[Evaluation of Yoon Administration's Economic Policy] Generous Scores from Business Community for 'Resolving Double Taxation on Dividends'... "Leading Capital Reshoring"

The business community identified key policy supports of the Yoon Suk-yeol administration’s economic policies, such as 'corporate tax reduction' and 'adjustment of double taxation on dividends from overseas subsidiaries,' as measures that helped boost corporate vitality. Despite a large fiscal revenue shortfall, the government was praised for its unwavering support efforts to promote private-led economic growth. Unlike the previous administration’s state-led economic growth through massive fiscal spending, the shift to a market-centered paradigm was positively evaluated for enhancing predictability in corporate management.

According to major economic organizations such as the Korea Chamber of Commerce and Industry and the Federation of Korean Industries on the 20th, the business sector regarded the government’s resolution of double taxation on dividends from overseas subsidiaries as a policy with substantial benefits. The issue of double taxation on overseas subsidiary dividends had long been criticized as an unreasonable policy from the corporate perspective. Previously, foreign tax credits were applied to overseas subsidiary dividend taxation, but since last year, the method changed to non-inclusion in taxable income. Non-inclusion means that the income is not included in taxable income calculation under the Corporate Tax Act. As a result, the method shifted from deducting tax amounts to excluding the income from taxable income from the outset.

This change influenced the acceleration of capital reshoring, bringing large amounts of corporate overseas retained earnings back to Korea. According to Samsung Electronics’ semiannual report, dividends from Samsung Electronics’ overseas subsidiaries to the headquarters (domestic corporation) amounted to KRW 21.8457 trillion in the first half of this year. This figure is 158 times higher than the dividend amount in the first half of last year (KRW 1.378 billion). Profits retained by overseas subsidiaries such as Samsung Electronics’ U.S. and Vietnam subsidiaries were repatriated in the form of dividends. This also contributed to the government’s current account surplus. As of July, dividend income recorded a surplus of USD 2.56 billion, contributing to three consecutive months of current account surpluses.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is delivering a speech at the 'Emergency Economic Ministers' Meeting and Export Investment Measures Meeting' held on the 18th at the Government Seoul Office in Jongno-gu, Seoul. Photo by Jo Yong-jun jun21@

원본보기 아이콘

The reduction of the top corporate tax rate from 25% to 24%, a 1 percentage point decrease, also received positive evaluations. Last year, the government announced plans to lower the top corporate tax rate to a maximum of 22% and simplify the four-tier tax bracket system to two or three tiers. However, during parliamentary discussions, an agreement was reached to reduce the tax rate by 1 percentage point per bracket. Corporate tax reduction is considered an incentive to increase corporate investment. Despite concerns about reduced corporate tax revenue, strengthening corporate investment is key to creating a virtuous economic cycle through new job creation and domestic demand stimulation. For the same reason, the government expanded tax credit benefits for investments in national strategic technologies such as semiconductors, displays, and bio industries to up to 35% this year. Lee Su-won, head of the Corporate Policy Team at the Korea Chamber of Commerce and Industry, said, "The government needs to further strengthen corporate vitality by expanding the reduction of the maximum corporate tax rate and extending the period for investment tax credits in strategic industries."

The expansion of foreign skilled labor is also expected to ease labor shortages in sectors such as shipbuilding. According to the 'Monthly Immigration and Foreign Policy Statistics Report for July 2023' released by the Ministry of Justice, the number of visitors entering under the Employment Permit System (H-2) shrank from 250,655 in 2019 to 29,480 last year. Accordingly, the government is considering increasing the number of foreign skilled workers (E-7-4) in the mid to long term. The plan is to raise the quota for converting foreign skilled workers from about 2,000 last year to 35,000 this year, enabling companies to replenish skilled labor.

However, improvements are needed in labor reform and real estate policies. In particular, real estate policy is a concern as it is linked to rising household debt. Since new real estate supply is not increasing rapidly, steep housing price rises are expected, and despite the current high-interest-rate environment, households are increasing debt through mortgage loans to purchase homes due to these concerns. Prolonged high interest rates could lead to economic contraction and an increase in loan delinquencies, which may negatively impact domestic demand.

원본보기 아이콘

Professor Seok Byung-hoon of Ewha Womans University’s Department of Economics said, "To supply new apartments, regulations on redevelopment and reconstruction need to be eased, but one of the most representative regulations, the reconstruction excess profit recovery system, requires bipartisan agreement, so time is needed." He added, "Another constraint is the need for bold new measures to curb expectations of rising housing prices, such as realistically implementing the price ceiling system for pre-sale prices, and new housing supply policies."

Securing labor market flexibility is also a challenge. Labor reform is essential as a pillar of economic policy reform. Professor Seok explained, "Labor market rigidity makes it difficult to create jobs for young people because it is not easy to dismiss low performers." From the corporate perspective, government reforms such as enhancing union accounting transparency to secure labor market flexibility are urgently needed.

There is also a call for the government to establish a concrete exit strategy balancing fiscal soundness and economic recovery. Jo Kyung-yeop, senior researcher at the Korea Economic Research Institute, said, "During the global pandemic, countries worldwide expanded fiscal spending by injecting large amounts of funds, but now an exit strategy is needed." He added, "The challenge is to consider that raising interest rates to resolve this may slow the pace of economic recovery."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.