Korea's Tax Policy Runs Counter to OECD Trend
South Korea's chip giant Samsung Electronics Co. paid 28 percent of its net profit for corporate tax in the first half of this year, which was two times higher than Apple‘s 14 percent.
Samsung Electronics is not an exception. The corporate tax burden ratio of the nation’s other leading companies, such as Hyundai Motor Co. and POSCO Group, is higher than that of U.S.-based companies.
According to a report released by the Korea Economic Research Institute (KERI) on September 27, Samsung Electronics’ corporate tax ratio rose to 28 percent in the first half of this year from 23.8 percent a year earlier after the government raised a corporate tax rate from 22 percent to 25 percent last year.
On the other hand, Apple’s corporate tax ratio dramatically dropped from 24 percent to 14 percent over the same period with the corporate tax reduction in the U.S. The reversal in the payment burden between the two IT giants occurred for the first time in a year. The corporate tax rate is the ratio between an income before income taxes and a company’s estimated amount of corporate taxes. Generally, South Korean companies actually pay less taxes than the corporate tax ratio.
KERI used South Korean companies’ 2018 semi-annual reports and U.S.’ 10-Q consolidated income statements to compare the corporate tax ratio in the three industries – electrical electronics, automobile and steel.
Although the average corporate tax rate of OECD countries, including the U.S., continuously decreased from 32.5 percent in 2000 to 23.9 percent in 2018, the South Korean government increased its corporate tax rates. This adversely affects the nation’s investment promotion, according to market experts.
In the automobile sector, one of the nation’s major industries, Hyundai Motor’s corporate tax ratio also grew from 20.6 percent to 24.9 percent. The corporate tax ratio of Ford Motor Co., a competitor in the U.S., fell from 19.1 percent to 13.9 percent.
In the steel sector, the corporate tax ratio of POSCO increased 28.2 percent to 31 percent, while that of U.S.-based Nucor Corp. decreased from 31 percent to 23.5 percent. The corporate tax ratio of South Korean firms in the top three industries was all higher than that of their U.S. competitors.
KERI pointed out that the reversal in corporate tax ratio between the companies was due to the fact that South Korea raised its corporate tax rate from 22 to 25 percent and the U.S. lowered it from 35 percent to 21 percent last year.
According to the data from the KERI, the rise in corporate tax rates made domestic listed companies face a higher rise in corporate tax burden than operating profits and income before taxes in the first half of the year.
The operating profit and income before taxes of 450 companies, which had a surplus in both operating profit and income before taxes for two years in a row from last year, rose 27.7 percent and 27.3 percent, respectively, but their corporate tax ratio reached 49.3 percent. They saw their operating profit rise 13.3 trillion won (US$11.96 billion) but their corporate tax ratio increase 5.3 trillion won (US$4.76 billion) as well. In short, a 39.8 percent growth of their operating profits brought about corporate taxes.
Excluding Samsung Electronics and SK Hynix Inc., the operating profit increased only 200 billion won (US$179.78 million), or 0.6 percent, while the corporate taxes surged 800 billion won (US$719.1 million), or 11.8 percent. In other words, the operating profit remained still but the corporate tax ratio dramatically grew. As a result, the corporate tax ratio of the 450 companies rose 3.5 percent points from 20.5 percent in the first half of last year to 24 percent in the first half of this year.
For 50 companies with more than 300 billion won (US$269.66 million) of an annual income before taxes, which are subject liable for higher corporate taxes, the operating profit increased 33.3 percent while the corporate tax grew 58.5 percent. The amount of the 50 firms’ corporate tax increases stood at 5.2 trillion won (US$4.67 billion), accounting for 98.1 percent of the total increases of 5.3 trillion won (US$4.76 billion).
The corporate tax ratio of the 50 businesses also went up by 3.6 percent points from 20.5 percent in the first half of last year to 24.1 percent in the first half of this year.