Hankyung Research Institute Requests Ministry of Economy and Finance to Revise Tax Law Amendment Increasing Corporate Tax Burden

[Asia Economy Reporter Suyeon Woo] The Korea Economic Research Institute (KERI) has suggested improvements, stating that a significant portion of the '2021 Tax Reform Bill' announced by the government last month could increase the tax burden on companies. On the 20th, KERI announced that it submitted a memorandum containing a total of 14 proposals across six laws to the Ministry of Economy and Finance to revitalize corporate activity, which has been depressed due to the fourth wave of COVID-19, and to rationalize the corporate tax burden.

The main proposals from KERI include ▲temporarily expanding the corporate tax carryforward loss deduction limit for COVID-19 affected industries ▲maintaining the current country standard (corporate tax burden rate of 15%) for the controlled foreign corporation (CFC) deemed dividend system ▲rationalizing tax incentives for investment and win-win cooperation ▲maintaining the application of investment tax credits on construction burden charges ▲and increasing the tax credit rate for video content production costs.

First, KERI argued that for COVID-19 affected industries such as aviation, dining, and accommodation, the corporate tax carryforward loss deduction limit should be temporarily expanded to alleviate the tax burden on companies. The carryforward loss deduction system allows companies that have incurred losses to carry forward those losses to subsequent fiscal years and deduct income up to a certain limit. Under current law, carryforward deductions are allowed up to 60% of each fiscal year's income for up to 15 years (100% for small and medium enterprises), and KERI requested that large corporations also be allowed the same 100% limit as SMEs.

Next, KERI requested maintaining the current country standard for the CFC deemed dividend system. Under current law, domestic companies are taxed on a portion of the income of overseas corporations in which they hold more than 50% equity. This system applies only to countries where the corporate tax burden rate is 15% or less, but the revised law expanded the scope to countries with a tax burden rate of 17.5% or less.

This revision is expected to increase the additional tax burden on Korean companies operating in countries such as Singapore (17%) and Hong Kong (16.5%), where the corporate tax top rate is around 15-18%. KERI emphasized, "Although this system was introduced to prevent tax avoidance by retaining income in low-tax countries, it may have the adverse effect of increasing the tax burden on Korean companies investing overseas for legitimate business expansion."

The third proposal concerns rationalizing tax incentives for investment and win-win cooperation. Current tax law imposes additional corporate tax if the amount spent for investment and wage increases aimed at win-win cooperation falls below a certain level of corporate income.

The problem lies in the taxation criteria. Even when large business groups increase investment and wage expenditures to fulfill social responsibilities, small and medium enterprises affiliated with these large groups are subjected to additional tax burdens. Therefore, KERI proposed exempting small and medium-sized companies affiliated with large business groups from taxation if the large group achieves excess profit redistribution.

The proposal also includes applying investment tax credits to construction burden charges. Energy companies mainly collect 'construction burden charges' from local users when building district heating systems or conducting collective energy projects. However, the government excludes these charges from the integrated investment tax credit (corporate tax credit for certain equipment investments), considering them as subsidies.

KERI pointed out that construction burden charges differ in purpose from government subsidies, so excluding tax credits on the grounds of overlapping support is unreasonable. Since assets invested with construction burden charges are also investments executed as part of corporate revenue, KERI requested the government to withdraw the amendment that excludes tax credits.

Finally, KERI proposed increasing the corporate tax credit rate for video content production costs from the current 3% to 7%. To actively support the video content industry, which has emerged as a new growth engine in the post-COVID era, the rate should be aligned with major advanced countries where the tax credit rate exceeds 10%.

Currently, major countries' tax credit rates for video content production costs are 25-35% in the United States, 30% in France, 16-40% in Australia, and 10% in the United Kingdom, while Korea's rate is only 3% for large corporations. KERI suggested raising the rate from 3% to 7% for large corporations, from 7% to 10% for mid-sized companies, and from 10% to 13% for small and medium enterprises.

Choo Kwang-ho, head of KERI's Economic Policy Office, evaluated, "Although this year's tax reform bill expanded tax support for R&D and facility investments, it was limited to some new industry sectors, and improvements to systems causing unreasonable tax burdens on companies were insufficient." He added, "Given the prolonged fourth wave of COVID-19 and increasing uncertainties, fundamental tax support measures such as lowering corporate tax rates and reforming inheritance tax systems are needed alongside improvements to unreasonable tax systems."

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