An audit by the Board of Audit and Inspection found that the tens-of-trillions-of-won “tax revenue shortfalls” that occurred for two straight years in 2023-24 stemmed from the Ministry of Finance and Economy (then the Ministry of Economy and Finance) omitting tax law changes and building an inaccurate forecasting model. When 2024 corporate tax was recalculated with the omitted tax law change effects included, the revenue error shrank 45%, from 11.9 trillion won to 6.6 trillion won.
Announcing the results of its audit on “the operation of major fiscal management systems” on the 27th, the Board of Audit and Inspection identified, year by year, why corporate tax forecasts missed. In 2023, external conditions such as the Ukraine war had changed and corporate earnings were likely to shrink, but the ministry used the average of past statistics as is when estimating corporate net profit. In 2024, the effect of a tax law change that excludes dividends received from overseas subsidiaries from taxable income was not included in the calculation. In effect, it projected that more corporate tax would be collected than actually was.
The capital gains tax model was built on the premise that it moves at the same rate as growth in real estate prices and transaction volume, and the Board found that this model was not accurate. When the errors were corrected and the figures re-estimated, the error fell from 7 trillion won to 3.1 trillion won in 2023 and from 4 trillion won to 1.6 trillion won in 2024.
The tax revenue shortfalls recorded by the ministry reached 56.4 trillion won in 2023 and 30.8 trillion won in 2024. At the time, criticism arose inside and outside the government that tax revenue forecasts were far too inaccurate, and in this audit the Board focused on the causes behind corporate tax and capital gains tax, the taxes with the most conspicuous errors among various tax items.
The Board also pointed out that there were improper elements in the process of tapping multiple fund sources to cover the revenue shortfall. The National Finance Act requires National Assembly deliberation when the scale of changes to fund spending exceeds 20% of the originally planned amount. The ministry outwardly kept to this standard, but by using “repayment deferrals” between funds (postponing repayment of borrowed money), which are not classified as fund spending, it effectively exceeded 20%. The Board judged that “skipping the National Assembly deliberation process lowered accountability and transparency in fiscal management.” However, its position is that because formal requirements were met, it is hard to view this as “illegal.”
The Board also cited as problems the fact that many uncollected receivables managed by the ministry were past their statute of limitations and that the settlement of remaining balances of national subsidies was delayed. In this connection, the Minister of Finance and Economy was issued a caution and notification.