Over the past years, there has been the question of whether New Zealand should adopt a Capital Gains Tax (hence force “CGT”). As recently as 21 February 2019, the Tax Working Group’s final report was released including the question on implementation of a comprehensive CGT and the recommendations for government. Again, it seems to provoke a number of debates although only two of 99 recommendations embody CGT. The oppositions point out the complexity and the cost as the main reason for their objections even though they also agree that a comprehensive CGT realizes equality of tax burden. It seems to be reasonable when seeing CGT in Korea which has one of the most complicated systems. This essay will briefly compare the different or similar aspects of CGT in New Zealand and Korea. Prior to this, for the underlying understanding, this will explore the overall taxation system of New Zealand and Korea.
First of all, it is important to understand the structure of taxation as a prerequisite in order to comprehend the specific tax topic. Tax laws in Korea can be classified into national taxes and local taxes depending on the enforcement authorities. As for the national taxes, there are Income Tax Law, Corporation Income Tax Law, Inheritance Tax and Gift Tax Law and Comprehensive Real state Holding Tax Law, Value-added Tax Law and so on. Local taxes embody many kinds of taxes such as Acquisition Tax and registration Tax Law, Property Tax Law and several surtaxes (Ministry of Strategy and Finance, 2016, p. 1). In New Zealand, the principal taxation statutes are Income Tax Act 2007, Tax Administration Act 1994, Taxation Review Authorities Act 1994 and Goods and Services Tax Act 1985 (Coleman et al., 2018, p. 33).
The noticeable difference between New Zealand and Korea is that Korea has Corporation Income Tax Law, Inheritance Tax and Gift Tax Law, Comprehensive Real Estate Holding Tax. By contrast, New Zealand does not have a law for corporation income separately but include it in the Income Tax Act 2007. In terms of Inheritance tax and gift tax, New Zealand had originally Estate and Gift Duties Act 1955 ranging from death duty to gift duty. However, succession duty was abolished in 1992 and gift duty was eventually repealed in 2011 as the Estate and Gift Duties Act 1955 itself was repealed (Coleman et al., 2018, p. 67). Lastly, Korea has Comprehensive real estate holding tax which is charged even when holding. In addition to holding tax, CGT is imposed when selling although it cannot be evidently seen in the taxes listed above. However, CGT is imposed by Income Tax Law and Corporation Income Tax Law (Ministry of Strategy and Finance, 2016, p. 1). In this respect, Korea’s CGT looks similar to New Zealand’s. Taxes on a property with CGT will be revisited a subsequent section.
Turning to authorities relating to tax, in Korea, any law is enacted by the National Assembly (equivalent to Parliament). Under the tax laws, Presidential Decrees are established by a president. By the Presidential Decrees, the Minister of Strategy and Finance can make rules. They, which are arranged in three rows, are all statute laws. And then, the Commissioner of the National Tax Service (equivalent to the Commissioner of Inland Revenue) can prepare guidelines to enforce the laws (Ministry of Strategy and Finance, 2016, p. 3). Likewise, only Parliament can enact laws in New Zealand so only legislations by Parliament are acts (equivalent to laws). Then, the Governor-General can make regulations for administering statutory regimes or governing (Coleman et al., 2018, p. 22 - 26).
As stated above, Korea has Corporation Income Tax Law, whereas New Zealand does not. This is because it would seem that corporate income tax is differently treated from personal income tax in Korea. In fact, corporate income tax and personal income tax have a disparate view on income, expenditure, tax rates and tax credits in Korea, which are very different yet very similar to New Zealand.
Firstly, as to personal income tax, tax year means a period starting on 1 January and ending on 31 December in Korea while New Zealand’s tax period starts from 1 April and ends on 31 March. Tax rates for personal income tax in Korea are progressive from 6 per cent to 42 per cent with seven tiers on a range of taxable income (KPMG, 2018, Tax returns and compliance; Deloitte, 2017, p. 17; PwC, 2018, Individual- Taxes on personal income). It is getting more complicated over time. Personal income tax rates in New Zealand are also progressive but they range between 10.5 per cent and 33 per cent with four tiers depending on a range of taxable income (ITA 2007 Part A). Also, one key point of differences is that surtax of 10 per cent of the personal income tax is added to it when paying in Korea (PwC, 2018, Individual- Taxes on personal income).
Another obvious difference between the personal income tax of New Zealand and Korea is of deductions and tax credits. According to s DA1 of Income Tax Act 2007 in New Zealand, a deduction is an expenditure incurred in deriving income or carrying on a business, other amounts allowed as a deduction under other parts of Act, and depreciation losses. This has resulted in the prohibition of private or domestic expenditure. Examples of private limitation are clothing, food, housing, child care and so forth (Coleman et al., 2018, p.335). There is also employment limitation (ITA 2007 s DA 2(4)). If a taxpayer is an employee, the taxpayer cannot claim any deductions relating to salary income even if the expenditure derives income. Instead of a deduction, it enables to claim tax credits known as Independent Earner Tax Credit (ITA 2007 s LC 13).
On the other hand, Korea’s deductions are broader than this. For a business person, all business-related expenses are surely deductable and employment income deduction is available for employee (PwC, 2018, Individual- Deduction). Additionally, business person and natural person both can add basic deductions and additional deductions. For example, all taxpayers are basically eligible for KRW 1.5 million per year or a taxpayer has to serve family member aged 70 or over is eligible KRW 1 million per year and so on and so forth (PwC, 2018, Individual- Deduction). These kinds of basic deductions and additional deductions function as an instrument for realising social welfare. On this point, Coleman et al (2018) commented that “Deducting tax credit rebates from the tax payable, instead of from income, gives an equal benefit to all taxpayers regardless of the amount of their income.” (p. 507). Korea authorities have recognised it so deduction items have gradually changed to the tax credit category as long-term agenda. For instance, Income Deduction for Credit Card Usage is transferred to tax credit in 2015 so that the middle class can benefit more (Ministry of Strategy and Finance, 2017, p.12). Nevertheless, it is still presumed tax credits for an individual person had a lower impact on the actual amount of deduction. This is because the tax credits have thresholds so taxpayers rarely have the tax credits in reality. Tax credit for medical expenses epitomises this obstacle. A tax credit of 15 per cent is available for medical expenses per annum but the medical expenses are limited to KRW 7 million and simultaneously it is eligible only when medical expenses exceed 3 per cent of salary income (PwC, 2018, Individual- Deduction- Special tax Credits).
Next, Korea has Corporation Income Tax Law separately from Income Tax Law for a person, which is in stark contrast with New Zealand. In principle, Corporation Income Tax Law in Korea adopts the all-inclusive theory, also known as a negative system, about the incidence of taxation. This makes Corporation Income Tax Law in Korea differ from the Income Tax Law for a person in Korea and the Income Tax Act 2007 for individuals and companies in New Zealand, which are imposed only on listed items. As a consequence, although there is no definition on income in Korea’s tax law and New Zealand’s, there is no problem because only listed items are subjected to a personal income tax in Korea and personal and business income tax in New Zealand. Conversely, in the case of corporate income tax in Korea, all-inclusive income, including CGT and excluding listed items, is taxed.
Contrary to companies’ tax rate in New Zealand which is a flat rate of 28 per cent, Korean companies’ tax rate is progressive with four tiers from 10 per cent to 25 per cent (PwC, 2018, Corporate- Taxes on corporate income; ITA 2007 Schedule 1 Part A 2). It tends to decline as the years go by for achieving international competition. Others, however, claim that it should be increased so as to finance government expenditure for the welfare system (Ministry of Strategy and Finance, 2017, p.22). Here, the fact that the final report of the Tax Working Group in New Zealand concluded no reduction and no introduction of a progressive system with regard to company tax rate is noteworthy (“Tax Working”, 2019, p.18). In light of this, it can be seen that those issues have been on the agenda. It is interesting to look at the current status and the controversy over it, and agenda and the controversy over it through both New Zealand and Korea. As can be seen, the controversy on taxation is inevitable in the course of policy formulation and implementation because taxation needs social consensus in particular.
To discuss CGT, firstly it should be broadly discussed tax on property. Tax on a property in Korea can be divided into three phases. When acquiring real estate, motor vehicles, construction equipment, golf membership and so on, it requires to pay acquisition tax and occasionally registration tax as well (Deloitte, 2017, p. 19). Even when holding, real property tax is levied. Also, the comprehensive real estate tax is imposed if the owner is individual and the property is land or residential buildings (Deloitte, 2017, p. 19). When selling, finally, it is subject to CGT. As a company, the gains from the property are boiled down to its income due to its all-inclusive principle (Deloitte, 2017, p. 9). As a person, however, Income Tax Law isolates the CGT part for the separate taxation with a formidable number of pages. CGT includes real estate and also certain shares of a company (Deloitte, 2017, p. 18). Due to this hefty charge and the complexity with the comprehensive real estate tax, the many anomalies have arisen. Accordingly, rulings have been produced in abundance and a great deal of cost has been incurred both in private sector and public sector. Nevertheless, because it is believed this is for the fairness, Korean government intends to expand the range of CGT and reinforce the prevention of tax avoidance (Ministry of Strategy and Finance, 2017, p. 21).
In New Zealand, the purchase of a house requires the buyer to pay rates which are charged by local councils and vary from place to place (New Zealand Immigration, n.d., Rates). Afterwards, if the buyer sells the house within five years, it requires paying tax on the income from the sale irrespective of the original intention of buying as long as it is not family home or it does not correspond to the list of exclusions (Inland Revenue, n.d., Selling property). It does not look like New Zealand has CGT but upon closer examination, it can be found some specific capital gains are regarded as income. Subsequently, they become taxable, where the distinction between capital and income blurs (Coleman et al., 2018, p. 38). Examples of taxable capital gains are income from a capital transaction as a business, land transactions, personal property and so on (Coleman et al., 2018, p. 117). However, the final report of the Tax Working Group contains the introduction of CGT, expanding of taxable capital gains to be exact. This could be still placed in the Income Tax Act 2007 rather than a new tax law like Korea. Hence, businesses fly in the face of it according to a survey by Wellington Regional Chambers of Commerce and Business Central (Scoop Media, 2019, para. 4). There is no doubt that this far-reaching CGT will make a healthy profit for the government, which the Tax Working Group has expected $8 billion could be raised in the sheer first five years (Walls, 2019, para. 6).
In conclusion, this essay compared the overall taxation system and specifically the CGT of New Zealand and Korea. It did not include the fine details of any other specific tax topic except CGT. There is also a limitation that primary and up-to-date materials for Korean taxation were not able to be used due to the lack of English resources. Despite its limitation, it was helpful to broadly understand taxation by comparing the two countries and interesting to look a dilemma of tax policy which is a conflict between fairness and economy in the two countries. It is hoped that the two governments solve this conundrum and thus they achieve social consensus.
2,179 words
References:
Coleman, J., Davies, S., Elliffe, C., Gupta, R., Hodson, A., Maples, A., …, Tan, L. (2018). New Zealand taxation 2019 : principles, cases and questions. Wellington, New Zealand: Thomson Reuters.
Deloitte. (2017).Taxation and investment in Korea 2017 [PDF]. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-koreaguide-2017.pdf
Inland Revenue. (n.d.). Residential property. Retrieved from https://www.ird.govt.nz/property/property-selling/selling-property.html
KPMG. (2018). Korea – income tax. Retrieved from https://home.kpmg/xx/en/home/insights/2011/12/korea-income-tax.html
Ministry of Strategy and Finance. (2017). Korean tax policy: the past, present and future [PDF]. Retrieved from http://conferencias.cepal.org/politica_fiscal/Jueves%2023/Pdf/Sangyool%20Lee.pdf
Ministry of Strategy and Finance. (2016). 2016 Korean taxation [PDF]. Retrieved from http://english.moef.go.kr/skin/doc.html?fn=Korean%20Taxation_2016_Full%20Versi on.pdf&rs=/result/upload/eco/2017/08/
New Zealand Immigration. (n.d.). About buying a property. Retrieved from https://www.newzealandnow.govt.nz/living-in-nz/housing/buying-building
PwC. (2018). Korea, Republic of – Overview. Retrieved from http://taxsummaries.pwc.com/ID/Korea-Overview
Scoop Media. (2019, April 16). Central NZ businesses oppose capital gains tax. Scoop Media. Retrieved from http://www.scoop.co.nz/stories/BU1904/S00435/central-nz- businesses-oppose-capital-gains-tax.htm
Tax Working Group Final Report. (2019, March/April). Waikato Business News. p.18
Walls, J. (2019, February 21). Tax Working Group recommends capital gains tax: what it means for you. New Zealand Herald. Retrieved from https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12205791
오랫동안 영문 글쓰기를 해왔습니다. 첫 글쓰기를 시작으로 점차 나아지고 있는 것을 실감하고 있는데요, 잘써진 글을 올리고 있는 것이 아니라 작성된 순서대로 올려보고 있습니다. 모두 올린 후 제가 터득한 영문 글쓰기의 노하우를 공유하고자 합니다. 조금 더 기다려주세요.