"Government Tax Reform Bill Focuses on New Industry Benefits... Insufficient Tax Support for Marginal Companies"

Business Community "Tax Support Needed Considering Tax Equity and Polarization"
Expansion of Corporate Tax Loss Carryforward Deduction Limits for COVID-19 Affected Industries
Withdrawal of Expansion of Countries Subject to Deemed Dividend Tax on Overseas Subsidiary Retained Earnings

[Asia Economy Reporter Su-yeon Woo] The reason why the business community is concerned about the government's 2021 tax law amendment proposal is that it fails to reflect in detail the difficult situations that Korean companies are currently facing, such as the damage caused by COVID-19 and the rapidly changing uncertainties in overseas markets. Although the proposal includes expanded tax support for research and development (R&D) and facility investment, it is limited to certain new industries like semiconductors and batteries, and there is criticism that tax support for struggling sectors worried about immediate survival is insufficient.

Looking at the recommendations in the "2021 Tax Law Amendment Proposal Opinion" submitted by the Korea Economic Research Institute (KERI) to the Ministry of Economy and Finance on the 12th, most of the contents were aimed at "fairness" and "resolving polarization," including expanding tax support for COVID-19 affected industries, alleviating unreasonable tax burden increases on overseas-expanding companies, and easing additional taxation on small and medium enterprises within large business groups.

First, KERI proposed that the "corporate tax loss carryforward deduction limit" should be temporarily expanded for COVID-19 affected industries such as aviation, dining and lodging, and consumer goods companies. The loss carryforward deduction is a system that allows companies to carry forward losses (deficits) incurred in a specific year to subsequent years within a maximum of 15 years to deduct from income.

In Korea, loss carryforward deductions are allowed up to 60% of the business year's income, which is significantly lower compared to major advanced countries. The United States allows carryforward deductions up to 80% of income without a time limit, and Canada and Australia have no separate deduction limits. KERI requested that this limit be increased to 100% until 2024 to align tax fairness with overseas countries and support companies affected by COVID-19.

Additionally, amid growing uncertainties in overseas markets, KERI argued that the amendment increasing the tax burden on companies expanding overseas is undesirable and requested the withdrawal of the expansion of the application countries for the "deemed dividend system on retained earnings of certain foreign corporations." Under current law, a portion of the retained earnings of overseas subsidiaries in which domestic companies hold more than 50% equity is deemed as dividends and taxed with corporate tax. This is to prevent tax avoidance by leaving income in countries with low corporate tax rates.

However, the business community is concerned that this could have the adverse effect of increasing the tax burden even on companies that have invested overseas for legitimate business expansion purposes. The system was applied only to countries with a corporate tax burden rate of 15% or less, but the government has expanded the scope to countries with rates up to 17.5% in this tax amendment. It is expected that the tax burden on local subsidiaries in countries such as Singapore (17%) and Hong Kong (16.5%), where the top corporate tax rate is between 15% and 18%, will increase sharply.

Other laws identified for improvement include the "investment and win-win cooperation promotion tax system," which imposes double taxation on small and medium enterprises simply because they belong to large business groups; the "construction burden investment tax credit," which does not receive tax benefits because support funds are calculated despite being normal business activities; and the "tax credit for video content production costs," where support expansion is urgently needed to strengthen overseas competitiveness.

Lee Sang-ho, head of the Economic Policy Team at KERI, emphasized, "While export-oriented companies have recently shown a rebound in performance, face-to-face industries such as aviation, dining, and lodging are still struggling, resulting in polarization by industry even in corporate economic recovery," adding, "Government-level tax support is urgently needed for industries severely affected by COVID-19."

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