[Exclusive] Additional Review of 'Individual Corporate Tax' in Water Balance Model

IMF Visits Korea to Discuss Tax Revenue Forecasting Model with Ministry of Economy and Finance
"Use Firm-Level Micro Tax Data to Improve Accuracy"
Corporate Tax Interim Payment System Also Reformed, Model to Be Completed Next Month

[Image source=Reuters Yonhap News]

The Ministry of Economy and Finance is actively considering adding individual corporate tax information to the tax revenue forecasting model. This comes after the International Monetary Fund (IMF), which is working with Korea on improving the tax revenue forecasting model, advised that corporate taxes, which are sensitive to economic cycles, should be reflected in more detail. However, the National Tax Service (NTS) has clearly expressed opposition, and some within the Ministry of Economy and Finance have raised concerns about the uncertain effectiveness of this measure.

According to a comprehensive report by Asia Economy on the 14th, IMF officials who recently visited Korea met with staff from the Ministry of Economy and Finance’s Tax Policy Division to discuss improvements to the tax revenue forecasting model. The IMF pointed out that Korea’s current forecasting model lacks individual corporate tax information. They also suggested that due to the impact of industries with high economic volatility, such as semiconductors, tax revenue errors have occurred, and to improve the accuracy of tax revenue forecasts, micro-level tax data by industry and company should be incorporated into the model.

The IMF reportedly persuaded the Ministry of Economy and Finance by citing examples from other countries. In France, individual corporate taxes are reflected in the model to refine tax revenue forecasts, and the U.S. Treasury Department already incorporates company-specific tax data from its subordinate National Tax Service (IRS) into its models.

The Ministry of Economy and Finance is also aware of the problem that corporate tax information, which has a significant impact on tax revenue, is not reflected on a company-by-company basis in the model. A ministry official stated, “Tax authorities cannot share tax information of specific individuals or corporations in real time under current law,” adding, “While it is possible to estimate corporate taxes of large companies that have a major impact on tax revenue, this is not accurately reflected in the forecasting work.”

Corporate tax has recently been a decisive factor in errors in tax revenue forecasts. Last year, tax revenue amounted to 344.1 trillion won, falling short of the initial projection of 400.5 trillion won by 56.4 trillion won. The error rate reached 14.1%, marking the largest deficit ever, largely due to 24.6 trillion won less collected from corporate taxes. Conversely, in 2021, when national tax revenue exceeded expectations by 61.3 trillion won, corporate tax collection was about 17 trillion won higher, increasing the margin of error.

Corporate Tax Interim Payment System Also Being Reformed... Model to Be Completed by Next Month

The issue lies in feasibility. The National Tax Service is reportedly opposed to incorporating company-specific tax data into the tax revenue forecasting model. Currently, the Framework Act on National Taxes prohibits tax officials from providing taxpayer information. Although administrative agencies like the government may be granted exceptions as needed, the law only states that information ‘may be provided.’ Since it is at the discretion of the NTS, either the law must be amended or the NTS must be persuaded to use micro-level information in the tax revenue forecasting model.

There are also doubts about whether the measure will actually be effective. Even if the IMF’s advice is accepted, it is uncertain whether the errors in the tax revenue model will be significantly reduced. Large-scale tax revenue deficits typically stem from unexpected sharp declines in corporate performance and real estate market downturns. In years with significant global economic fluctuations, it is difficult to predict macroeconomic trends themselves. Especially since corporate tax reflects economic conditions with a lag, there are limits to how much accuracy can be improved by aggregating individual company information.

The Ministry of Economy and Finance is also working on reforming the corporate tax interim payment system to improve predictability. This is in response to criticism that the interim payment system makes corporate tax estimation more difficult in years with large economic fluctuations, such as last year and this year. The ministry views the current structure, which allows companies to choose between ‘half of the previous year’s tax amount’ or ‘a preliminary settlement for January to June,’ as complicating tax revenue forecasting.

The Ministry of Economy and Finance is expected to finalize the model improvement plan by next month after gathering all opinions. Since January, they have been steadily discussing collaboration on tax revenue forecasting and are now in the final stages of model development.