Reversed Policies, Government Trust Cracks... Burden Falls on Companies

Alternative Proposal for Employment Increase Tax Credit Amendment
Last Year's Employment-Decreasing Companies
Decided Not to Apply Preferential Deduction

Policy Changed During National Assembly Discussions
Management Crisis Companies Face 'Double Burden'

[Asia Economy Reporters Jang Sehee, Kim Hyemin] The government's alternative for the employment increase tax credit has been filled with completely different content just two months after the original plan was announced, leading to evaluations that the policy's credibility has been damaged. While it is common for policies to be revised during National Assembly discussions, generally the main direction is maintained with only some details changed.

◆Mixed feelings for companies with employment decline within 2 months= The original draft of the amendment to the Restriction of Special Taxation Act related to the employment increase tax credit, announced by the Ministry of Economy and Finance in December last year and submitted to the National Assembly last month, included provisions such as exemption from the obligation to pay tax credit amounts for the reduced number of employees within two years compared to the first year the credit was received, and continued application of the tax credit for the remaining period. The employment increase tax credit is a policy that provides preferential tax credits to companies whose number of regular employees increased compared to the previous year, favoring youth, disabled persons, national veterans, and elderly persons aged 60 or older. The credit amounts were set at 11 million KRW for small and medium enterprises (12 million KRW for local areas), 8 million KRW for mid-sized companies, and 4 million KRW for large companies.

However, the "alternative amendment" submitted to the National Assembly's tax subcommittee on the 19th organized the policy so that companies with decreased employment last year would not receive preferential tax credits. The benefit was limited to deferring the obligation to pay tax credits for one year. As a result, companies that fail to maintain employment at 2019 levels this year must repay corporate tax. The originally announced exemption from the obligation to pay tax credits for the reduced number of employees was changed to a conditional tax payment.

As the government policy reversed during the National Assembly discussions, companies struggling due to COVID-19 face the possibility of double hardship by having to return the tax benefits they had received. If the business condition does not improve during the grace period, they will have to pay the tax arrears for 2020 and 2021 all at once, increasing the burden. Especially considering that the amount of tax credits through employment tax credits was 713.4 billion KRW in 2019, 1.2813 trillion KRW in 2020, and 1.3103 trillion KRW in 2021, many companies have benefited, so the impact on companies with employment decline is expected to be significant.

Professor Kim Soyoung of Seoul National University’s Department of Economics said, "Since 2019 was before COVID-19, many companies may have to return tax benefits," adding, "Given the poor economic situation, lowering the criteria and proportionally reclaiming tax credits is also a method."

◆Damage to policy credibility= The presentation of this alternative has been evaluated as undermining the credibility of government policy. Especially combined with frequent reversals in real estate policy, concerns are rising that distrust in policies will spread.

The government encouraged registration of housing rental businesses to stabilize the jeonse and monthly rent market but changed the policy direction citing rising housing prices. In 2017, the government announced the "Plan to Revitalize Rental Housing Registration," inducing multi-homeowners to register as rental business operators through tax benefits. The intention was to implement a policy where tenants and landlords coexist. However, as rental registration became a popular tax-saving method and listings disappeared from the market, many benefits were withdrawn within a year. The government was criticized for increasing market risk by imposing capital gains tax surcharges on rental business operators and removing the comprehensive real estate tax exclusion benefits.

In the economic downturn caused by COVID-19, the most important thing is to restore trust in policies, but with policies changing constantly, there are concerns that the market will not see effective results. Professor Kim Soyoung pointed out, "Companies need to operate by considering future costs and profits, but if government policies keep changing, it may be difficult to make investment plans."

In response, government insiders argue that the current composition of the National Assembly subcommittee itself makes it difficult to review bills, and that this is unrelated to policy credibility. The current composition of the Ministry of Economy and Finance tax subcommittee is 7 members from the Democratic Party, 5 from the People Power Party, and 1 from a minor party. Although Minister Kwon Chilseung of the Ministry of SMEs and Startups and Minister Lee Inyoung of the Ministry of Unification recently joined, ministers typically do not attend unless related to their departments, resulting in a minority government situation.

A government official said, "Ministers related to other standing committees do not attend the Ministry of Economy and Finance subcommittee," adding, "Since it is effectively a minority government, it is structurally difficult for government bills to be passed."

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