Lost Tax Due to Low Government Standard Prices

The government plans to mandate stating of actual transaction prices in all real estate contracts starting from the end of next year.

Currently in practice, transaction prices stated in contracts are 70% to 90% of the actual price.

The Ministry of Construction and Transportation has decided to pass a `Certified Real-estate Business Act` reform and announced giving research grants to the Korea Appraisal Research Institute (KARI) on March 31.

“The research results will be collected periodically till the end of September. With these we will reform the Certified Real-estate Business Act, enforcement order, enforcement regulations and others by the end of next year. That is our aim,” explains Yun-ho Ryu, director of the land department at the Ministry of Construction and Transportation.

First, the Ministry calls for mandatory stating of actual transaction prices in real estate contracts and they are looking for ways to carry this out.

Related to this, the government considers granting judicial power to administrative regional governments who are verifying these real estate contracts and enforcing statement of actual transaction prices.

Also included in the research are ways to lower state tax such as income tax transfer and regional tax such as registration tax, real property acquisition tax, etc., in order to reduce tax burdens which have increased with this new reform.

Miscellaneously, in order to increase the level of Korean real estate services up to the level of developed countries, the government plans to provide enlargement of realtor businesses; improvement of realtor assistant policies; improvement of state-sponsored testing for licensing real estate agents, etc.

Director Ryu said, “When we find detailed methods to implement every plan, we will contact related organizations such as the Ministry of Finance and Economy, Ministry of Government Administration and Home Affairs, Ministry of Justice and others for assistance.”

The government is pursuing a `mandatory statement of actual transaction prices in real estate contracts` due to criticism on real property tax revenue being unrealistic.

Last year, the government announced standard prices on public housing such as apartments in April and September. Their plan was to stop the housing price jump by tax burden.

However standard prices are not realistic due to differences in the time of the real estate price survey held by the government and the time of the standard price announcement.

In practice, the standard price for 13 pyong² apartments in Jamsil 2 Dan-ji, Songpa-gu, Seoul in September was released at 2.31 billion won. This is a 22% (44 million won) increase from the price before the announcement. Market prices already exceeded 3.8 billion won in September. So the standard price is only about 60% of the market price.

“Even similar real estate has different market prices therefore making accurate standard prices almost impossible. If the price is stated too high, there will be unfortunate victims, so negotiated prices are given out, said one National Tax Service official.

If the stating of actual transaction prices becomes mandatory, it could help stabilize real estate prices and is expected to aid in various government housing policies.

However there are prior problems to resolve.

“So far there was considerable discussion concerning actual transaction prices of real estate. There were various policies such as authenticated contracts to compensate for the registration transcript but this was hardly effective. What we need is a policy structure that enables faithful reporting of transactions,” emphasized Young-hun Roh, a researcher committee member at the Korea Institute of Public Finance.

There is also a need for mitigating taxation resistance.

“There must be some incentives for people, who report their taxes faithfully,” said a related public official from Gangnam-gu, Seoul.

Jae-Seong Hwang Ki-Jeong Ko jsonhng@donga.com koh@donga.com