Biden: South Korea Must Shift Overseas Income Tax System to Respond to US-Centered Tax Policy

[Asia Economy Reporter Jeong Hyunjin] It is expected that if the Biden administration's US-centric tax policy is implemented, Korean companies' production or investment in the United States will increase, leading to claims that changes in corporate tax systems are necessary to support this. There is an argument that the taxation system should shift from a residence-based system to a source-based system, which taxes only domestic income and excludes income generated abroad.

The Korea Economic Research Institute under the Federation of Korean Industries stated this on the 16th through a report titled "Biden's US-Centric Tax Policy and Its Implications," mentioning that the biggest feature of the Biden administration's tax policy is its US-centric approach.

First, the Biden administration encourages reshoring by providing a 10% tax credit benefit to companies that relocate overseas production facilities back to the United States. Additionally, a 10% offshore penalty tax is imposed when US companies bring products and services produced at overseas facilities back to the domestic market for sale. The minimum tax rate (GILTI) on profits earned by US companies through overseas subsidiaries will also be raised from the current 10.5% to 21%.

As a result, the tax burden on overseas expansion companies is expected to increase. Lim Dongwon, a senior researcher at the Korea Economic Research Institute, explained, "If the Biden administration's offshore penalty tax and others are applied, existing Korean export companies to the US will face increased tax burdens, which is expected to lead them to relocate to the US or increase investment there."

According to the report, the United States switched to a source-based taxation system for business and dividend income in 2018. Since then, not only have US multinational corporations returned domestically, but the US has also attracted headquarters of multinational corporations from other countries, preventing capital outflow and promoting the attraction of foreign capital, according to the Korea Economic Research Institute's analysis. The institute stated, "In fact, about 77% of the US's overseas retained earnings were repatriated domestically after the tax system transition."

Currently, among OECD countries, only five countries?Korea, Ireland, Mexico, Chile, and Israel?maintain a residence-based system that taxes worldwide income, including both domestic and foreign income, according to the Korea Economic Research Institute.

Senior researcher Lim emphasized, "Under Korea's current residence-based taxation system, domestic companies are likely to invest overseas and there is a concern that income generated abroad will be excessively retained locally, which could weaken the competitiveness of multinational corporations based in Korea." He added, "The difference between net income and dividends from foreign direct investment from 2014 to 2018, except for 2015, shows a positive value, indicating that net income not distributed as dividends is accumulating overseas, suggesting an increase in overseas retention rather than reinvestment domestically."

The Korea Economic Research Institute pointed out that, with the Biden administration's tax policy implementation imminent and overseas retained earnings expected to grow larger in Korea, it is necessary to positively consider changing the residence-based taxation principle on foreign-source income. Senior researcher Lim stressed, "To enhance the international competitiveness of our companies, especially those operating in the US, Korea should also apply a source-based taxation method to strengthen tax fairness on domestic and foreign investments and to correct distortions in investment allocation."

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