Finance ministry rejects tax forecast error finding, says model already overhauled

The finance ministry said Tuesday that it has already overhauled the models it uses to forecast tax revenue, pushing back on a state audit that faulted the accuracy of those estimates after errors averaged 51 trillion won ($38.6 billion) a year over four years.

The Ministry of Economy and Finance was responding to the Board of Audit and Inspection, which released the results of its review of major fiscal management systems the same day and advised the ministry to draw up plans to improve how its forecasting models are designed and run. The ministry said it had already acted that advice, saying in its statement that it improved the forecasting model flagged by the audit and would keep working to raise the reliability of its estimates. It said the overhaul followed repeated large shortfalls in tax revenue between 2021 and 2024.

With technical advice from the International Monetary Fund, the ministry redesigned the models used to project corporate tax and capital gains tax receipts. For corporate tax, it replaced a model that calculated the tax base in several stages with one that derives it directly by applying a growth rate to the previous year's tax base. For capital gains tax, it moved from simply applying rates of increase in property prices and transaction volumes to a regression analysis of how those two variables affect receipts. It also introduced a model that uses artificial intelligence to predict companies' operating profits when estimating corporate tax revenue.

Its review procedures were tightened as well. In February, the ministry upgraded its tax revenue forecasting committee from an advisory body to a deliberative one. It has also amended the National Finance Act to make a second forecast of tax revenue compulsory each September.

The ministry said it will keep working to improve accuracy by strengthening cooperation with other government agencies and outside experts and by further refining the models.