OECD Urges South Korea To Broaden Tax Base

by Mary Swire, Tax-News.com, Hong Kong

22 December 2008

The Organization for Economic Co-operation and Development has warned South Korea that drastic tax reforms must be implemented if it wishes to sustain its economic growth.

An economic survey of South Korea published on the OECD's website on December 17 explained that the country was flagging in four key areas, with tax revenues being highlighted as one of these.

According to the survey, South Korea's tax system is inappropriately designed to cope with the demands of an ageing population, with public spending suffering as a consequence.

The survey also concluded that:

"Korea has one of the lowest tax burdens in the OECD area, reflecting its small public sector. However, rapid population ageing will put upward pressure on government spending. The challenge is to meet the long-term need for greater expenditures and tax revenue while sustaining strong economic growth."

"A pro growth tax reform implies relying primarily on consumption taxes for additional revenue. There is also scope for raising personal income tax revenue from its current low level by broadening the base by reducing the exemptions for personal income."

"The planned cuts in the corporate tax rate should be financed at least in part by reductions in tax expenditures. The broadening of direct tax bases would also help finance an expansion of the earned income tax credit to address widening income inequality."

"In addition, the local tax system should be simplified and reformed to enhance the autonomy of local governments."

Earlier this year, the OECD predicted that Korea's economic growth is likely to drop to just 2.7% over the next 12 months; a noticeable decline from the 3.5% growth rate recorded for 2008.

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