As published on donga.com, Friday 20 May, 2022.
Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said in a round-table conference with leaders of SMEs that it was necessary to reform and overhaul South Korea’s corporate tax rates and tax system compared to other advanced countries, pointing out a huge “burden placed on businesses under the Moon Jae-in administration that raised the maximum rate of corporate tax from 22 percent to 24 percent and increased corporate tax brackets from three to four.
For the past five years, countries around the world have scrambled to reduce corporate taxes in an effort to strengthen business competitiveness, yet South Korea went against the trend and increased corporate tax instead. As a result, South Korea’s highest corporate tax rate increased by 3.5%p compared to the average of the OED countries. South Korea’s corporate tax rate is higher than that of major Asian economies such as Japan, Taiwan, and Singapore, and this is dragging down the South Korean business’s competitiveness. Unlike many other advanced economies that apply a flat tax rate for corporate taxes, South Korea has four tax brackets for corporate taxes, placing a huge tax burden on large businesses. As a result, Samsung Electronics paid 2.5 times more corporate taxes than Taiwan’s TSMC and 1.6 times more corporate taxes than American chipmaker Intel. The government has tied a sandbag to domestic companies that must compete in the global market.
Corporate tax is a key indicator of a country’s corporate environment. Businesses contribute to the economic growth through active investment, where tax rates are appropriately determined and fair taxation is in place. Under punitive taxation system, however, this virtuous cycle cannot take place. An excessive increase in tax rate discourages businesses from hiring and leads them to raise prices. On the other hand, lowering corporate taxes by 1 percentage point could lead to a 3.6% increase in infrastructure investment.
Amid the slowing down of the engine of economic growth, the current corporate tax system that works against business competitiveness is not sustainable. The government needs to speedily overhaul the corporate tax structure, first by significantly lowering corporate tax rates in tax law amendment scheduled to take place in July, and then by coming up with measures to streamline tax brackets to the level of advanced nations.
Some worry that lowering corporate tax rates may lead to reduction in tax revenues. However, in a mid to long term perspective, lowering tax rates will strengthen business productivity and contribute to the nation’s financial soundness. The corporate tax rate reduction is a direct incentive to bring offshore businesses back home. The new government’s economic agenda must take a bold move of reducing corporate taxes and thereby take the first step towards the “private-led economy.”