Korean Businesses Relieved as Trump’s Tax Reform Does Not Include Excise Tax

Concern over the long-term weakening of Korean businesses’ competitiveness is growing as the corporate tax rates of Korea and the US were reversed while Korean companies were relieved as the US’ major tax reform did not touch the excise tax. However, the addition of a clause on the base erosion and anti-abuse tax (BEAT) is still making Korean companies tense.

Korean businesses were relieved as a major tax reform by US President Donald Trump did not touch the excise tax. However, the addition of a clause on the base erosion and anti-abuse tax (BEAT) is still making Korean companies tense. Concern over the long-term weakening of Korean companies' competitiveness is also growing as the corporate tax rates of Korea and the US were reversed.

The US House of Representatives held a general meeting and passed a tax reform bill that cuts the corporate tax rate from the current 35 percent to 21 percent and cuts the highest personal income tax rate from 39.6 percent to 37 percent on December 20 (local time). The reform bill, which is expected to have a US$1.5 trillion tax cut over the next decade, is now waiting for President Trump's final signature.

It is worth noting that the special excise tax provision for multinational corporations has been deleted. This provision imposes a 20% consumption tax on businesses in the US when purchasing capital goods or intermediate goods from their overseas affiliated companies. In response, Korean companies such as Samsung Electronics and Hyundai Motor were concerned that their price competitiveness will be damaged. Fortunately, this provision has been dropped off in the final, giving Korean companies a sigh of relief. Observers say the US Congress was burdened by the strong opposition from European Union (EU) countries with absolutely huge deals with the United States.

However, the establishment of the BEAT in the final draft may become burdens on Korean companies. The BEAT provision intends to prevent US companies such as Google and Apple from setting up ghost companies overseas to avoid taxes, but also cover multinational corporations. Germany and other European countries are strongly opposed to the BEAT provision discriminating against foreign companies. "It seems that Korean companies with a high proportion of the manufacturing business are not likely to receive significant impacts," said an official in the Korean business community.

It is also noteworthy that the US and Korean corporate tax rates were reversed as the tax reform bill passes the US House of Representatives on the day. The Moon Jae-in administration is trying to raise the current corporate tax rate of 22% to 25%.