Ministry of Economy and Finance: "South Korea's Major Corporations Have Higher Effective Tax Rates Than the US and Japan... Lowering Corporate Tax to Attract Businesses"

[Asia Economy Sejong=Reporter Kwon Haeyoung] The effective tax rate of large corporations in South Korea was found to be 21.9%, higher than that of other advanced countries such as the United States, Japan, and the United Kingdom.

The Ministry of Economy and Finance released a press reference on the 13th, stating, "The fundamental purpose of this corporate tax reform plan is to revise the corporate tax structure to align with global standards."

The ministry explained, "The effective tax rate for all companies in 2021, including foreign tax credits, was 18.8%, and for large corporations, it was even higher at 21.9%. This shows that the effective tax rate for large corporations in South Korea is higher compared to other advanced countries."

According to an analysis by the Korea Institute of Public Finance cited by the ministry, as of 2019, South Korea's corporate tax effective rate was 21.4%, higher than the United States (14.8%), Japan (18.7%), and the United Kingdom (19.8%).

The ministry argued, "The effective tax rate of 17.5% cited by some is calculated excluding foreign tax credits for all companies, which does not reflect the actual tax burden on companies. It is appropriate to calculate the actual corporate tax burden based on the total tax burden, including corporate taxes paid locally overseas."

It also pointed out that after raising the corporate tax rate from 22% to 25% in 2018, foreign investment in domestic companies decreased and the overseas relocation of Korean companies accelerated. Foreign direct investment in domestic manufacturing declined from $10.05 billion in 2018 to $8.22 billion in 2019, $5.97 billion in 2020, and $5 billion in 2021. Conversely, domestic manufacturing investment abroad nearly doubled from $8.78 billion in 2016 to $18.16 billion in 2021.

The ministry stated, "International organizations such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) also recommend lowering the top corporate tax rate and simplifying tax brackets. South Korea's corporate tax rate system, with four brackets at 10%, 20%, 22%, and 25%, is excessively complex and does not align with global standards."

South Korea's top corporate tax rate, including local taxes, is 27.5%, which is more than 3 percentage points higher than the OECD average of 21.2%, ranking seventh highest among 38 OECD countries. Among OECD members, 24 countries including the United States apply a single tax rate system, and 11 countries including Australia apply a two-tier system. Multi-tier progressive tax rates hinder corporate growth and investment and cause inefficiencies such as artificial division. In contrast, only South Korea and Costa Rica have adopted a progressive tax system with four or more brackets. As a result, South Korea's tax competitiveness dropped 11 ranks since the introduction of the 25% corporate tax bracket in 2018, and particularly in the corporate tax sector, it fell 12 ranks to 39th, according to the ministry.

The ministry emphasized, "Recently, there has been a trend of global companies relocating away from China, but we are at a disadvantage in attracting companies due to our higher and more complex corporate tax rate system compared to competing countries. We need to ease the corporate tax burden so that our global companies can compete on a level playing field with major companies in competing countries."

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