FedChamber: "Korean Large Corporations' R&D Tax Support Only 2%, Double Taxation Also an Issue"

Korea's Corporate Tax System Competitiveness 'Weak' Compared to Advanced Countries
Need to Overcome Corporate Management Crisis through Tax Rate Reduction and Improvement of Unreasonable Systems

[Asia Economy Reporter Park Sun-mi] There have been calls to raise the tax credit rate for research and development (R&D) investment by large Korean corporations to the level of competing advanced countries, as the tax support benefits for R&D investment by Korean large corporations are woefully insufficient compared to those of advanced countries.

On the 27th, the Federation of Korean Industries (FKI) released a report titled "International Comparison and Implications of Major Corporate Tax Systems (Analysis of Korea and G5 Countries)" stating that Korea has an excessive disparity in tax support by company size compared to the G5 countries (United States, Japan, United Kingdom, Germany, France). The G5 countries either provide equal support regardless of company size (United States, France, Germany) or, even if they provide differentiated support, the gap is not as large as in Korea (Japan, United Kingdom). The R&D tax credit rate for large corporations in G5 countries averages 17.6%, whereas in Korea it is only up to 2%.

The FKI argued that the government's insufficient support system for large corporations' R&D could act as a factor suppressing domestic R&D investment, and therefore, the tax credit rate for general R&D by large corporations should be raised at least to the level of competing countries.

All G5 countries have a loss carryforward deduction system, but only Korea and Japan limit both the deduction cap and the allowable deduction period for large corporations, which was also pointed out as a problem. The loss carryforward deduction system allows companies to carry forward losses incurred to the following year and deduct them from taxable income, thereby easing the corporate tax burden.

Currently, small and medium-sized enterprises (SMEs) in Korea can fully deduct the income of the current year using losses incurred in the previous year, so they do not have to pay taxes. In contrast, large corporations can only deduct up to 60% of the current year's income regardless of how large the previous year's losses are, and must pay taxes on the remaining 40%. The undeducted loss amount can be carried forward again to the next year for deduction, but only up to 15 years from the year the loss occurred.

The FKI noted that since the purpose of the loss carryforward deduction system is to support the rapid normalization of management for deficit companies, differentiating deduction limits and periods by company size contradicts the system's intent. They called for expanding the deduction limit for large corporations or abolishing the limitation on the allowable deduction period, as other countries have done.

Korea's double taxation was also cited as a problem, with calls to switch to a system that exempts dividends received by companies from overseas subsidiaries from taxation. Overseas subsidiaries of companies pay corporate tax locally on their earned income and then distribute the remaining income as dividends to the domestic parent company. If the parent company is taxed domestically on the dividends received, it results in double taxation on the same income source both abroad and domestically.

All G5 countries do not tax dividends received by companies from overseas subsidiaries domestically. The FKI stated, "The problem with Korea's current method is that it is an 'incomplete' system where double taxation issues still arise due to differences in domestic and foreign corporate tax rates," and warned, "If the double taxation burden is not resolved and overseas subsidiaries' income is retained locally instead of being distributed domestically, opportunities for added value and job creation through reinvestment of overseas income in Korea will be lost."

The tax burden on corporate retained earnings was also pointed out, with Korean companies bearing the heaviest burden among major countries. Retained earnings refer to the profits remaining within a company after paying taxes, which are not distributed externally through investments or dividends but retained internally. Korea operates a system called the 'Investment and Win-Win Cooperation Promotion Tax System' that taxes corporate retained earnings.

Among the G5, European countries do not have a system taxing retained earnings, while only Korea, the United States, and Japan operate such a system. Korea taxes retained earnings at a flat rate of 20%, whereas Japan applies progressive taxation with rates ranging from 10% to 20% depending on the tax base, and the United States taxes at a flat 20% rate like Korea but exempts the tax if the retained earnings are proven necessary for corporate activities, resulting in no actual tax burden.

Choo Kwang-ho, head of the FKI Economic Headquarters, emphasized, "Recently, due to high inflation and sustained interest rate hikes, the financial conditions of our companies have worsened, and their capacity for investment and employment has shrunk," adding, "Along with lowering corporate tax rates, unreasonable systems should be improved to provide relief so that companies can effectively respond to the current management crisis."

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