[What Do You Think] Corporate Tax Rate Structures Vary by Country... Careful Response Needed

[濁流淸論(Takryu Cheongron)] "Corporate international competitiveness is the core of the national economy... All regulations must be lifted to focus on reviving companies"

Takryucheongron is a column that provides in-depth analysis and diagnosis by experts in the relevant fields on socially contentious topics. This week's topic is 'U.S.-Originated Corporate Tax Increase.'

The global environment regarding corporate tax is rapidly changing. Countries are trying to overcome the economic difficulties caused by COVID-19 through large-scale fiscal spending. Not only South Korea but also the United States, with a new president, is announcing large-scale fiscal expenditures.

U.S. President Joe Biden emphasized tax increases even before his inauguration and has maintained that stance since taking office. The previous president lowered the corporate tax rate from 35% to 21%, but Biden plans to raise it back to around 28%. This is strongly aimed at securing funds for trillions of dollars in fiscal spending.

Corporate tax is not imposed on individuals, the final recipients of income, which minimizes tax resistance and makes it easier to avoid political responsibility. However, it can weaken the international competitiveness of companies and ultimately have a negative impact on the national economy. The introduction of a global minimum tax seems to have been proposed to overcome this political situation. The U.S. policy has multiple purposes, including facilitating fiscal funding without harming companies. However, the global harmonization strategy for corporate tax led by the U.S. does not seem easy. Besides the resistance from U.S. companies, the corporate tax rate structures differ among countries.

Among the 37 OECD countries, 11 maintain a top corporate tax rate at or below 21%. These include the Czech Republic at 19%, Estonia 20%, Finland 20%, Hungary 9%, Ireland 12.5%, Lithuania 15%, and Slovenia 19%. These countries are effectively in a position where they need to raise taxes, so accepting a global minimum tax rate of 21% would be difficult.

Most OECD member countries have a single corporate tax rate. The Netherlands and France have two-tiered rates, and Luxembourg has a three-tiered rate structure, which are exceptions. South Korea’s top corporate tax rate is 27.5% (including local income tax), but it also has a multi-tiered structure with rates of 22%, 20%, and 10%.

The introduction of a global minimum tax could harm companies with poor business environments, such as small and medium-sized enterprises, and could neutralize various tax policy tools like investment tax credits. Among approximately 790,000 corporate tax filers, about 48.8% (47.3% in 2016) are exempt taxpayers, who could be most affected.

The national economy is influenced by the competitiveness of private companies based on cutting-edge technology. Raising the national economy through fiscal expansion via taxes is very limited. Increasing taxes does not necessarily increase corporate tax revenue. In South Korea’s case, the top corporate tax rate was raised from 22% to 25% (27.5% including local income tax) in 2018, but last year corporate tax revenue actually decreased by 23%, or 16.7 trillion won, compared to the previous year. Value-added tax also decreased by 5.9 trillion won, resulting in an overall tax revenue reduction of 7.9 trillion won.

Some advanced countries with globally competitive companies, such as the U.S., may seek short-term tax revenue increases through raising corporate tax rates or introducing minimum taxes. However, for other countries, tax increases could actually be a negative factor. Especially since South Korea could be most affected, it is necessary to wisely respond to the global trends regarding corporate tax. Given that corporate international competitiveness is the core of the national economy, it is important to focus on revitalizing companies by easing various regulations.

Hong Kiyong, Professor, Department of Business Administration, Incheon National University

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