The Moon Jae-in administration will start raising the rate of taxation for large businesses next year. Going against the latest trend that many countries are scrambling to lower corporate taxes, the government will increase the top marginal corporate income tax rate by 3 percent points and reduce the tax deduction for conglomerates’ research and development (R&D) investments. The corporate tax changes are expected to increase government revenue from large businesses alone by 3.7 trillion won (US$3.29 billion) a year starting from next year.
According to the “Revised Tax Bill in 2017” released by the government on August 2, the top marginal corporate income tax rate will be raised next year to 25% from the current 22% for corporations with more than 200 billion won (US$177.79 million) of taxable income a year. It will hit 129 companies in South Korea based on reports of 2016, which were profits from 2015. The government has decided to raise the top marginal corporate income tax rate for the first time in 28 years after increasing the rate from 30 percent to 33 percent for unlisted large businesses and 34 percent for listed large busineeses in 1990.
Accordingly, South Korea’s top corporate income tax rate will return to the same level of the Lee Myung-bak administration in 2009 at 25 percent. The figure is 3 percent points higher than the average rate of the Organisation for Economic Co-operation and Development (OECD) countries and on par with the average of the world’s 20 major economies (G20) at 25.7 percent, according to the Ministry of Strategy and Finance (MOSF). South Korea’s corporate tax brackets will expand to four – 10 percent for corporations with less than 200 million won (US$177,478) of taxable income, 20 percent for corporations with a taxable income between 200 million won (US$177,478) and 20 billion won (US$17.74 million), 22 percent for corporations with a taxable income between 20 billion won (US$17.74 million) and 200 billion won (US$177.38 million) and 25 percent for corporations with over 200 billion won (US$177.38 million) of taxable income. With the hike, South Korea will become a country with the second most complicated and highest progressive tax rates for conglomerates in the world along with Belgium with four brackets, following the United States with eight brackets.
The government will dramatically reduce the R&D investment tax credits for large businesses. The rate of tax credits for general R&D costs, including labor costs and material costs, at research centers belonging to large businesses will remain at 1 to 3 percent until the end of this year but it will go down to 0 to 2 percent next year. The rate for small and medium-sized businesses and medium businesses will remain at the current of 25 percent and 8 to 15 percent, respectively.
The rate of tax reductions on investment in various facilities, such as productivity improvement facilities, safety equipment and environmental protection facilities, for large businesses will also lower from the current 3 percent to 1 percent. The ministry said it has decided the rate considering the fact that the rate of tax reductions on investment in other facilities, like energy conservation facilities, has already dropped to 1 percent in the past few years.
Starting from next year, the “investment and mutual growth promotion tax system” will be applied. Under the new system, the government will impose additional 20 percent of taxes on shortfalls when businesses spend less than a certain percentage of incomes on the investment, excluding land, increase in workers’ wages and mutual growth plans.
The government expects that the tax hike for large businesses will increase its tax revenues by 3.7 trillion won (US$3.29 billion) in total per year. The figure includes 2.6 trillion won (US$2.31 billion) from the increase of nominal corporate tax rates and 1.1 trillion won (US$975.96 million) from the rest of revised tax laws, such as the decrease of R&D investment tax amount deduction.
Lee Man-woo, a professor at Korea University's Business School, said, “The new tax laws will cause many ill effects and the increase of taxes is also highly likely to fall short of the government’s expectations.” There is also a speculation that an increasing number of companies, which has just exceeded a taxable income of 200 million won (US$177,478) 20 billion won (US$17.74 million) and 200 billion won (US$177.38 million), will split off in a bid to avoid the differential tax rates. With the trend of downsizing management, the amount of investments and number of jobs will decline, shrinking the base of tax revenues.
In addition, some say that domestic conglomerates will turn their overseas offices into local subsidiaries, pile up money earned from the global market overseas and increase facilities investment using local subsidiaries in countries in where they have lower tax rates than South Korea.
The rate of South Korea’s corporate taxes is now higher than its competitors including Hong Kong with 16.5 percent and Singapore with 17 percent. Global multinational companies are unlikely to build their local subsidiaries in South Korea and they can even move their existing subsidiaries in South Korea to other countries. A senior official from tax system at the MOSF said, “The government’s forecast for tax revenues doesn’t take such ill effects into consideration.”
As South Korea has decided to raise its top marginal corporate income tax rate for conglomerates from the current 22 to 25 percent, the figure is now higher than 22 percent of the average rate of OECD countries. The U.S. and France has the higher rate than South Korea, while Japan, the U.K., Germany, Switzerland, Singapore and Taiwan has the lower rate.