Local Governments Ask for Share of VAT Revenue

Mayors, heads of guns (“gun” and “gu” are basic administrative units in Korea), and ward governors nationwide are calling for partial distribution of value-added tax (VAT), which is state tax, to relieve financial difficulties of local governments.

The lower-level council decided on October 28 to draw up a tax-sharing plan to distribute 20 percent of VAT to upper-level local authorities and channel it to the lower-level local governments as a form of subsidy and submit the idea to the National Assembly and Ministry of Finance and Economy by next week.

Implemented in Germany, Japan, and the U.S., a tax-sharing system is designed to complement the vulnerable finance of local governments by allowing the central and local governments to share national taxes such as value-added, income, and corporate taxes.

The council said that of the total 234 cities, guns, and gus, 90.2 percent (211) had less than 50 percent financial independence, while as much as 66.2 percent (155) of the cities, guns, and gus was incapable of paying off the salaries of government employees with local tax revenues.

Meanwhile, financial hardship was expected to worsen as municipalities have to additionally shoulder a total of 1.03 trillion won, including 830 billion won for next year’s four major local elections and 200 billion won for paid local council members.

If 20 percent of value-added tax is appropriated for tax sharing, the revenue of local governments is expected to rise by an annual 6.6 trillion won. The ratio of national tax to local tax will also be adjusted from the current level of eight to two to seven to three.

The council will demand the National Assembly and the government to install “special commission on tax reform” that involves municipalities, the National Assembly, and academia to adjust the tax items of state and local taxes.

Addressing this, an official with the Ministry of Finance and Economy said, “We will come up with a concrete way to overhaul local taxation, including exchange of tax items in state and local taxation by the end of the year. Demands of the local governments will be reviewed fully.”

Joong-Hyun Park sanjuck@donga.com