"Compromise Product?" Tax Special Cases Become a Burden... 70% Sunset Extension

Government: "Ineffective Measures Will Be Removed After In-Depth Evaluation"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The sunset extension rate for tax incentives that reduce or deduct taxes under certain conditions exceeded 70% last year. This means that 7 out of 10 tax incentive projects have their sunset extended during the National Assembly's deliberation process. While extending the sunset is inevitable for projects essential to industrial revitalization, there are many cases where the sunset deadline is extended out of habit, considering constituencies and complaints.

According to the Ministry of Economy and Finance on the 9th, the sunset extension rate for tax incentives last year was 72.0%. It had declined from 60.6% in 2018 to 55.8% in 2019 but rebounded last year.

The government conducts in-depth evaluations if the sunset occurs in the relevant year and the annual tax reduction amount exceeds 30 billion KRW. This year, among 86 projects with sunsets, the government is conducting in-depth evaluations on 13 projects.

Usually, when a deadline is set and the sunset approaches, extension discussions take place, but it is very rare for the government to revise the sunset due to policy direction or opposition from stakeholders. Because of this, even within the government, the term "product of compromise" is used.

A government official said, "Once the incentives are applied, stakeholders are involved, making it difficult to revise the sunset," adding, "Especially, it is true that it is difficult to delete tax reduction benefits for specific regions requested annually by the political circles."

For example, in the 2018 tax law amendment, the Ministry of Economy and Finance included a provision excluding quasi-members of mutual finance from the non-taxable deposit limit of 30 million KRW or less. This was based on the judgment that the non-taxable deposit system, originally intended to help farmers, fishermen, and low-income groups build assets, was being abused as a tax-saving tool by high-income groups. However, during the National Assembly deliberations, the extension was granted due to opposition from politicians and the agricultural sector.

Within the government, the stance is to comprehensively review effectiveness, policy direction, and stakeholder opposition when extending tax incentive sunsets. Since the tax incentive system is applied temporarily with a specific purpose, they strive to conduct in-depth analysis at sunset and eliminate unnecessary incentives. Accordingly, credit card income deductions for increased consumption in 2021, VAT reductions for small business owners, and tax credits for rental business operators, which were organized as part of the COVID-19 crisis response, are unlikely to be extended further.

Tax experts suggest boldly abolishing non-taxable and exemption systems that have fulfilled their purpose and reforming ineffective systems. Professor Kim Woo-cheol of the Department of Taxation at the University of Seoul emphasized, "Projects with no performance risk causing negative effects such as unnecessary complexity of the system and excessive issuance of tax exemptions," adding, "From the perspective of tax revenue management, tax exemption systems that have fulfilled their purpose should be abolished."

This content was produced with the assistance of AI translation services.