Korea to face another massive shortfall in tax revenue

Jeong Jeong-hoon, head of the tax policy division at the Ministry of Economy and Finance briefs on the revised tax revenue estimate for 2024 at the government complex in Sejong on Wednesday. (Yonhap)

The South Korean government is expected to see another significant shortfall in tax revenue this year, due mainly to the sluggish semiconductors industry and the real estate market slump, according to the Ministry of Economy and Finance on Thursday.

The government is forecast to collect 337.7 trillion won ($254 billion) this year, 29.6 trillion won -- 8.1 percent -- less than the ministry's earlier forecast when planning the 2024 budget.

This year’s projection is 6.4 trillion won under 344.1 trillion won last year.

The latest figure also marks the second consecutive year of a massive shortfall after last year, when the country had already reported its biggest drop of 56.4 trillion won from the government's preliminary figures.

The ministry blamed a decline in corporations' operating profit in 2023 and the high-interest rate trend for the drop in tax revenue.

“Plagued by a contraction in global trade and a chip industry slowdown, the fall in corporate tax revenue was sharper than previously expected. Persistently languishing real estate transactions also led to declining capital gains tax revenue,” the ministry said.

Financial authorities had embarked on a revision of the tax revenue forecast over concerns that they might miss their estimate as they did last year. It is unusual for the government to announce an update on the tax revenue forecast without preparing a supplementary budget for two consecutive years.

The government said it has no plans for an extra budget or issuance of sovereign bonds to offset the steep decrease in tax revenue.

By tax item, corporate tax revenue was estimated at 63.2 trillion won, down 14.5 trillion won from the initially expected 77.7 trillion won. The sharp decline came as the operating profit of listed companies dwindled by 44.2 percent in 2023 from the previous year.

Despite the improvement in earned income tax stemming from the increase in the number of employed people and wages, the amount of income tax expected to be collected is estimated at 117.4 trillion won, similar to the previous year’s level.

As property transactions decrease and asset market uncertainty increases, it is presumed that capital gains tax revenue will plummet by 26 percent from 22.4 trillion won to 16.6 trillion won.

On the criticism that President Yoon Suk Yeol’s tax reforms included tax cuts for the rich that have led to a drop in tax revenue for the state, the ministry flatly dismissed the accusation.

“The tax revenue shortfalls that occurred this year and last year are caused by drastic changes in external conditions that have deteriorated since 2022, not tax reduction policies. The impact of tax reforms was already reflected in the 2024 budget planning,” said Jeong Jeong-hoon, head of the tax policy division at the ministry.

Since 2020, other major countries have been experiencing growing errors in estimating how much tax they would collect in the aftermath of the COVID-19 pandemic, the ministry added.

“For Korea, it is especially tough to estimate corporate taxes in an environment where external uncertainty has increased due to its high dependency on trade,” it said.

By Park Han-na(hnpark@heraldcorp.com)