No Additional Benefits for Companies in This Year's Tax Reform

Corporate Tax Cut and Increase in Tax Credit Also Excluded

On the 27th, the Doosan Tower building in Dongdaemun-gu, Seoul, is visible as the government decided to inject 1.6 trillion won into Doosan Heavy Industries, which is experiencing financial difficulties, through the Korea Development Bank and the Export-Import Bank of Korea. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Jang Sehee] The government's economic policy direction for the second half of the year, to be announced in early next month, is unlikely to include additional tax benefits such as corporate tax cuts or an increase in the investment tax credit rate for productivity-enhancing facilities. Although the government has announced plans to activate reshoring (the return of overseas companies to Korea) in response to the novel coronavirus disease (COVID-19), it is being criticized for turning a deaf ear to companies demanding improvements in the investment environment.

On the 19th, a senior government official said, "There is no discussion at all among the ruling party, government, and the Blue House regarding corporate tax cuts," adding, "Since the deadline for corporate tax filing and payment has already been extended proactively, and consumption is increasing, there will be no additional tax benefits."

The government has also decided not to raise the investment tax credit rate for productivity-enhancing facilities in this second half economic policy direction. A government official stated, "The investment tax credit rate for this year's investments was proactively increased in the second half economic policy direction last year," and "there will be no further increase in the tax credit rate." Instead of raising the investment tax credit rate for productivity-enhancing facilities, the government is considering expanding the eligible companies. Additionally, the government is discussing extending the originally planned 'special accelerated depreciation for corporate investment' (which was set to expire at the end of June) by another six months and adding ICT, big data, and artificial intelligence (AI) to the scope of the investment tax credit.

The government's decision not to cut corporate tax is based on the judgment that Korea's corporate tax rate is appropriate. Korea currently applies a progressive tax rate in four tiers (10%, 20%, 22%, and 25%) according to the Corporate Tax Act revised in 2017. The Ministry of Economy and Finance holds the view that Korea's highest corporate tax rate is not high compared to countries with similar economic scales (GDP of $20,000 and population over 50 million). Countries with economic scales similar to Korea include Canada (26.8%), Germany (29.9%), Italy (27.8%), Spain (25.0%), Australia (30.0%), and France (32.0%).

The government also considered the impact on securing tax revenue. It estimates that raising the corporate tax rate by 1 percentage point this year would increase tax revenue by 1.2 trillion won, while lowering it by 1 percentage point would reduce tax revenue by the same amount. Furthermore, since corporate tax is a fundamental part of the tax system, it is difficult to lower it only for a limited period (special application).

A government official said, "The basic tax system does not allow for limited targets or temporary applications like special cases," adding, "There has never been a precedent for temporarily lowering the corporate tax rate, and other countries do not do so either."

It was analyzed that if the investment tax credit rate for productivity-enhancing facilities for large corporations is raised by 1 percentage point while the scale of corporate investment remains the same, 500 billion won less tax revenue would be collected. In fact, the investment tax credit rate for large corporations was raised from 1% in the 2018 fiscal year to 2% in the 2019 fiscal year, and the amount of tax credits claimed by companies nearly halved. The investment tax credit for productivity-enhancing facilities is a system where individual companies invest first and then report later. The performance of the investment tax credit for productivity-enhancing facilities was ▲486.1 billion won in 2016 ▲378.2 billion won in 2017 ▲1.1414 trillion won in 2018 ▲5.57 trillion won (estimated) in 2019.

However, some argue that bold tax cuts reflecting the voices from the field should be implemented to encourage corporate investment. Professor Kim Taeg-gi of Dankook University's Department of Economics said, "If the corporate tax cut card is not taken out amid the unprecedented COVID-19 crisis causing a contraction in corporate investment, the situation could become more difficult by the end of the year," adding, "If both corporate investment and employment shrink, it will ultimately affect the economic growth rate."

The business community has argued that to overcome the crisis caused by COVID-19, corporate investment sentiment must be revived through corporate tax cuts and other measures. Sohn Kyung-shik, chairman of the Korea Employers Federation, emphasized at a board meeting on the 13th that for reshoring, corporate tax should be significantly reduced considering global standards, and uniform labor-related systems should be reestablished. The Korea Economic Research Institute recently proposed in its report "Comparison and Analysis of the 2008 Global Financial Crisis and the 2020 COVID-19 Economic Crisis" that to activate corporate investment, tax reforms such as corporate and income tax cuts, revival of temporary investment tax credits, and expansion of investment tax credits are necessary to boost corporate investment sentiment. According to the institute, major advanced countries (G7) have lowered their highest corporate tax rates by an average of 5.4 percentage points over the past decade to attract corporate investment. During the financial crisis, the government lowered corporate and income taxes and provided tax benefits for corporate investments such as research and development (R&D) to promote corporate investment. According to a survey on the business environment of foreign-invested companies conducted by the institute in March, 56% of respondents said that the abolition of the corporate tax exemption system for foreign-invested companies at the end of 2018 had the greatest impact on investment policies.

This content was produced with the assistance of AI translation services.