[Issue Analysis] Ministry of Economy and Finance's Public Opinion Campaign Ahead of Budget Bill Processing: "Effective Corporate Tax Rate Higher Than UK, US, and Japan... Investment Also Declining"

If Corporate Tax Increases, Foreign Investment in Korea Decreases... Domestic Companies Move Overseas

[Asia Economy Sejong=Reporter Kwon Haeyoung] The effective tax rate for 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. While the ruling Democratic Party strongly opposes the government's plan to lower the top corporate tax rate, calling it a 'super-rich tax cut,' critics argue that the higher tax rate compared to advanced countries undermines corporate competitiveness and triggers overseas relocation. There is also analysis that the reduction in corporate tax will lead to increased investment, production, and employment, and that small shareholders investing in domestic companies will benefit in the form of dividends.

Large Corporations' Effective Tax Rate: Korea > UK, US, Japan

On the 13th, the Ministry of Economy and Finance released a press reference stating, "The effective tax rate for all companies in 2021, including foreign paid taxes, was 18.8%, and for large corporations, it was even higher at 21.9%," explaining 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, South Korea's effective corporate tax rate was 21.4% in 2019, higher than the United States (14.8%), Japan (18.7%), and the United Kingdom (19.8%). Some claim that South Korea's effective corporate tax rate is 17.5%, but the Ministry of Economy and Finance explains that this figure excludes foreign paid taxes for all companies and thus does not reflect the actual tax burden on corporations.

The Ministry stated, "It is appropriate to calculate the actual corporate tax burden based on the total tax burden, including corporate taxes paid locally overseas," and added, "The fundamental purpose of this corporate tax reform plan is to revise the corporate tax structure to align with global standards."

In fact, 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 (21.2%) and ranks seventh highest among the 38 OECD countries. Among OECD member countries, 24 countries including the United States apply a single tax rate system, while 11 countries including Australia apply a two-tier system. As a result, South Korea's tax competitiveness has dropped 11 ranks since the introduction of the 25% corporate tax bracket in 2018, and particularly in the corporate tax area, it has fallen 12 ranks to 39th place, according to the Ministry of Economy and Finance.

Raising Corporate Tax Reduces Foreign Investment in Korea... Domestic Companies Relocate Overseas

The Ministry of Economy and Finance also emphasizes the need to lower corporate taxes, citing that domestic investment decreased and overseas investment increased due to corporate tax hikes under the Moon Jae-in administration. According to the Ministry, foreign direct investment in domestic manufacturing dropped from $10.05 billion in 2018, when the corporate tax rate was raised from 22% to 25%, to $8.22 billion in 2019, $5.97 billion in 2020, and $5 billion in 2021. Meanwhile, domestic manufacturing investment overseas nearly doubled from $8.78 billion in 2016 to $18.16 billion in 2021.

The Ministry stated, "Foreign companies consider corporate and income taxes first when establishing headquarters in a specific country," and added, "After the corporate tax rate increase in 2018, foreign companies' domestic investment decreased while the overseas relocation of Korean companies accelerated." It further noted, "Recently, a global trend of companies moving away from China has emerged, but due to Korea's higher and more complex corporate tax rate system compared to competing countries, we are at a disadvantage in attracting companies," emphasizing, "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."

[Image source=Yonhap News]

The Era of Small Investors... Lower Corporate Tax Benefits Minority Shareholders

The government’s position is that the benefits of lowering corporate taxes extend not only to large corporations but also to small and medium-sized suppliers, employees, and shareholders through expanded investment. For example, in Samsung Electronics, the largest domestic company, the number of common small shareholders was only 140,000 in 2017 when the top corporate tax rate was raised from 22% to 25%, but now it has reached 5.5 million. With one in ten Koreans investing in the largest domestic company, critics argue that the opposition party's approach and logic, which criticize corporate tax cuts for large corporations as tax breaks for the wealthy, do not align with reality. On the same day, Joo Ho-young, floor leader of the People Power Party, emphasized, "If corporate tax decreases, the profits go to the majority of shareholders, small investors, and employees who hold corporate stocks," adding, "The portion going to one or two chaebol (conglomerate) heads is extremely minimal."

The Ministry of Economy and Finance stressed, "The primary suppliers of major domestic large corporations number from dozens to thousands depending on the industry, such as 1,300 for semiconductor Company A and about 740 for five completed car companies," and added, "If investment expands due to corporate tax cuts, it will benefit small and medium suppliers in materials, parts, and equipment, as well as shareholders and employees, and the government will also benefit from increased tax revenue."

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