The credibility of tax law as a subpart of the legal system depends on the preciseness of its concepts and scopes thereof. Tax expenditures, as one of the groundwork for tax law, need detailed analysis and review. Many important financial control systems such as the tax expenditure budgetary system required by the 「National Finance Law」 amended in 2010 or the preliminary feasibility study on new tax preferential regulation required by the 「Tax Reduction and Exemption Control Act」 amended in 2014 are based on the concept and the scope of tax expenditures.
Since the tax expenditures are the exception to the benchmark tax system, constitutional principles should be applied in a different way. In view of tax equalitarianism, tax expenditures should be kept at a minimum necessary level, and the benefit of the doubt in the interpretation of the clause (in dubio pro fisco) should be given to the tax authority.
Tax expenditures defined in the 「Tax Reduction and Exemption Control Act」 and the 「Tax Expenditure Budgetary Report」 are “departure from the benchmark tax system, such as tax exemption, tax reduction, tax credit, tax allowance, preferential tax rate or tax deferral made under certain requirements, having the characteristic of financial expenditures.” Tax expenditures of Republic of Korea in 2015 amounted to 33.5 trillion won, among which 18.5 trillion won are from the 「Tax Reduction and Exemption Control Act」 and 14.5 trillion won are from individual tax law such as the 「Income Tax Law」. Main objective of this study is to ascertain whether the items of the Tax Expenditure Budgetary Report match the definition of tax expenditures.
Different countries have used various specific criteria for the tax expenditures. The United States and Canada use a broadly defined definition for tax expenditures, while the United Kingdom and Germany apply a narrower scope of tax expenditures. The United Kingdom distinguishes between tax expenditures and ‘structural reliefs’, and Germany only makes reference to aid to enterprises and business sectors of the economy.
In particular, many countries commonly exclude some measures from the scope of tax expenditures, such as a allowance for family units, credit for pension, and a tax deferral, because these measures lack particularity concerning beneficiaries, do not serve a particular purpose other than the efficient operation of the tax system, and are not administratively feasible to eliminate.
If the tax expenditures included in the 「Tax Expenditure Budgetary Report」 are analyzed by the same logic, some measures have more characteristics of the structural norm than of tax expenditures. Even under the broadest definition for tax expenditures, personal or family allowances for individual income tax, deemed input VAT credit, and pension credit, which constitute over 20 percent of the entire amount of tax expenditures, are more of the structural norm than tax expenditures. Although the number of such measures is not so high, since their revenue amounts are large in sum, they can distort the tax policy.
Accordingly, the scope and concept of tax expenditures must be defined in a lucid manner and in concordance with internationally used criteria for tax expenditures. Then, the tax policy on the reduction of tax expenditures will be clearly made and be implemented without.