Starting next year, as a plan to make finance and insurance businesses that earn more than 1 trillion won annually pay about twice as much education tax as before has passed the Cabinet meeting, the government has been mulling how to define the "revenue amount" that serves as the basis for taxation.
This is because the finance and insurance industry, which will pay the additional tax, is raising its voice that "we need to revisit which items are recognized as the revenue amount." In round one, where the sides fought over whether to raise the education tax rate, the Ministry of Economy and Finance pushed ahead with its original plan, and round two has effectively begun over the standard for the tax rate. The Ministry of Economy and Finance has asked the industry for related statistics to review the validity of the industry's claims.
According to the government on the 22nd, the Ministry of Economy and Finance is deliberating an amendment to the enforcement decree of the Education Tax Act that defines the revenue amount. When it announced the tax reform plan in Jul., the government said that if a finance or insurance business's revenue amount exceeds 1 trillion won, it would levy 1.0% as education tax on the excess.
Previously, a single rate of 0.5% applied regardless of whether the revenue amount was 1 trillion won or less, or exceeded it. The government explained that the standard was set in 1981 and that it took this step because the domestic gross value added of finance and insurance has increased 75 times since then.
Simply put, the revenue amount of finance and insurance businesses is sales. The education tax is levied not on net income, which subtracts expenses from a finance or insurance business's revenue, but on the revenue (sales) itself. However, the enforcement decree of the Education Tax Act recognizes only net profit, not revenue, as the revenue amount for derivatives and foreign exchange transactions. This acknowledges their particular use in risk-hedging (hedge) transactions.
The industry argues that the enforcement decree of the Education Tax Act should be revised so that securities are also regarded on a net-profit basis for the revenue amount. Currently, the Education Tax Act does not recognize losses from the sale of securities, so no matter how large the loss is, if a specific issue is sold at a profit, that profit is counted in full as the revenue amount.
Even if the Ministry of Economy and Finance decides to change the revenue amount standard, the subsequent procedures are somewhat complicated. In particular, it is unclear whether the law must be amended or whether an enforcement decree revision alone would suffice. The Education Tax Act stipulates that gains from the sale of securities are part of the revenue amount. Because it is specified in the law rather than in an enforcement decree that a ministry can revise on its own, there is a strong possibility that the National Assembly would have to amend the law.
A Ministry of Economy and Finance official said, "It seems we will need an interpretation from the Ministry of Government Legislation," adding, "As for the scope of recognition of securities in the revenue amount, we need to see what is stipulated by law and what is set by enforcement decree."
Academia believes the revenue amount standard should remain as is, given the purpose of introducing the education tax. Kim U-cheol, a professor at the University of Seoul, said, "Even a diner owner pays value-added taxes, but finance and insurance businesses do not," adding, "The education tax was introduced as a substitute for value-added taxes, which are based on sales."
Still, some voice concerns about side effects when the tax rate rises. Oh Mun-seong, president of the Korea Association of Tax Policy, said, "The education tax on finance and insurance businesses also has the character of an indirect tax," adding, "The burden can be passed on to the ultimate consumer, namely borrowers, so if the education tax goes up, loan rates may also rise."