Taxation in Agriculture

Chapter 24. Korea

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

24.1. Overview

In 2017 cultivated land accounted for 16% of total land area in Korea with an average farm size of 1.6 hectares. More than 70% of farms are less than 1 hectare in size while only 8% are larger than 3 hectares. Amongst OECD countries Korea is one of the most land scarce.

Agricultural taxation is comprised of state and local taxes and includes income and property tax. Income tax includes general income tax and corporate tax. Property tax is classified into property tax, aggregate land tax, inheritance and gift tax, and capital gains tax. Other taxes that are also imposed include the value added tax.

Along with providing one of the highest levels of agricultural support and protection to its farmers among OECD countries, Korea’s agricultural sector also receives a considerable number of special tax treatments. Tax expenditure on agriculture accounts for 12.1% of total expenditure in 2018 which is higher than the share of agriculture in budget expenditure (Table 24.1). Tax expenditures account for 19.8% of total expenditure on agriculture, higher than for other policy areas, indicating the importance of tax relief as a policy measure to support the sector. Special tax treatment for the sector includes: the zero VAT rate for agricultural inputs (worth KRW 1.6 trillion in 2017), the tax exemption for fuel oil used for agricultural production (worth KRW 1.2 trillion in 2017), and special treatment of capital gains tax on self-cultivated agricultural land (worth KRW 1.2 trillion in 2017). There is also a tax favouring investments and deposits of mutual financial institutions including agricultural cooperatives, fisheries cooperatives and credit unions.

Table 24.1. Budget and tax expenditures in Korea, 2018

Trillion KRW, %

	Budget expenditure		Tax expenditure		Total expenditure		B/(A+B) (%)
	Amount (A)	Share (%)	Amount (B)	Share (%)	A+B	Share (%)
Agriculture1	19.6	4.6	4.8	12.1	24.4	5.2	19.7
Education	64.1	14.9	1.5	3.8	65.6	14.0	2.3
Social welfare	135.2	31.5	10.8	27.1	146.0	31.1	7.4
Others	210.1	49.0	22.7	57.0	232.8	49.7	9.8
Total	429.0	100.0	39.8	100.0	468.8	100.0	8.5

1. Forestry and fisheries included.

Source: National Assembly Budget Office (2018).

24.2. Income taxation

Korea’s tax system supports farmers by providing special provisions for the agricultural incomes of farmers and agricultural corporations and farmlands and farming equipment.

Income from grains and other food crops are exempt from taxation and income from plant cultivation is not taxed if the revenue is less than KRW 1 billion. The agricultural income tax applied by local authorities on crops was abolished in 2009 due to tax revenues declining to the point of not being sufficient to cover administrative costs associated with the measure.

As for incomes incurred from other activities, farming incomes are considered as business income and the basic framework under which they are subject to income tax or corporate tax is the same as for other industries. For instance, livestock farming is subject to general income tax collected by the state.

For agricultural enterprises income generated from crops for human consumption is excluded from corporate income tax until 2021. Also, dividends from these businesses are fully or partially exempt from personal income tax with the remaining dividends taxed separately from other types of income until 2021.

When property is transferred, the seller is subject to capital gains tax depending on the profits from the transfer. The usual tax rates for capital gains are between 6% and 42% depending the capital gains. Farmers selling land near where they live or selling land that they have used for agricultural production for more than eight years are exempt from paying capital gains tax.

Deferral of deficits is also applied to the farming sector. Losses can be carried forward for up to ten years and deducted from taxable income in the current tax year.

24.3. Property taxation

Property tax and comprehensive real estate taxes are imposed for the holding of properties according to the value of the given property. An annual property tax ranging from 0.07% to 5% is charged. Farmers are levied a flat rate of 0.07% on their farmland. If the landowner belongs to the farmland pension programme and is actively farming the land they are exempt from paying property taxes until 2021.

Acquisition tax is imposed when a property is acquired. This tax for the acquisition of farmland and farming facilities is reduced by 50% on farmland acquired for cultivation by a person who has engaged in farming for least two years or a person who is taking up occupancy in a rural community (an urban-to-rural returner referred to as “returning farmers”) until 2021. Until 2019 acquisition tax on properties gained by an agricultural corporation for farming purposes within two years of the registration of the incorporation was fully exempted.

In the case of inheritance or gift taxes these are imposed on the heir or beneficiary depending on the value of the property. In the agricultural sector, the relevant provisions allow inheritance tax and gift tax to be partially or fully exempted.

Gift tax is a progressive tax under which marginal tax rates between 10% and 50% usually apply. Until 2020 no gift tax is applied in the case where farmers gift productive farmland to a child who is a farmer and who undertakes to farm the land for at least the next five years.

Farm assets are excluded from inheritance tax with a maximum deduction of KRW 1.5 billion from the taxable value of inherited property, when inherited by the farmer’s direct descendant and both the benefactor and the heir have been engaged in farming and the heir continues to farm the land for at least five years afterwards.

24.4. Tax on goods and services

Value added tax is exempted for agricultural produce and unprocessed food products. To ensure farmers are not disadvantaged a 0% VAT is levied on some agricultural inputs such as fertilisers, plant protection chemicals, agricultural machinery and equipment and materials for livestock farming and feed. The 0% VAT is also imposed on some environmentally-friendly equipment and materials used in agricultural production until 2020.

VAT paid by farmers on inputs purchased for their businesses can be refunded.

The transport, energy and environment tax is imposed on gasoline, diesel and other oil fuels is not charged to the agricultural sector for fuel used in agricultural machinery i.e. tractors and heaters until 2021. The usual rates are the following: for gasoline and alternative petroleum products the tax is KRW 475 per litre, and for light oil and alternative petroleum products the tax is KRW 340 per litre. Tax revenue foregone for this tax relief was worth KRW 1.2 trillion in 2017.

24.5. Environmental taxes

There is a transport, energy and environment tax imposed on fuels (see the description in the section above).

24.6. Tax incentives for R&D and innovation

In general, there is a special income tax or corporate tax treatment to promote investment in R&D as well as human resource development. However, it is not limited to the agricultural sector. Expenses covered are salaries for researchers, capital expenses for R&D materials, and job capability development costs. Tax credits are also available for investment in facilities needed for R&D. Levels of tax deduction differs according to the type of business and size of a corporation. Credit ratios are higher for SMEs. This is the third largest item in terms of revenue foregone for the agricultural sector.

24.7. Other taxes

Agricultural corporations are exempted from paying the registration and license tax when they are registered as corporations until 2020.