It has been found that the Tax Cuts and Jobs Act recently passed by the United States House of Representatives includes an excise tax of 20% applied to cross-border inter-subsidiary transactions by multinational companies located in the United States.
The tax reform bill proposed by the Republican Party is to cut the corporate tax rate from 35% to 20% so that companies keep doing business in the U.S. The House of Representatives proposed the excise tax in order to prevent American companies from avoiding taxes by using tax havens.
The bill is applied to every multinational company doing business in the U.S. Under the circumstances, South Korean automakers are strongly opposed to the bill. “According to the bill, Hyundai Motor America and Kia Motors America have to pay the excise tax when transferring their money to the headquarters in South Korea for parts and finished products,” one of them explained, adding, “The same applies to Samsung Electronics and LG Electronics, which are building consumer electronics manufacturing facilities in the United States.”
The bill is stirring controversies in that it can be in violation of various international conventions prohibiting double taxation, including that between South Korea and the U.S. signed in 1979. On November 5, immediately after the opening of the bill, Here for America (HFA), which is a coalition of international automakers in the United States, released a statement, claiming that the discriminatory taxation will be a threat to themselves that have provided 1.2 million jobs and invested US$75 billion in the United States.
It is still unclear whether the bill will be passed by the Senate as the House of Representatives and the Senate have yet to reach a compromise. The Senate recently excluded the excise tax from the tax reform bill with multinational companies expressing their strong opposition after the opening of the bill early this month. The Senate handles the bill at its plenary meeting on November 30 or December 1.
Tax Bombshell in Return for Huge Investment
South Korean companies doing business in the U.S. are claiming that the tax reform bill will cause even more discrimination. “The bill, which is to urge American companies such as Google and Apple to shift their profits to the United States, is in fact a border tax imposed on multinational companies’ headquarters in their home countries and their corporations in the United States during their financial transactions,” one of them commented. Multiple governments are expected to join forces in that the tax reform bill is applied to every global company currently doing business in the United States.
South Korean companies, in the meantime, have made large-scale investments in the U.S. since the election of U.S. President Donald Trump. According to the Korea Chamber of Commerce and Industry, 42 major South Korean companies are planning to invest US$17.3 billion in total until 2021.
The ratio of South Korea’s investment in the U.S. to its total overseas investment continued to rise and reached as high as 47% in the first half of this year. Nevertheless, the U.S. government is planning to impose a tariff of 50% on washing machines manufactured by Samsung Electronics and LG Electronics. In addition, the U.S. government is trying to reinstate tariffs on South Korean automobiles and auto parts by revising the KORUS FTA.
“The U.S. government is eager to protect the profits of American industries by cutting the corporate tax and implementing import regulations,” said a local industry expert, continuing, “Still, the South Korean government and National Assembly are focusing on labor-friendly policy while letting Google and Apple dodge taxes in spite of their huge profits in South Korea.”