Tax revenue shortfall to reach $22 billion due to corporate tax drop

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Korea is expected to face a 30 trillion won ($22 billion) tax shortfall this year, crippled by the carryover effects of steep declines in corporate tax revenues from 2023, according to financial authorities, Sunday.

This figure raises significant concerns about the fiscal deficit, because the government experienced a 56 trillion won shortfall in tax revenues last year.

However, the concern is somewhat mitigated by the ongoing rebound in the semiconductor industry. The full impact of strong corporate earnings on tax revenue will take a few quarters to materialize.

The fiscal authorities plan to use reserve funds from government-operated accounts, along with unused budgets and special accounts. Additionally, the central government will reduce allocations to municipalities and cut spending on education.

According to the Ministry of Economy and Finance, the government is revising the country’s budget plans to account for the shortfall exceeding 30 trillion won.

As of July, the government collected 208.8 trillion won in taxes, 8.8 trillion won less than a year ago.

Propelling the rapid shortfall is a 15.5 trillion won decrease in corporate taxes during the first seven months of this year.

Korea reported a 6 trillion won increase in value-added taxes, but this was insufficient to offset the nearly 16 trillion won shortfall.

It remains to be seen whether semiconductor giants Samsung Electronics and SK hynix will be able to meet their tax obligations adjusted for the August mid-term payment period.

The mid-term prepayment allows corporate taxpayers to pay either half of last year's tax or an estimate for the first half of this year.

Overall, the ministry’s sourcing capabilities are limited.

Last year, a surplus of about 20 trillion won underpinned by the depreciation of the country’s currency allowed the government to use the Foreign Exchange Stabilization Fund to help offset the shortfall.

However, the fund is already allocated for the redemption of publicly managed funds.

The shortfall raises concerns about the country’s medium- to long-term fiscal soundness. Lower-than-expected revenues lead to higher-than-anticipated national debt.

The ministry’s 2024-28 fiscal plan projects national debt to reach 1,277 trillion won by 2025, accounting for 48.3 percent of nominal GDP. This is 3.7 trillion won higher than the previous estimate of 1,273.3 trillion won.

The National Assembly Budget Office's Aug. 26 report recommended that the government promptly announce potential budget shortfalls and prepare timely fiscal response measures.