[Tax Story] Realization of Officially Announced Prices and the Principle of Tax Legality

Baek Jeheum, Lawyer at Kim & Chang

Every year, January and February are the "season of official land price controversies." The 2021 standard land official price, decided and announced on February 1, recorded the highest increase since 2007, just before the financial crisis, with a nationwide average rise of 10.37%. By city and province, major cities such as Seoul (11.41%), Gwangju (11.39%), Busan (11.08%), and Daegu (10.92%) are leading the surge in official land prices. Based on the standard land official prices, the official prices of nationwide detached houses and apartment complexes are scheduled to be announced at the end of April. The official prices released annually by the government not only form the tax base for real estate taxes such as property tax and comprehensive real estate holding tax but also serve as criteria for calculating regional health insurance premiums, determining eligibility for basic pensions, and basic livelihood security recipients, among other uses, acting as a benchmark for over 60 types of taxes, quasi-taxes, and charges.

Last November, the government announced a plan to realize the actual market value of real estate official prices, declaring its intention to raise the realization rate to about 90% of market prices. To this end, in April last year, a legal basis was established allowing the Minister of Land, Infrastructure and Transport to set target rates for reflecting market prices and to formulate plans to achieve these targets. Following the amendment of the three real estate laws last year, the highest tax rates on housing surged sharply to 12.5% for acquisition tax, 7.2% for holding tax, and 82.5% for capital gains tax, and with official prices also soaring, multi-homeowners have faced a tax bombardment. Even retirees owning a single home in designated adjustment areas now face the reality of having to relocate due to tax burdens, a scenario that was once only hypothetical but has become a real-world issue.

Real estate official prices are governed by the Real Estate Price Public Notice Act as the basic legislation, with different rules for land, detached houses, and apartment complexes. The method of calculating official prices is characterized by the following: for land, professional appraisers investigate and evaluate, and then professional appraisers verify the results; for detached houses, the Korea Appraisal Board is responsible for investigation, calculation, and verification; for apartment complexes, the Korea Appraisal Board conducts investigation and calculation but there is no separate verification process. Previously, standard prices for detached houses were investigated and evaluated by professional appraisers, but under the current system, Korea Appraisal Board employees conduct the investigation and calculation, and the verification of individual detached house prices, which was formerly delegated to professional appraisers, is now performed by Korea Appraisal Board staff. Additionally, it is noteworthy that the legal status of the Korea Appraisal Board regarding apartment complex official prices has changed from a professional appraisal institution to a real estate price investigation agency. Ultimately, the official prices of detached houses and apartment complexes have been downgraded from objective value-based evaluations to subjective prices based on investigation, calculation, and adjustments to market price reflection rates, lacking proper verification processes and thus diverging from appropriate prices as stipulated by the Real Estate Price Public Notice Act.

The origin of Korea's official prices is generally traced back to the 1973 Land Use Management Act, which stipulated the announcement of standard land prices. Subsequently, the standard land prices by the Ministry of Construction under the Land Use Management Act, the standard taxable prices by the Ministry of the Interior under the Local Tax Act, and the standard market prices supervised by the National Tax Service were operated individually until the enactment of the Land Price Public Notice Act in 1989, which unified the diversified land price system by basing land price calculations on the standard land official price while allowing adjustments according to legal purposes. In 2005, the aforementioned law was fully revised into the Real Estate Price Public Notice Act, which was then bifurcated in 2016 into the Real Estate Price Public Notice Act and the Act on Appraisal and Appraisers. The 2020 revision added a provision allowing the government to establish target rates for market price reflection and annual achievement plans.

While Korea's real estate price public notice system has settled into a unified land price calculation system and undeniably plays a role as a unified standard for various administrative purposes, there remain many criticisms. First, to calculate an appropriate tax burden, tax rates and tax bases are determined in a mutually antagonistic relationship through consideration of each other; therefore, if the official price forming the tax base is realized closer to market value, tax rates should correspondingly be lowered. Simultaneously raising both is criticized as a regression in tax policy. Moreover, artificially raising the realization rate of official prices to trigger a chain reaction of increases in various taxes and charges is seen as indirect tax hikes, potentially violating Article 59 of the Constitution, which stipulates that tax types and rates must be determined by law, highlighting concerns about the principle of legality in taxation. Additionally, the official prices of apartment complexes, which directly affect the property rights of the majority of citizens, are determined by investigation and calculation amounts from the Korea Appraisal Board, which lacks a verification process; establishing a separate verification procedure is urgently needed. For detached houses, the entity verifying official prices should be designated as a third party rather than the Korea Appraisal Board to ensure fairness. Since official price determination falls within the realm of appraisal, it is difficult to impose appropriate legal controls, and if these prices are directly used as tax bases, the fundamental purpose of the principle of legality in taxation may be undermined. Therefore, it is worth considering allowing individual tax laws to adjust official prices within legally defined limits. It is time to seek the wisdom of "seeing the subtle to understand the obvious" by carefully considering the various ripple effects brought about by the realization of official prices.

Baek Jeheum, Lawyer at Kim & Chang