Tax Raise
The Korean government and the ruling party officially announced their intention to increase tax rates for the first time since President Moon Jae-in took office. The government will ramp up burdens on large corporations and high-income earners in order to implement the presidential pledge to bring tax justice to the nation. Discussions on raising taxes for welfare funding are expected to begin in earnest.
"As tax exemptions and cuts have their limits, it will be difficult to reach the tax income target without making a change in the corporate tax,” said Chu Mi-ae, representative of the Minjoo Party in a national finance strategy meeting held at the guesthouse of Cheong Wa Dae on July 20. Then Chu proposed raising the corporate tax rate for ultra-large companies with taxable income of more than 200 billion won (US$180 million) from the current 22% to 25%. This means that the highest new bracket will be created in the current three-bracket corporate tax structure (10%, 20%, and 22%). Chu predicted that if the proposal goes into effect, the government will be able to collect 2.93 trillion won (US$2.6 billion) more in tax. Chu asserted that the government will be able to use the increased tax revenue as subsidies for small business owners in connection with a minimum wage increase.
According to the Minjoo Party, companies with over 200 billion won (US$180 million) in taxable income accounted for 0.02% (126) of all companies which reported their income tax last year. The list includes major affiliates of the five biggest business groups in Korea -- Samsung Electronics (22.726 trillion won in net profit), Hyundai Motor (7.148 trillion won in net profit), SK Hynix (2.960 trillion won in net profit), Lotte Chemical (1.837 trillion won in net profit in 2016) and LG Chem (1.281 trillion won in net profit) -- and major affiliates of other business groups.
"In order to redistribute income, it is necessary to increase the current 40 percent income tax rate for those who earn more than 500 million won (US$450,000) a year to 42 percent," Chu added. Those subject to this change totaled 6,680 people as of 2015.
On July 19, the government announced that it would cover 178 trillion won (US$160 billion) in public funding without a tax raise by utilizing a natural increase of 60.5 trillion won (US$54 billion) in tax for 5 years. The plan was criticized as an impracticable one. It seems that the government and the ruling party judged that it will be better to make a head-on breakthrough at the beginning of the new administration when approval rates are usually high rather than facing headwinds after avoiding resistance against a tax raise for one to two years.
However, it is expected that controversy will break out and rage as the government which showed a holding attitude about raising the nominal rate of the corporate tax will pick a tax raise card. The opposition Liberty Korea Party is strongly opposed to the corporate income tax hike. Therefore, it will be a real challenge for the issue to pass the National Assembly.