Government Rolls Back Tax Exemptions

The regulations on tax exemptions and the reduction of interest on financial products, such as long-term housing savings and share dividend income will disappear or decrease by the end of next year, placing more tax burdens on the people.

It has turned out that the tax reductions for mid- and small-sized companies and self-employers have already decreased significantly.

According to the Ministry of Finance and Economy (MOFE) on November 29, the government has decided to abolish or downsize clauses related to tax reductions, including tax-free interest income, low charges levied on share dividend income, and the securities transaction tax exemption of funds whose terms are all to end by the end of next year in order to make up revenue for the government’s low birth rate measures.

The National Assembly is currently discussing the tax exemption and reduction downsizing measures proposed by the MOFE this year. However, in order to increase funds, the tax law will be revised next year and tax reduction measures will be cut starting 2007.

An MOFE official said, “Due to tax benefits, only a few in the low-level bracket are subscribing for deposit products. Also, since the time to exempt the securities transaction tax to maintain the securities market have already passed, it will be better to abolish the tax reduction regulations.”

Accordingly, there are high possibilities that tax reduction regulations for tax privileged savings, long-term housing savings, and deposits at union banks, such as Nonghyup and the National Federation of Fisheries Cooperative will disappear.

Those currently subscribing to tax-privileged savings are paying 10 percent of the interest in taxes, but with the revised tax law, they will have to pay 16.5 percent of the interest (including resident taxes), the same as regular deposits. Those currently subscribing to long-term housing savings or deposit products from union banks are not paying the interest income tax.

Minority shareholders holding listed stocks for over one year are paying five percent of their dividends as income taxes, but starting in 2007, they will be expected to pay a maximum of 35 percent.

Taxation professor Park Jeong-wu at the University of Seoul said in apprehension, “If tax reduction regulations are abolished or cut down, the amount of money that households and companies can actually utilize will decrease.”

Dong-Yong Min legman@donga.com mindy@donga.com