"Investment and Win-Win Cooperation Promotion Tax System, Only Tax Revenue Increase Effect... Sunset Extension Inappropriate"

Hankyung Research Institute 'Review of Issues in Sunset Extension'

[Asia Economy Reporter Dongwoo Lee] A claim has been raised that extending the sunset clause of the 'Investment and Win-Win Cooperation Promotion Tax System,' which has failed to achieve the policy goal of 'inducing a virtuous cycle between corporate income and household income' and only resulted in economic inefficiency and increased tax revenue, is inappropriate.

The Korea Economic Research Institute stated this on the 7th through a report titled 'Review of Issues When Extending the Investment and Win-Win Cooperation Promotion Tax System.' The 'Investment and Win-Win Cooperation Promotion Tax System' is a system that taxes (at a rate of 20%) corporate income deemed as non-recirculated income if a company's investment, wage increase, or win-win support falls below a certain amount of current income, in addition to corporate tax. It was applied temporarily for three years starting in 2018, and an attempt was made to extend it for two more years in the 2020 tax law amendment.

The report noted that from the introduction of the predecessor system, the Corporate Income Recirculation Tax System, implemented since 2018, there was a prevailing prediction that taxing corporate non-recirculated income would have minimal effects on dividends, investment, and wage increases, while distorting corporate decision-making and causing economic inefficiency.

Prior studies have shown that the policy effectiveness of the system is low, indicating that investment and dividends increased significantly, but there was no significant impact on wage increases. In particular, the study by Park Jong-guk, Hong Young-eun, and Kim Su-jin (2020) confirmed a significant increase in investment inefficiency after the introduction of the Corporate Income Recirculation Tax System, criticizing that it failed to achieve policy intentions and only caused social inefficiency.

Im Dong-won, a senior researcher at KERI, also pointed out, “As investment induced by the tax system was carried out inefficiently, taxing corporate non-recirculated income not only failed to achieve policy effectiveness but also caused other economic inefficiencies.”

The report criticized that contrary to the intention of the Corporate Income Recirculation Tax System and the Investment and Win-Win Cooperation Promotion Tax System to “induce the establishment of a virtuous cycle structure where corporate income flows into household income through investment or wages,” they only increase “corporate tax revenue.”

The calculated tax amount on non-recirculated income increased significantly from 53.3 billion KRW in 2016 to 427.9 billion KRW in 2017, 719.1 billion KRW in 2018, and 854.4 billion KRW last year, showing a substantial tax revenue increase effect. By scale, the tax burden share of general companies other than mid-sized companies and mutual investment-restricted companies, which cannot actively invest or hire, reached about 72% as of last year.

The report explained that in the era of global tax competition, corporate tax systems must align with international trends or standards to maintain tax neutrality without distorting the economic efficiency of domestic companies. However, in Korea’s case, it is going against international trends by attempting to extend the sunset clause after introducing the unprecedented 'Investment and Win-Win Cooperation Promotion Tax System.'

While major advanced countries such as the United States and the United Kingdom have lowered or are pushing to lower corporate tax rates in recent years to strengthen corporate competitiveness and activate investment, Korea is opposing the global trend by raising corporate tax rates for large conglomerates and introducing the Investment and Win-Win Cooperation Promotion Tax System for large companies.

Researcher Im stated, “Taxation on retained earnings (non-recirculated income) aimed at promoting investment and win-win cooperation is unprecedented domestically and internationally. If this system is extended further, it will exemplify a Galapagos policy.” He added, “Ultimately, if domestic tax burdens increase, corporate domestic management activities will shrink, and companies will increasingly accumulate income earned abroad overseas and pay corporate taxes locally, which will distort economic efficiency and even reduce tax revenue.”

Furthermore, Im said, “If policies like extending the sunset clause of the Investment and Win-Win Cooperation Promotion Tax System continue without fundamental measures such as lowering corporate tax rates, improving the corporate environment will be difficult due to excessive tax burdens on companies.”

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