[Why&Next] Crisis Predictions Exceeded Expectations... "Major Countries Compete in Corporate Tax Cuts"

"Top tax rate cut from 25% to 22%
Must pass regular National Assembly session on the 9th next month

Possible to use risk response measures
due to economic downturn in the second half of next year"

Urgent need to resolve corporate funding issues
Will lead to positive economic cycle
"Corporate tax rates differ among major countries
Korea's is excessively high... at a 'crawling level'"

Samsung Electronics Semiconductor (DS) Division Hwaseong Campus. (Photo by Samsung Electronics)

[Asia Economy Reporters Moon Chaeseok, Choi Seoyoon] The reason major economic organizations urged the National Assembly on the 7th to promptly pass the amendment to the Corporate Tax Act is that signs of a stagflation (economic stagnation amid rising prices) crisis indicate that corporate management risks may be more severe than expected. It is also interpreted that concerns about the momentum for passing bills during the regular session weakening due to the 'Itaewon tragedy' investigation political climate influenced this. These organizations argue that cutting corporate taxes to attract investment and increase employment is necessary to overcome the economic crisis. In fact, major competitors like the United States and Taiwan are competitively lowering corporate taxes, while South Korea still struggles to pass such legislation in the National Assembly.

Fear of the Worst Economic Crisis... Business Community Says "Cut Corporate Taxes to Boost Investment and Employment"

The six economic organizations?the Korea Chamber of Commerce and Industry, Korea Employers Federation, Federation of Korean Industries, Korea International Trade Association, Korea Federation of Small and Medium Business, and Korea Federation of Medium-sized Enterprises?issued a joint statement on the day, insisting that the government-proposed amendment to the Corporate Tax Act, which lowers the top corporate tax rate from 25% to 22%, must be passed during the regular National Assembly session ending on the 9th of next month. While the content reflects messages they have consistently advocated, the underlying meaning of this statement is about 'timing,' according to the business community. They emphasize that passing it immediately would be most effective for companies to prepare for the economic downturn. The six economic organizations stress that if the law is enacted now, the policy will be implemented from the second half of next year when companies pay corporate taxes, making it at least usable as a tool to respond to corporate management risks caused by the economic recession in the latter half of next year.

There is a growing voice that the urgent need to cut corporate taxes to 'emergency rescue' companies currently facing funding crises should be heeded. With current interest rates and prices rising, consumption has sharply declined, and companies are left with unsold products piling up in warehouses. According to the Korea Chamber of Commerce and Industry, manufacturing inventories have increased for four consecutive quarters. As of the second quarter, inventories surged 18% compared to the same period last year, marking the largest increase in 26 years. The government's decision to raise interest rates temporarily to curb soaring prices makes it difficult to obtain loans quickly, and combined with skyrocketing raw material prices, product profitability is plummeting. This 'complex economic crisis' leaves no reason to hesitate on tax reductions.

From a long-term perspective, the business community believes that companies extinguishing the 'urgent fire' of financing through corporate tax cuts are likely to increase investment and employment, leading to a 'virtuous economic cycle.' There is concrete evidence supporting this. According to a 2016 report by the Korea Development Institute (KDI), a 1% decrease in the average effective corporate tax rate is estimated to raise the investment rate by 0.2 percentage points. An OECD survey shows that two years after the United States cut corporate taxes, the average gross fixed capital formation growth rate rose from 3% to 3.7%, an increase of 0.7 percentage points. France also saw an increase from 0.5% to 3.7%, a 3.2 percentage point rise. The gross fixed capital formation growth rate refers to the increase in management costs such as replacing old facilities with new ones or establishing new factories and purchasing equipment for new businesses.

"Advanced Countries Move Forward, But South Korea Lags Behind"

The reason the six economic organizations made a 'determined statement' urging the National Assembly to immediately pass the corporate tax cut law is persuasive given the long-standing criticism that South Korea's corporate tax rates are higher than those of major overseas countries. According to recent data from the Federation of Korean Industries titled 'Need to Enhance Corporate Tax Competitiveness to Revitalize Businesses,' South Korea and the five major countries (G5)?the United States, United Kingdom, Japan, France, and Germany?all provide corporate tax credit benefits for a certain portion of corporate research and development (R&D) investments, but there is a significant disparity in support depending on company size. The Federation of Korean Industries notes that the United States, France, and Germany provide equal benefits regardless of company size. Japan and the United Kingdom also offer differential support like South Korea, but compared to Japan's 2 percentage points (large companies up to 10% - small companies 12%) and the UK's 11.7 percentage points (13% - 24.7%), South Korea's 23% (up to 2% - 25%) is excessive. The tax credit rate is also criticized as unreasonably low. The G5 average is 17.6%, while South Korea's maximum is only 2%. This 'South Korea large companies maximum 2%' figure applies to Samsung Electronics' semiconductor (DS) division, which competes fiercely with Taiwan's TSMC and the United States' Intel.

Consequently, the corporate tax burden rate for individual companies is overwhelmingly higher in South Korea. This fact is evident when compared with countries participating in the US-led semiconductor alliance 'Chip4' (South Korea, United States, Japan, Taiwan). According to the Federation of Korean Industries, as of last year, South Korea's corporate tax burden rate was 26.9%, higher than Japan's 22.3%, the United States' 13.0%, and Taiwan's 12.1%. Particularly within the semiconductor industry, the 'corporate tax shackles' in South Korea are tighter than those in countries where Samsung's direct competitors in the foundry sector, such as TSMC (Taiwan) and Intel (United States), are located, posing significant challenges to corporate management. Even the world's strongest country, the United States, saw its corporate tax burden rate decrease by 3.4 percentage points from 16.4% in 2018 last year through tax reduction policies such as the Trump administration's corporate tax rate cuts and investment promotion measures. Taiwan's corporate tax burden rate was the lowest among the four countries for four consecutive years (13% - 12.9% - 12.3% - 12.1%). The business community's self-deprecating lament that 'advanced countries move forward, but South Korea lags behind' is proven by these statistics to be a reality.

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