"Korea's Inheritance Tax Burden at OECD's Highest Level, Urgent Need for Tax System Rationalization"

"Reduce the top tax rate from 50% to 30% and simplify tax brackets from 5 to 3"

[Asia Economy Reporter Park Sun-mi] There has been a claim that South Korea's current inheritance tax system leads to an excessive tax burden and that the taxation system should be rationally reformed.

According to the report titled "Review of Rational Reform Measures for Inheritance Taxation Methods and Tax Rates" by the Korea Economic Research Institute on the 16th, South Korea's inheritance and gift tax revenue as a percentage of Gross Domestic Product (GDP) stood at 0.5% in 2020, ranking third among OECD member countries and about 2.5 times the OECD average (0.2%). The top inheritance tax rate on direct descendants in Korea is also 50%, double the OECD average (approximately 25%). In particular, when inheriting shares from major shareholders, a surcharge valuation (20% additional) is applied, effectively imposing a top inheritance tax rate of 60%, which is the highest level among OECD countries.

The Korea Economic Research Institute pointed out that the combined top rates of inheritance tax (50%) and income tax (45%) in Korea total 95%, the second highest in the OECD after Japan (100%), and when applying the surcharge valuation for major shareholders in business succession, it reaches 105%, the highest among OECD member countries.

Researcher Lim Dong-won of the Korea Economic Research Institute stated, "Income that has already been subject to income tax once accumulates and becomes subject to inheritance tax, resulting in a form of double taxation," adding, "If inheritance tax is high, income tax should be low or vice versa, but in Korea, inheritance tax ranks second and income tax seventh, both being high." He further argued, "While maintaining a high top inheritance tax rate internationally, the continuous increase in the top income tax rate is causing the overall tax burden to rise."

The Korea Economic Research Institute suggested that since most OECD countries currently either do not impose inheritance tax on direct descendants (19 countries) or reduce the tax rate (10 countries), reflecting an international trend toward easing inheritance tax, South Korea should also reduce its excessive inheritance tax burden accordingly. They stated that even if inheritance tax is imposed, the rate should be lower than the top income tax rate, recommending a rational easing by changing the current five-tier progressive tax rate structure of 10% to 50% to a three-tier progressive tax rate structure of 10% to 30%.

Additionally, the report argued that South Korea's inheritance tax method, which is an estate tax type, violates the "ability-to-pay principle" that taxes should be levied according to the taxpayer's capacity to pay, and therefore should be converted to an inheritance acquisition tax method. Researcher Lim asserted, "The inheritance acquisition tax method imposes inheritance tax based on the actual size of the inherited property, allowing for fair taxation in relation to the taxpayer's ability to pay," adding, "However, to prevent tax avoidance such as disguised division due to the inheritance acquisition tax method, it will be necessary to improve the tax administration system."

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