Comments on the Bill to Amend the Real Estate Brokerage Act to Mandate Reporting of Actual Transaction Prices

-Ministry of Construction and Transportation Notice No. 2003-215-

1. Background and Focus of the Amendment to the Real Estate Brokerage Act

On September 26, the government gave advance notice of legislation to amend the Real Estate Brokerage Act. The amendment would punish real estate brokers for falsely stating transaction details or preparing dual contracts, and would require them to notify city, county, or district offices of contract details, as a measure to prevent the preparation of dual contracts by real estate brokers—a cause of real estate speculation and tax evasion—and to secure actual transaction prices.

Over the past two years, real estate prices, especially apartment prices, have surged, leading to a sharp increase in real estate transactions nationwide. In the course of registering transactions, parties to transactions had to decide what amount to report to the tax authorities amid three different standards: the Ministry of Government Administration and Home Affairs’ standard market value for taxation, which serves as the basis for acquisition and registration taxes; the National Tax Service’s standard value, which serves as the basis for capital gains tax; and the actual transaction price prescribed by law. In that process, it was pointed out that tax equity was not being achieved among buyers and sellers who made different choices.

The purpose of the amendment is to eradicate the practice of real estate brokerage offices preparing dual contracts in order to pay less in taxes such as acquisition tax, registration tax, and capital gains tax (leaving aside, for now, the issue of who actually prepares them), and to strengthen penalties against brokerage offices in order to achieve fair taxation. At the same time, by forcing ex post reporting of the details of all real estate transactions regardless of the form of the brokerage contract, it also intends to complete the Comprehensive Land Information Network.

2. Expected Problems

The following problems are expected from the advance legislative notice requiring the reporting of actual transaction prices in the proposed amendment to the Real Estate Brokerage Act.

First, the government explains that the purpose of the amendment is to unify the tax base around actual transaction prices. However, this can be seen as a reprise of the Ministry of Construction and Transportation’s plan pursued during the legislative process of the 1989 Act on Public Notice of Land Prices and Appraisal of Lands, etc., which sought to unify under publicly announced land prices such standards as standard land prices, standard market value for taxation (land grading system), appraised value, and the National Tax Service’s standard value. More than 10 years later, planning yet another unification based on a new standard—actual transaction price—without analyzing why the earlier public land price system failed to achieve unification and what problems it had, amounts to creating a new pricing system and may only deepen public confusion.

Second, requiring brokers to report transaction details to city, county, or district offices while retaining the current contract certification system would further complicate real estate transaction procedures by one more step, running counter to the simplification of administrative regulation. There is also a problem in shifting from the current operating method—under which only formal items are checked when certifying a contract—to one involving substantive review of whether the contract amount matches the actual transaction price. This is an area that has already generated much friction between private citizens and public officials over contract certification, and strengthening review authority is likely to trigger a sharp increase in administrative appeals. Furthermore, holding advisory meetings and delaying decisions in order to ensure substantive review could effectively nullify real estate transactions and hinder the free circulation of real estate.

Third, even if real estate brokers report the details of all transacted real estate, it is in practice impossible to establish standards for actual transaction prices by type of property. As of 2002, there were a total of 30.87 million privately owned land parcels, and the number of parcels transacted nationwide that year was 2.08 million. Of these, about 54 percent were duplicate parcels arising from apartment transactions, where hundreds of unit buildings are located on the same parcel, meaning such duplicate parcels account for most actual transaction parcels. Apartment transactions amount to a nationwide average of 16 percent of the total apartment housing stock, while land for other uses amounts to only 3 percent of all privately owned parcels. Even within that 3 percent, given the high transaction volume of multi-family housing, the effective transaction volume for land used for other purposes becomes even smaller (see attached chart). For apartment complexes, where transaction volume is relatively high, it may be possible to set an approximate actual transaction price standard at the level of the standard value. But it is impossible to create actual transaction price standards for land and aggregate buildings used for other purposes. Rather than establishing a unified tax base covering all real estate, it is highly likely that actual transaction price standards will be created mainly for apartments, while for real estate used for other purposes the current standard value and standard market value for taxation based on publicly announced land prices will remain in place. Fair taxation across different types of real estate will remain a distant goal, and this may increase the public’s desire to hold land, whose market value tends to be reflected relatively inadequately.

Fourth, responsibility and authority for real estate sales contracts belong to the parties to the transaction, and clear rules regarding acts by transaction parties who seek improper gain by violating laws and regulations during the transaction process must first be established before penalties can be set, according to the seriousness of the violation, for brokers who arrange real estate transactions.

Article 6 (Prohibition of False Statements of Grounds for Registration, etc.) and Article 8(2) of the Special Measures Act on Real Estate Registration already provide that where an application for registration is made by falsely stating the grounds for registration in the registration application, the offender shall be punished by imprisonment of up to three years or a fine of up to 100 million won. In a sale, the ground for registration is the contract, and the sales contract, as evidence of that contract, is required to be certified with details such as the parties and transaction amount stated therein. Falsely stating the transaction amount, one of the items contained in the certified contract serving as the ground for registration, may also be said to violate Article 6 of this Act. However, because the Special Measures Act on Real Estate Registration is focused on the real-name registration system for real estate, it has neglected entries other than those concerning the substantive legal rights embodied in the transaction. If the legislature were to make clear, by supplementing the Special Measures Act on Real Estate Registration, its intention to punish parties required to register for falsely stating the transaction amount and other details in a sales contract, the problem of dual contracts could be substantially resolved. After clarifying the level of punishment for the transaction parties, penalties should then be set by taking into account whether the real estate broker directly prepared a false dual contract, actively induced it, or merely acquiesced in the parties’ preparation of one.

If penalties on real estate brokers are made excessively severe, the likely scenario is that parties will be encouraged to engage in direct transactions, increasing transaction accidents, and that even transactions passing through brokerage offices will be disguised as direct transactions in order to avoid punishment for preparing dual contracts. Even if the law is violated, they may choose instead to risk a fine of up to 5 million won for failing to notify the city, county, or district office. In the end, unless punishment is made clear for acts by transaction parties or their agents of falsely stating the actual transaction price in the process of applying for registration, including certification of the sales contract, the effectiveness of the mandatory reporting system for actual transaction prices will be low, and it may encourage irregular handling of brokerage business.

Finally, there are problems associated with the standard of actual transaction prices or the disclosure of transaction information registered in the Comprehensive Land Information Network. If such information is not disclosed, it will be difficult to achieve the original goal of establishing a fair transaction order. On the other hand, if all information is disclosed to the public and exceptional cases are found that have not undergone substantive review under strict guidelines, the fairness and credibility of review decisions may be damaged.

3. Prerequisites and Conclusion

Although I agree with the basic objective of unifying the tax base for all real estate nationwide on the basis of actual transaction prices, amending the Real Estate Brokerage Act without sufficient prior review and preparation regarding the problems raised above will only increase public confusion and make it difficult to expect the intended results.

First, there must be a reexamination of the various systems, including tax law, that have prevented the current public land price, standard market value for taxation, and standard value from being unified. A system must first be established to unify the current tax standards, such as by expanding and overhauling the public land price system into a real estate price disclosure system that integrates the land-centered public land price system with the standard value determined mainly for aggregate buildings and evaluates and discloses land and above-ground buildings as a single unit.

Second, at current transaction volumes, it is beyond reach to create actual transaction price standards for real estate other than apartments. The government must lead by example by compiling official real estate transaction information related to the sale, compensation, court auction, public auction, sale of developed housing sites, and purchase of state-owned and public land conducted by each ministry and local government, thereby laying the foundation for actual transaction price standards. On the basis of the information the government builds, private-sector actual transaction prices can then be added, leaving the subsequent task of analyzing and using these basic data to assign realistic transaction price standards to the 30.87 million privately owned parcels.

Third, before anyone applies for contract certification, they should be able to easily ascertain the guidelines for substantive review. If the outcome of substantive review cannot be anticipated, the free trade of real estate will be obstructed, and wasteful social costs will arise as people seek access to undisclosed information.

Lastly, while it is only natural that real estate brokers should be subject to the guidance and supervision of the competent authorities, they are also expected to play a role as facilitators for the smooth implementation of national policy. Therefore, rather than legislating primarily through harsh punishment, the government should induce participation—for example, by appointing diligent practitioners as advisory committee members—so that they can contribute to improving the efficiency of the real estate market.

In conclusion, the requirement to report actual transaction prices in the advance-noticed amendment to the Real Estate Brokerage Act should be deferred until the government first establishes a plan to remedy the shortcomings of the current system and, in accordance with an implementation plan, determines that the time has come when private-sector participation is needed. A policy imposed unilaterally on the private sector alone is unlikely to produce the desired results, and I believe it would merely lead, once again 10 or so years later, to renewed debate over unification while leaving real estate policy in continued stagnation.

Jonghyun Hwang (Director, R2 Korea Real Estate Investment Advisory Co., Ltd.)

Wiki:

https://www.cfe.org/w/bbsDetail.php?idx=68

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Original title: 실거래가 신고 의무화를 위한 부동산중개업법개정안에 관한 의견

Author: Jong-hyun Hwang

Date: 2003-10-09

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=bill&pn=4&idx=25825