax burden. The Act on the Promulgation of Statutes stipulates that laws directly related to imposing obligations on citizens should be enforced at least 30 days after promulgation unless there are special urgent reasons; thus, the immediate enforcement of the revised acquisition tax system on the day of promulgation during the year is criticized for undermining taxpayer trust and potentially violating the law.

The excessive progressive tax rate system of housing acquisition tax, a transaction tax, may distort transaction volume without improving fairness among individuals and threaten the stability of local government revenue. Clearly, if no housing transactions occur due to the freezing effect, tax revenue will directly decrease. It is necessary to consider introducing a simple proportional tax rate for housing to block threshold effects and maintain consistency with the overall taxable items. There is also a valuable viewpoint that operating heavy taxation or exemption conditions on a household basis in acquisition tax violates Article 36, Paragraph 1 of the Constitution, which protects marriage and family life. While it cannot be denied that the housing acquisition tax system performs a policy tax function, it is necessary to pursue the value of 文質彬彬 (a harmonious balance between form and substance) to harmonize with the essential taxation form of acquisition tax as a transaction tax that taxes legal acts.