As the ruling and opposition parties coordinate their opinions on the reform of the inheritance tax system, the government announced that it would shift the taxation method from the current estate tax system to an inheritance acquisition tax.
The government noted that in the tax amendment proposal announced last year, it would push for adjustments to the top inheritance tax rate and tax base, as well as an expansion of child deductions; however, this was left unresolved due to opposition party backlash.
In this context, as discussions on inheritance tax reform have recently become active in the political arena, speculation has arisen that the government has revealed plans for the introduction of an inheritance acquisition tax to gain a lead in the tax reform initiative.
◇ At least 3 years until implementation… Inheritance acquisition tax announced amidst political uncertainty
On the 12th, the government stated that it would transition the future inheritance tax system from the current estate tax to an inheritance acquisition tax. While the estate tax is based on the total estate of the deceased (decedent), the inheritance acquisition tax taxes each property acquired by the heir.
The estate tax is considered easier to administer, allowing taxation simply by assessing the total estate size. In contrast, the inheritance acquisition tax determines taxes based on each heir’s portion of inherited assets, which is favorable for tax equity. However, there is a challenge in tracking the inheritance acquisition status for each heir, and this could lead to increased administrative demands regarding tax information management.
Political circles also seem to agree on the necessity of transitioning to an inheritance acquisition tax. However, there are some puzzled reactions regarding the timing of the announcement. This is because both ruling and opposition parties recognize the current inheritance tax system's burden as excessive and are in the process of reaching coordination on the direction of reform.
The major opposition party, the Democratic Party of Korea, has also excluded its party line from fast track discussions and stated that it will finalize the tax reform through consultations with the ruling party. Under these circumstances, if the new topic of inheritance acquisition tax comes to the forefront, there could be a possibility of re-evaluating existing topics, such as expanding spousal deductions.
In response to this, the Ministry of Economy and Finance indicated that the content being announced aims to push for the 'transition to an inheritance acquisition tax,' noting that all agreed-upon spousal inheritance deductions during the legislative process can be reflected. The opposition’s resistance to reducing the 'top inheritance tax rate' will also be pursued through a separate public discourse process, independent of the transition to the inheritance acquisition tax.
Specifically regarding spousal inheritance deductions, if they are completely abolished during the National Assembly discussion process, they plan to adjust the deduction standards upward and ensure that no inheritance tax is levied on property inherited by the spouse after transitioning to the inheritance acquisition tax.
Jeong Jeong-hoon, head of the Tax Division at the Ministry of Economy and Finance, said, 'If the proposal being discussed in the political arena (abolishment of the spousal inheritance tax) occurs first, the limit of the spousal inheritance deduction will change from a maximum of 3 billion won to unlimited,' adding that 'any parts that change through the National Assembly discussion process can be absorbed as is.'
The government is planning to announce the legislative notice for the bill to amend the Inheritance and Gift Tax Act related to the transition to the inheritance acquisition tax within this month, and after going through public hearings and opinion-gathering procedures next month, it aims to submit the legal bill to the National Assembly in May. The actual implementation of the inheritance acquisition tax is anticipated for 2028. The Ministry of Economy and Finance explained that after the legal revisions this year, amendments to the enforcement ordinance would occur next year, and preparations such as establishing an inheritance acquisition tax execution system would be necessary by 2027.
◇ Seen as a competition for policy leadership between the government and the National Assembly
Even if the government proceeds as represented, it is a long-term task regarding tax reform that must be viewed over the next three years. Therefore, there are concerns whether the introduction of the inheritance acquisition tax can proceed at its own pace during a time when governmental momentum for national governance has diminished due to the impeachment politics. It is believed that this should be pursued after political uncertainties are resolved following the acting authority system.
Analysts suggest that the policy announcement aimed at recovering policy leadership as the acting authority continues to be excluded from national discussions. Earlier, Choi Sang-mok, the acting president and the Minister of Economy and Finance, stated at the Cabinet meeting the previous day that he was 'very sorry and regrettable' that 'the ruling and opposition parties are operating a national council without the government,' and that 'the government will soon hold meetings to assess the livelihood economy to listen to voices from the field and present immediate measures needed, such as cost reduction and revenue expansion.' This statement is interpreted as a reaffirmation by the highest national authority that 'the government is the main subject leading policy.'
Regarding the viewpoint that the introduction of the inheritance acquisition tax is a competition for leadership in tax reform, the Ministry of Economy and Finance is drawing a line, stating that it merely formalizes the intention to transition to the inheritance acquisition tax, which they had previously expressed, to enhance tax equity and alleviate the tax burden on the public.
The government's main reasons for transitioning the inheritance tax system to an inheritance acquisition tax include ▲ enhancing tax equity ▲ improving the effectiveness of deductions ▲ aligning with global standards. It is stated that paying tax in proportion to the size of inherited assets aligns with principles of fairness. The current inheritance tax system, which levies taxes based on the total estate of the deceased, is also criticized for having tax rates that are excessively high based on the size of the tax base.
Additionally, it has been pointed out that the current inheritance tax method distributes policy support benefits, such as the 'disability deduction' granted to specific heirs, among other heirs.
A representative from the Ministry of Economy and Finance stated, 'It is reasonable to tax gifts and inheritances in the same way as they are both asset transfers,' adding that 'there is a need to rationalize the tax burden by taxing only the property acquired by the recipient, similar to gifts.'
Considering these points, many advanced countries have also chosen to adopt the inheritance acquisition tax method for taxation of inheritance. Jeong Jeong-hoon, head of the Tax Division, stated, 'Both the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) evaluate that the inheritance acquisition tax is more desirable for tax fairness or wealth distribution,' adding, 'Domestic surveys have shown that more than two-thirds of experts and public opinion favor the transition to the inheritance acquisition tax.'