The government has submitted its settlement report for FY 2011 to the National assembly. The report is prepared on accrual basis for the first time after the National Accounting Act’s legislation in 2007, according to the plan to transfer the government accounting standard from cash basis to accrual basis.
However, the recognition time of tax revenue used preparing this settlement report does not correspond well with the principle of accrual accounting. According to the IMF’s GFSM 2001, income based tax revenue should be attributed to the period in which the income is earned. Yet, the National Accounting Standard of Korea regulates tax revenue to be recorded in the period in which tax liability is determined.
Such rules prohibit tax revenue from being recorded in the same year in which economic values that give rise to the tax liability is created. For example, income tax revenue recorded under such law comes to be tax based on economic activities of the last year, considering tax reporting and determination usually take place a few months after the fiscal year ends. Although this regulation resulted from interpreting the flexibility that GFSM allows with the time of tax recording, it would restrain the benefit of an accrual basis in national accounting, making it harder to analyze tax revenue in relation with policy and macroeconomic dynamics.
NABO estimated tax revenue based on a stricter concept of accrual accounting. Tax revenue in 2011 under cash basis was distributed to each month and then aggregated considering each tax item’s reporting schedule. The monthly revenue progress rate data for 2007-2010 was used for the distribution. The resulting tax revenue for 2011 shows a gap of 0.6 % with the administration’s figure. While the government’s figure contains tax revenue determined in 2011 based on 2010’s economic activities, NABO’s contains tax revenue based on 2011’s activities only. Because the economy was better in 2011 than 2010, NABO’s figure is 0.6% higher than the government’s. Corporate income tax is also shown to follow the economic cycle better when attributed to the time of income earned in the year, instead of the year when the tax liability was determined. As stricter application of accrual basis has benefits in generating a more intuitive tax revenue record for policy analysis purposes, the administration should consider preparing tax revenue settlements apart from its regular settlements, thus better implementing the principle of accrual accounting.
Shin Youngim, Chang Yoonjeong
However, the recognition time of tax revenue used preparing this settlement report does not correspond well with the principle of accrual accounting. According to the IMF’s GFSM 2001, income based tax revenue should be attributed to the period in which the income is earned. Yet, the National Accounting Standard of Korea regulates tax revenue to be recorded in the period in which tax liability is determined.
Such rules prohibit tax revenue from being recorded in the same year in which economic values that give rise to the tax liability is created. For example, income tax revenue recorded under such law comes to be tax based on economic activities of the last year, considering tax reporting and determination usually take place a few months after the fiscal year ends. Although this regulation resulted from interpreting the flexibility that GFSM allows with the time of tax recording, it would restrain the benefit of an accrual basis in national accounting, making it harder to analyze tax revenue in relation with policy and macroeconomic dynamics.
NABO estimated tax revenue based on a stricter concept of accrual accounting. Tax revenue in 2011 under cash basis was distributed to each month and then aggregated considering each tax item’s reporting schedule. The monthly revenue progress rate data for 2007-2010 was used for the distribution. The resulting tax revenue for 2011 shows a gap of 0.6 % with the administration’s figure. While the government’s figure contains tax revenue determined in 2011 based on 2010’s economic activities, NABO’s contains tax revenue based on 2011’s activities only. Because the economy was better in 2011 than 2010, NABO’s figure is 0.6% higher than the government’s. Corporate income tax is also shown to follow the economic cycle better when attributed to the time of income earned in the year, instead of the year when the tax liability was determined. As stricter application of accrual basis has benefits in generating a more intuitive tax revenue record for policy analysis purposes, the administration should consider preparing tax revenue settlements apart from its regular settlements, thus better implementing the principle of accrual accounting.
Shin Youngim, Chang Yoonjeong