Korea’s high tax, frequent changes in taxation hinder business development

2021.11.25 09:24:36 | 2021.11.25 09:25:45

[Graphics by Song Ji-yoon]이미지 확대

[Graphics by Song Ji-yoon]

Six out of 10 large companies operating in South Korea believe that the country’s unfavorable tax environment with high corporate tax rate and frequent changes in taxation is a major obstacle to their business operation, a survey conducted by a think tank here showed Wednesday.

Some 64.5 percent of accounting and tax managers at Korea’s top 100 companies said in the survey commissioned by Maeil Business Newspaper and carried out by the Korea Economic Research Institute (KERI) that the country’s tax regime is not generous compared with other countries. The survey was conducted from Oct. 26 to Nov. 10.

Some 62 percent of the respondents said that their companies have experienced a negative impact on business activities due to frequent tax law changes in the past five years. Among those who complained of the tax burden, 38.7 percent said the biggest challenge to their business is the growing tax burden driven by the steady increase in the corporate tax rate and the reduction of the deduction limit for losses carried forward from the previous year.

“Our business suffered a lot of damage due to the pandemic, but the tax credit continued to be reduced,” said an official from a company in the survey.

The Korean government lowered the tax deduction rate for R&D investment for large companies from 3-6 percent in 2013 to 0-2 percent last year for reasons such as securing tax revenue. The deduction limit for losses carried forward, which is designed to provide deductions for business losses, has been cut from 100 percent in 2015 to 60 percent in 2019, and the maximum corporate tax rate has risen by 3 percentage points from 22 percent in 2018 to 25 percent.

While companies are feeling the pinch from the growing tax burden, this year`s government tax revenue from corporate tax is expected to surge by 18 percent on year to 65.5 trillion won, according to the finance ministry’s projection.

The high tax burdens are taking a toll on capex spending by the corporate sector, which is an economic growth engine, the respondents said. According to the Bank of Korea, the growth rate of facility investment, which was 12.3 percent in the first half of this year, is expected to plunge to 5.5 percent in the second half and then further drop to 2.1 percent next year. The rate of decline is steeper, with the facility investment growth rate falling from 12.7 percent in the second quarter of this year to 6.0 percent in the third quarter.

"The recent surge in raw material costs in the global market and the rapid deterioration of corporate profitability will cause facility investment to fall further next year,” said Lee Sang-ho, head of the economic policy team at the KERI. “The government should step up investment incentives aggressively and broaden tax credits before corporate investment freezes out.”

A 1 percentage point drop in the effective corporate tax rate would have the effect of increasing facility investment by 6.3 percent, the KERI said.

By Kim Jung-hwan and Minu Kim

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]