Sangui Presents Report on 'Study for Enhancing Rationality of Property Taxation'
Transaction, Holding, Transfer, and Inheritance Taxes All Higher than OECD Average
Realization of Excessive Tax Burden... Need to Abolish Major Shareholder Surcharge, etc.
There has been a call from the business community to rationalize South Korea's property tax system by converting inheritance tax into capital gains tax and lowering the comprehensive real estate tax rates. This is to mitigate economic shocks caused by population aging and to stimulate domestic demand.
On the 24th, the Korea Chamber of Commerce and Industry (KCCI) argued that urgent reforms are needed in a report titled "Study on Enhancing the Rationality of the Property Tax System."
According to the report, the proportion of property taxes relative to GDP in South Korea is higher than the average of OECD member countries. Comparing the share of property taxes to GDP in 2021, transaction taxes in Korea stood at 2.59%, significantly higher than the OECD average of 0.51%. The holding tax share was 1.18% in Korea versus 1.00% for the OECD average. Capital gains tax accounted for 1.77% in Korea, compared to 0.21% on average in OECD countries. Inheritance tax was 0.33% in Korea, higher than the OECD average of 0.20%.
KCCI pointed out that the burden of property taxes incurred at acquisition, holding, and transfer stages has continuously increased since 2010. When combining acquisition tax, holding tax, and capital gains tax as a proportion of GDP, the OECD average rose from 1.45% in 2010 to 1.72% in 2021, but Korea's share surged from 2.92% to 5.54%, nearly doubling. KCCI noted that "the main cause is considered to be the strengthened comprehensive real estate tax burden implemented in 2018."
As the tax burden increased, housing demand, supply, and transaction volumes declined while prices soared sharply. The market became more unstable. According to KCCI, since the introduction of the comprehensive real estate tax in 2005, overlapping taxation with property tax has worsened distortions in the housing market. Since 2019, the comprehensive real estate tax has been applied differently depending on the number of houses owned. Such a differentiated taxation system is rarely seen in major countries.
Inheritance tax is also significant. Its top rate is among the highest in OECD countries. The final tax burden on taxpayers, combining income tax and inheritance tax, is also at the highest level. South Korea's top income tax rate is 45%. Considering this, the total tax burden on assets formed by the decedent, imposed both during their lifetime and after death, can reach up to 72.5%, the second highest among OECD countries. When including the additional valuation for major shareholders, the tax burden rises to 78.0%, the highest among OECD member countries.
There is also an issue of double taxation. Among 38 OECD countries, only seven, including South Korea, have inheritance tax top rates higher than the top income tax rate (45%). According to KCCI, inheritance tax is levied on assets already taxed by income tax, resulting in overlapping taxation. Meanwhile, the inheritance tax top rate being higher than the income tax top rate exacerbates the double taxation problem.
Another problem is that the inheritance tax exemption amount has not been adjusted for a long time, failing to reflect realities such as inflation, thereby increasing the tax burden. From 2000 to last month, the consumer price index rose by 82.4%. While asset prices nearly doubled, the inheritance tax exemption amount remained almost unchanged.
There are also concerns that the additional valuation applied to major shareholders in inheritance tax negatively affects business succession. To ensure smooth business succession, it is necessary to maintain a stable shareholding ratio. Most of the assets inherited by successors in Korea are stocks. Due to the additional valuation for major shareholders, many are forced into involuntary stock disposals.
KCCI proposed abolishing inheritance tax and converting it into capital gains tax. Major countries support smooth business succession by allowing dual-class shares and donations of shares to public interest corporations. South Korea lacks such systems. Introducing capital gains tax would allow deferral of excessive tax burdens until the point of disposal, thereby protecting management rights. They also called for abolishing the additional valuation for major shareholders.
If the current inheritance tax system must be maintained, KCCI suggested lowering the top inheritance tax rate or increasing the exemption amount. Since 2000, when the current tax base and rate system was applied, prices have nearly doubled, but exemption amounts and rates have barely changed. The government recently announced plans to lower the top rate and increase spousal exemption amounts. KCCI additionally proposed raising the inheritance exemption limit for financial assets from 200 million KRW to 400 million KRW, judging that revitalizing the financial market is necessary to correct the distorted asset structure overly concentrated in real estate.
They also argued that the top comprehensive real estate tax rate, currently up to 5%, should be lowered to the pre-2018 level of 2%. Although the comprehensive real estate tax overlaps with property tax, exemptions remain incomplete. This raises investment entry barriers for potential homebuyers, leading to a decline in housing transactions.
Kang Seok-gu, head of KCCI's research division, said, "Excessive property taxation not only infringes on individuals' property rights but also causes instability in corporate management rights and losses to the national economy," adding, "We need to create a 'business-friendly country' where rewards for performance are guaranteed."
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