FKI Proposes 'Corporate Tax Reform Plan' to Ministry of Economy and Finance... "Top Tax Rate 20%"

Seven Tasks Presented Including Corporate Tax Rate Reduction and Simplification of Tax Bracket Structure

[Asia Economy Reporter Kim Jin-ho] The Federation of Korean Industries (hereinafter referred to as FKI) announced on the 15th that it proposed the '7 Major Tasks for Corporate Tax Reform to Enhance Corporate Competitiveness' in response to the launch of the new Yoon Seok-yeol administration. The FKI delivered this proposal to the Ministry of Economy and Finance on the 12th.

The tasks proposed by the FKI to alleviate the corporate tax burden include ▲ lowering the corporate tax rate and simplifying the tax brackets ▲ abolishing and easing the minimum tax system ▲ expanding tax support for research and development (R&D) ▲ abolishing and easing tax incentives for investment and win-win cooperation, totaling seven items.

◆ High corporate tax burden... hindering corporate competitiveness and management vitality = The FKI cited the high domestic corporate tax burden compared to major overseas countries and the resulting decline in corporate competitiveness as reasons for the need to ease the corporate tax burden. As of 2020, Korea's corporate tax burden rate and corporate tax reliance (the proportion of corporate tax revenue to total tax revenue) were 3.4% and 19.6%, ranking 6th and 4th respectively among 35 OECD countries.

The FKI explained that Korea's corporate tax burden rate and corporate tax reliance significantly exceed the OECD average corporate tax burden rate (2.6%) and corporate tax reliance (13.0%), indicating that the corporate tax burden on Korean companies is considerably high.

The FKI argued that lowering the corporate tax burden would promote economic growth, thereby increasing the stability of tax revenue collection. Based on an analysis of annual corporate tax revenue, GDP, and unemployment rate statistics from 1996 to 2020, the FKI found that reducing Korea's effective corporate tax by 10% would increase the economic growth rate by 1.07 times (6.94%) and decrease the unemployment rate by 0.98 times (1.90%).

Although a reduction in effective corporate tax revenue would cause a short-term decrease in tax revenue, the tax revenue increase effect from improved economic growth would be greater, resulting in an overall increase in effective corporate tax revenue by 1.03 times (2.94%). The FKI viewed that easing the corporate tax burden would stimulate corporate facility investment and contribute to economic growth. According to the FKI, a 1 percentage point reduction in the corporate tax rate would increase corporate facility investment by up to 3.6%.

◆ 7 Major Tasks for Corporate Tax Reform = The FKI pointed out that Korea is going against the global trend by strengthening corporate tax collection, such as raising the corporate tax rate and expanding tax brackets recently. Over the past decade (2011?2021), 38 OECD countries lowered their highest corporate tax rates by an average of 2.2 percentage points (from 23.7% to 21.5%). In contrast, Korea introduced a new tax bracket for taxable income exceeding 300 billion KRW in 2018, expanding the tax brackets from 3 to 4 stages, and raised the highest corporate tax rate from 22.0% to 25.0%, an increase of 3.0 percentage points.

Accordingly, the FKI stated that Korea is the only country among 38 OECD countries as of 2020 with four or more tax brackets and proposed simplifying the current corporate tax system to two brackets and lowering the highest tax rate to 20%.

The FKI also emphasized the need to abolish or ease the minimum corporate tax system. The FKI pointed out that even if tax credits and exemptions for corporate R&D are expanded, the minimum tax payment requirement prevents companies from fully benefiting from these credits, reducing their effectiveness. According to the FKI, as of 2021, only six countries, including Korea, impose a minimum tax on corporations at the central government level among 38 OECD countries.

The FKI stated that expanding tax support for corporate R&D investment must precede to revitalize the contracted private R&D investment. It especially emphasized the need to normalize the R&D tax credit rate for large corporations, which has been continuously reduced since 2013. Regarding the tax incentives for investment and win-win cooperation, the FKI pointed out that additional taxation on after-tax income results in double taxation issues.

Additionally, the FKI proposed other improvement tasks such as ▲ expanding the limit on the carryforward of losses for large corporations ▲ converting foreign-source dividend income of corporations to tax-exempt status ▲ expanding the application of the consolidated corporate tax system.

Choo Kwang-ho, head of the FKI Economic Headquarters, said, “With the recent Russian invasion of Ukraine and the global monetary tightening trend, the internal and external uncertainties faced by our companies have intensified, increasing management difficulties.” He emphasized, “We must ease the corporate tax burden to enhance corporate global competitiveness and revitalize the private sector.”

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