This report aims to review the current status of tax expenditure and its management system in Korea, compare it with those of major countries and develop improvement plans regarding the current tax expenditure management system.

   As of 2015, Korea is operating 215 items in the tax expenditure system, which requires around 33 trillion won, and is reinforcing the system through the recent introduction of the tax expenditure performance management system. Due to different benchmark tax systems and scopes of aggregation by country, it is challenging to uniformly compare the size of national tax expenditure across different countries. However, a simple comparison based on statistical data shows that, as of 2014, the size of Korea's tax expenditure is smaller than that of the US (37.8 times), the UK (9.9 times) and Canada (6.5 times) and larger than that of Germany (0.7 times).

   While the exemption amount regarding the 80 items without sunset clauses is around 21 trillion won, as the evaluation is conducted mostly on items that have expired based on sunset clauses, there is a need to expand the introduction of sunset clauses on all tax expenditure items. While the share of items lacking a sunset clause (80 items, exemption amount of 21.2 trillion won) in the overall tax expenditure is substantial, evaluation is focused only on items that have expired based on sunset clauses, leading to loopholes in system management. It is possible to apply different sunset periods including short-term (2~3 years) and mid-term (4~7 years), etc., based on the characteristics of each system while applying sunset clauses on overall items for systematic evaluation. Germany, in particular, carried out a two-year evaluation by domestic and foreign research institutions (corporate tax items are evaluated by foreign institutions) regarding the 20 items accounting for 74% of the overall exemption amount.

   It is possible to consider the introduction of diverse systems including through benchmarking overseas cases where the increase in the number of tax expenditure items is capped and constraints are applied when the existing system is revised. Currently, Korea has a system based on the "Legal Limit on the National Tax Exemption Rate". However, the system is effective only for preventing a rapid increase of tax expenditure and not for reducing the national tax exemption amount. To manage tax expenditure, Germany is allowing the introduction of new tax expenditure items only on those for certain purposes to limit the increase of the number of tax expenditure items, and, in the case of the revision of the existing system, tax support is replaced with financial support or a recommendation to reduce the existing system is given. It seems that Korea also needs to consider exploring such initiatives.