ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Analyzing the Policy Enforcement Effects of Introducing a Local Tax“Recognized Current Price” System

  • Lim, Sang-Bin Korea Local Tax Institute

Asian Tax Journal Vol. 25 No. 6 (2024), pp. 133-161

Abstract

The Local Tax Act has been applying the market standard value, which does not reflect the market price, until 2023, but from 2023, the market value system, which applies the market price in principle to gratuitous acquisitions, will be introduced and implemented. This study aims to demonstrate taxpayers’ reactions to the enhanced recognized current price valuation of gifts. In order to analyze the impact of the introduction of the recognized current price system on gift transactions, total transaction volume, gift transaction volume, and the proportion of gift transactions among transactions were set as dependent variables, and the timing of the policy change was set as a dummy variable to distinguish between the announcement and implementation of the recognized current price system. The results of the empirical analysis of this study show that the introduction of the recognized current price system for free acquisitions leads to a decrease in gift transactions. There was a 16－month grace period between the announcement of the introduction of the recognized current price system and its implementation, during which the number of gift transactions increased, confirming the taxpayers’ tax minimization behavior to reduce their tax burden by making gifts before the implementation of the recognized current price system. In addition, the increase in gift transactions until February 2023 confirms that the increase in gift transactions was due to tax－avoidant gift reporting by adjusting the timing of gifts to reduce tax burden after the implementation of the recognized current price system for gratuitous acquisitions. This study suggests that when implementing a new tax policy or system, setting a short grace period for the implementation of the policy or system can be an effective policy if taxpayers’ tax avoidance behavior is taken into account. Recently, the number of real estate－related gift transactions has been steadily increasing in Korea, which means that wealth is being transferred from the existing generation to the next generation. Therefore, the tax system for intergenerational wealth transfers should be continuously improved to meet the current economic environment, and it is necessary to collect various opinions and build public consensus in the process.

Keywords

  • Local tax
  • free acquisition
  • recognized current price
  • market valuation
  • tax avoidance

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