South Korea Plans Ways To Cure Budget Deficit

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

31 August 2009

The South Korean government has introduced a revision to its 2009 budget in order to counteract a worsening in the country’s fiscal deficit.

In its press release introducing the new budgetary measures, the South Korean Ministry of Strategy and Finance said that, while the economy has shown signs of economic recovery, the country’s fiscal balance has been worsening due to the expansionary fiscal policies that were introduced against the global economic downturn. Those policies have caused a drop in tax revenue and an increase in public expenditure.

The government has therefore introduced a 2009 tax package, aiming to raise an amount of KRW10.5 trillion (USD8.6bn) in additional revenue over the next three years, with the abolition of some tax exemptions and allowances more than offsetting further tax incentives. Up to 90% of the net increase in revenue will come from high-income earners and large companies.

It was confirmed that there would be further tax incentives for those on lower incomes, including tax incentives for self-employed business owners and SMEs. The incentives for SMEs would include relaxed regulations on the inheriting of family businesses.

To support future growth industries, there would be tax credits on R&D and technology acquisition. Tax allowances on R&D investment will be expanded from 20% to 25% for large companies and from 30% to 35% for SMEs. On top of that, tax allowances and exemptions will be given to green industry-related financial products.

The new package also contains tax increases for high-income earners and professionals, and imposing more severe penalties on frequent tax evaders. Income tax credits for those earning more than KRW100m per annum will be cancelled, along with the abolition of the tax credit on pre-reported property transfers.

To attract Islamic capital into Korea, the government will also offer a tax exemption on the profits made on distributions from ‘sukuk’ Islamic bonds.

The government reportedly now expects that there will be a budget deficit of about 5% of annual GDP in 2009, and it now has the objective of budgetary balance or a surplus by 2013.

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