Problems and Improvement of Estimated Income Taxation on the Personal Service Income
Asian Tax Journal Vol. 15 No. 5 (2014), pp. 293-317
Abstract
Estimated income taxation is a method used to estimate taxation standards as an alternative fora taxation authority or taxpayer in the event that the taxation standards are not determined byaccounting books or supporting documents according to the Principle of Documentary Taxation. Itis necessary to reconsider about the application of an identical estimated income taxation methodunilaterally to all business owners who do not record accounting books without any considerationof the actual business state or circumstances of the taxpayers, as it conflicts with the Principle ofFair Taxation. Therefore, this study pointed out the problems that happen in the process ofestimating income amount focusing on the personal service income which is classified as businessincome, and suggested the methods to improve the problems. Specifically, this study conducted a simulation with the service of the writers among thepersonal services. As a result of the simulation, it was found that there was a jumping effect thattax burden rapidly increases in the following three sections according to income size：a section towhich the standard expense rate is applied；a section to which additional tax is applied；and asection to which 1/2 is multiplied by the standard expense rate. For most businessmen who provide personal services, few incurred major expenses such aspurchase of inventories, rent, and labor costs, as they provide their own service. In addition, asmost of their services are intellectual services, there are no explicitly required expenses, which isimpossible to do bookkeeping. Compared to other businessmen in other business types, theirincome tends to be disclosed explicitly. In consideration of such characteristics of personal serviceincome, if standard expense rate is applied only to the income amount exceeding the range ofincome to which simple expense rate is applied, if the additional tax for non－bookkeeping is notcharged, and if the method to which 1/2 is multiplied by the standard expense rate is not used,the jumping effect of rapidly increasing tax burden can be removed from the three sections. The previous studies only pointed out the problems of the estimated income taxation systemwithout any specific ground. This study is different from the previous studies in that it points outthe problems of the current estimated income taxation system based on the simulation data of taxburden calculated in amount. In addition, by pointing out the problems of Standard Expense RateSystem that the previous studies had not mentioned, this study has significance in that it suggestsa specific improvement plan of the system, if Korea continues to apply standard expense rate system.
Keywords
- Estimated Income Taxation
- Personal Service Income