Finance Minister Hong Nam-ki said last week that the government had no plan to lower the country’s corporate tax rates. In a parliamentary audit of his ministry, Hong argued that corporate tax cuts would not necessarily result in an increase in investments, saying companies made investment decisions based on broader economic conditions.
The chief economic policymaker had to be reminded that reducing the tax burden on companies is a key part of efforts to reinvigorate the slumping economy. At a forum held days earlier, business leaders called on the government to cut corporate tax rates to help place them on an equal footing with their foreign competitors.
South Korea lowered its highest corporate tax rate to 22 percent in 2009 from the previous 25 percent but raised it back last year. Including levies paid to regional administrations, local firms with taxable profits of more than 300 billion won ($250 million) are subject to a tax rate of 27.5 percent.
By increasing the corporate tax rate, President Moon Jae-in’s administration ran counter to the global competition to forge more business-friendly conditions.
Over the past five years, 16 of the 36 member states of the Organization for Economic Cooperation and Development have cut corporate tax rates. The US slashed the maximum corporate tax rate to 25.9 percent last year from the previous 38.9 percent. The OECD average remained at 23.7 percent in 2018, down from 32.2 percent in 2000.
Only six OECD member nations, including Korea, have raised corporate tax rates over the past five years. Most of them have smaller economies that are less exposed to global competition.
The government needs to consider cutting corporate tax rates and strengthen other measures to reinvigorate corporate activity at home and encourage Korean firms to move overseas production back to the country.
From 2014 to 2018, an average of 10.4 Korean manufacturing firms operating abroad returned home annually. The annual number of US manufacturers that reshored over the cited period was 482 on average.
Even considering the difference in gross domestic product and trade structure between the two countries, Korea lagged far behind the US in the reshoring of domestic companies. Drastic corporate tax cuts by President Donald Trump’s administration is cited as the main reason for a steep rise in the number of US firms that relocated back in recent years.
The Moon government, which has been pushing for an expansionary fiscal policy, remains negative about corporate tax cuts, which it worries would further reduce tax revenue amid a prolonged economic slump.
According to the Finance Ministry, the government collected 209.5 trillion won in taxes in the first eight months of the year, 3.7 trillion won less than a year earlier. In August alone, tax revenue reached 20.2 trillion won, down 2.9 trillion won from a year earlier.
An analysis of taxation data by a ruling party lawmaker showed that corporate tax revenue increased 66.3 percent over the previous five years to 70.9 trillion won in 2018. The proportion of taxes collected from companies in Korea’s total tax revenues rose from 21.8 percent to 25 percent over the cited period. The ratio of corporate tax to GDP also climbed from 3 percent to 4.2 percent.
But corporate tax revenue is set to decline sharply in the coming year as local companies are struggling with deteriorating profitability due to falling exports and weakening domestic demand.
The combined operating profit of 96 listed firms of Korea’s top 10 conglomerates plunged 51.3 percent on-year to 24.9 trillion won in the first half of the year, according to data from Chaebul.com, an industry tracker. Affected by the reduced profit, these companies are projected to pay a combined 5.9 trillion won in corporate tax in the first six months of next year, down 55.1 percent from the same period this year. In Korea, a company pays corporate tax based on its earnings reported in the previous year.
The worsening profitability amid growing economic uncertainties is prodding companies to freeze or reduce investments, hurting their long-term competitiveness and aggravating the country’s unemployment problem.
In a move to encourage companies to invest, the government plans to raise the tax credit rate on investments by large companies to 2 percent from the current 1 percent on a temporary basis. This measure is insufficient to boost investments. What is needed to encourage companies to increase investments significantly in the long run is to cut corporate tax rates while taking other business-friendly measures such as lifting regulatory barriers and making the labor market less rigid.
Strengthened corporate competitiveness would boost profitability and lead to a rise in tax revenue.