South Korean Government’s Corporate Tax Policy Backfiring

Last year, the South Korean government’s corporate tax revenue fell short of its expectations by more than 7 trillion won. Experts point out that this is an adverse effect of the government’s policy to increase corporate taxes. According to them, the government hindered companies’ business activities by insisting on a higher corporate tax rate while many other countries stimulated their economies by lowering their corporate tax rates and its insistence led to a tax revenue deficit for the first time in five years.

For the past five years, a total of 16 OECD member countries lowered their corporate tax rates. This year, France lowered its rates applied to large and non-large companies from 33.3 percent to 31 percent and from 31 percent to 28 percent, respectively. In addition, France is planning to lower the rates to 25 percent in 2022. The United States lowered its maximum corporate tax rate from 38.9 percent to 25.9 percent in 2018 and the rate in Japan fell from 39.5 percent to 29.7 percent from 2012 to 2018.

According to the Korea Institute of Public Finance, a total of 76 countries lowered their corporate tax rates between 2000 and 2018. The average maximum corporate tax rate of OECD member countries fell from 32.2 percent to 23.7 percent in that period and that of G20 countries fell from 25.1 percent to 23.5 percent from 2010 to last year.
 

In contrast, the South Korean government raised its maximum corporate tax rate from 24.2 percent to 27.5 percent in 2018, mentioning the necessity of more welfare spending. In the OECD, only South Korea, Chile, Greece, Latvia and Slovenia raised their corporate tax rates between 2014 and 2019.

The South Korean government’s policy led to the tax revenue deficit. The Ministry of Economy and Finance announced on Feb. 10 that South Korea’s national tax revenue totaled 293.5 trillion won last year, 1.3 trillion won less than the government’s budget. Likewise, the corporate tax revenue, 72,174.3 billion won, was 7,075.8 billion won less than its planned amount.

South Korea’s much higher corporate tax rate is likely to keep deteriorating its tax revenue conditions. With the operating profits of semiconductor companies such as Samsung Electronics and SK Hynix plummeting this year, the government came up with a corporate tax revenue estimate of 64.4 trillion won, down 18.7 percent from a year earlier. Given that last year’s corporate tax revenue is 72.2 trillion won, the revenue is likely to decrease for the first time in six years. Under the circumstances, its national tax revenue for this year is predicted to fall approximately 1.5 trillion won to 292 trillion won or so.