OECD Says Property Taxation Should Shift From Transaction Taxes to Holding Taxes

[Financial News] The Organisation for Economic Co-operation and Development (OECD) has urged the Government of the Republic of Korea to implement sweeping tax reform, including changing inheritance tax to the Estate Acquisition Tax and shifting property taxation from transaction taxes to holding taxes.
In its 2026 Korea Economic Report released on the 2nd, the OECD said, "The current revenue structure, in which spending pressures related to aging are rising and direct tax revenue is falling because of tax expenditures, should be reformed in a direction that supports growth and revenue."
The OECD said, "The current revenue structure has a relatively low share of indirect taxes and corrective taxes, which cause less distortion." It added, "Additional revenue is needed while supporting growth, and value-added tax and corrective taxes should be used first for that purpose."
The tax reforms mentioned by the OECD cover five tax categories, including corporate tax.
First, it recommended that corporate tax gradually move to a flat rate while reducing tax expenditures.
Tax expenditures related to corporate tax account for 15.5% of corporate tax revenue, or 17.8% of total tax expenditures. The tax has a four-tier progressive rate structure. The OECD said this is more complex than the systems in other OECD countries, which use either a flat rate in 22 countries or a two-tier progressive structure in 12 countries.
It also called for major reform of Property Tax.
The key point is the need to shift transaction taxes to holding taxes and to convert inheritance tax to the Estate Acquisition Tax.
Property taxes amount to 3.0% of GDP, which is higher than the OECD average of 1.6%. However, the share of holding taxes, which cause less distortion, stands at just 29.4% in Korea, far below the OECD average of 56%.
Citing this, the OECD recommended shifting property taxation from transaction taxes to holding taxes. In the long term, it said taxation should be based on market prices, and assets with low utilization, such as vacant homes and second homes, should face higher tax rates to improve neutrality across housing types.
It also said inheritance tax should be changed to the Estate Acquisition Tax, and that the system for family business succession, which can be used to avoid taxes, needs to be improved.
The OECD said the family business succession system is being misused for tax avoidance and other purposes, noting that "unlike most OECD countries, inheritance tax is imposed on inherited assets rather than on the beneficiary."
It also recommended reducing the number of workers exempt from income tax.
Under the current income tax system, 32.5% of workers are exempt. Capital gains, including those from stocks, are effectively tax-free for individuals, except for major shareholders.
The OECD said, "Tax expenditures should be streamlined to broaden the tax base and reduce the number of workers exempt from taxation." It added, "In the medium to long term, Korea should move toward uniform taxation of various types of capital gains."
It also called for expanding the tax base for consumption taxes.
Korea's consumption tax rate is 10%, about half the OECD average of 19.3%.
Tax revenue as a share of GDP is also lower than the OECD average. The OECD noted that Korea expanded the number of tax-exempt businesses in 2024 by raising the sales threshold, and that low-cost imports under $150 are exempt from tax. It said, "The Korean government is lowering the tax burden under the simplified tax system, and this is affecting low tax revenue."
In particular, the OECD said tobacco taxes should be raised and alcohol taxes should be levied based on alcohol content.
It said tobacco taxes are low compared with OECD countries in terms of retail price and tax burden. It also said alcohol taxes are not sufficiently linked to the taxation of externality factors such as alcohol consumption.
For environmental taxes, it called for expanding the share of paid allocations through auctions in the Emissions Trading Scheme (ETS).
The OECD said, "Korea's ETS has a high share of free allocations and lacks market liquidity."

skjung@fnnews.com Jung Sang-gyun Reporter