Corporate tax hike contradicts global trend

The government’s plan to impose more levies on large companies will undermine their competitiveness amid a rising global trend of tax reductions and further distort the country’s taxation structure, analysts say.

A draft tax code revision unveiled early this month proposes raising the corporate tax rate for businesses with taxable profit of 200 billion won (US$176 million) or more to 25 percent from the current 22 percent.

The proposal goes against moves by most major economies to cut corporate taxes to help bolster local firms’ competitiveness and attract more foreign investors.

According to research by the Korea Institute of Public Finance, 19 out of 35 member states of the Organization for Economic Cooperation and Development have lowered corporate tax rates over the past decade. Only six have raised the rates, with the remaining 10 keeping them unchanged.

Accordingly, the OECD’s average corporate tax rate dropped from 24.85 percent in 2007 to 22.34 percent in 2017.

Some of the countries that have kept corporate tax rates unchanged, including the US, France and Belgium, are also moving to join the trend of lessening the tax burden on companies.

“The new government has been quick to cite OECD-related figures in efforts to give credibility to its policy initiatives, but it is turning a blind eye to the prevailing tendency of tax reductions among members of the organization,” said an economist at a local private think tank, asking not to be named.

Corporate taxes’ proportion of total revenues is higher in Korea than other advanced countries.

According to the KIPF research, corporate taxes accounted for 12.8 percent of the country’s total revenues in 2015, with the OECD average estimated to be around 9 percent.

Corporate taxes as a percentage of gross domestic product came to 3.2 percent in Korea in the same year, compared to 1.7 percent in Germany, 2.1 percent in France, 2.2 percent in the US, 2.5 percent in the UK and 4.1 percent in Japan.

Corporate taxes are mostly collected from a small number of large profitable firms in Korea, with nearly half of about 590,000 local businesses exempted from taxes.

According to tax authorities, the top 1 percent of companies pays approximately 76 percent of annual corporate taxes.

The proposed increase of the maximum corporate tax rate is set to deepen the distortion of the taxation structure.

The government estimated the measure would affect 129 large corporations, resulting in collecting 2.55 trillion won more from them annually.

Analysts note that the additional burden would not be shouldered equally by those firms, with the top 50 corporations having to pay more than 90 percent of increased levies.

The draft tax code revision would increase the number of taxable corporate income sections, to which progressive rates are applied, from the current three to four, contradicting global trends toward simplifying the taxation system.

According to a report by the National Assembly Budget Office, 26 OECD members levy a uniform corporate tax rate, with only two members — the US and Portugal — applying rates at more than four different levels.

Experts say increasing corporate taxes let alone applying progressive rates would contribute little to income redistribution, as the increased tax burden could be transferred to shareholders, employees, subcontractors and consumers.

There have been different views about the impact of corporate tax hikes on local companies’ investment and employment.

Business circles argue the heightened tax rate would result in reducing corporate investment and employment.

Some economists indicate previous measures to lower corporate taxes have not led companies to make more investment and hire more workers.

Many large profitable corporations have piled up huge amounts of cash in recent years, remaining reluctant to venture into new business opportunities amid uncertain conditions at home and abroad.

The proposed corporate tax hike would not trigger a wave of off-shoring by local businesses, analysts say, indicating that under Korea’s current taxation system, companies are to pay taxes for profits earned both at home and abroad.

“The increase of the maximum corporate tax rate cannot be seen as a decisive factor,” said Park Ki-baek, a professor of taxation at the University of Seoul.

Government officials say corporate decisions on off-shoring are swayed more by wage hikes than tax increases.

Still, the possibility may not be ruled out that local companies will seek to move their headquarters abroad and foreign-invested firms leave the country in search of places offering lower tax rates.

The new government’s bid to raise corporate taxes for the first time since 1991 is part of efforts to finance President Moon-Jae-in’s lavish programs to expand welfare benefits and create more jobs mainly in the public sector.

The draft tax code amendment also calls for raising the tax rate for individuals earning taxable income exceeding 500 million won to 42 percent from the current 40 percent.

The Moon administration remains reluctant to reduce the number of tax-exempt workers and increase value-added taxes while expanding tax benefits for small and medium-sized enterprises.

Experts say a more comprehensive overhaul of the taxation system and an improvement in the efficiency of government spending are needed to fund the government’s welfare and job creation programs.