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Will gov't push for increased corporate tax be successful?
First Vice Minister of Economy and Finance Kim Yong-beom, third from right, speaks at the Korea Chamber of Commerce and Industry (KCCI) in Seoul Oct. 29.
By Lee Kyung-min
By Lee Kyung-min
The government's move to increase tax on corporate income and financial investment gains will undergo major scrutiny during parliamentary committees this week, sources said Sunday.
Drawing the most attention is whether the government will be able to push ahead with a 14 percent tax on corporate income preserved in the form of reserves, set to take effect Jan.1 2021, about five months after the tax code revision was announced in July.
Affected are about 250,000, non-listed businesses, 80 percent of whose shares are held by firm owners, their families or individuals whose financial interests are closely tied to owners. They account for 31 percent of the total, and 49.3 percent of small- and medium-sized enterprises (SMEs).
They criticize the measure, since failure to keep a certain amount of reserves will pose a major threat to corporate financial soundness, because businesses will be under greater pressure to repay debt following a spike in their risk-based capital ratio, a major red flag for lenders.
“Only with corporate reserves are we able to borrow money from banks and maintain our credit ratings, not to mention a higher chance of winning government contracts,” Kang Seung-koo, head of an association representing some 7,000 small tech firms told a press conference at the Korea Federation of SMEs in Yeouido, Seoul, Oct 27.
Yet the Ministry of Economy and Finance said higher tax was justified because it was only for firms making what the government considers “excessive income,” defined as the amount of corporate profit reserved that is greater than 50 percent of its net income or an amount greater than 10 percent of the owner's equity capital in the firm.
The ministry maintains that the revision is needed to identify tax dodgers that set up paper companies knowing that their dividend or rental income subject to individual income tax at a rate of between 6 percent and 42 percent can be significantly reduced to a corporate tax with a rate of between 10 percent and 25 percent.
First Vice Minister of Economy and Finance Kim Yong-beom said at the meeting at the Korea Chamber of Commerce and Industry (KCCI) in Seoul Oct. 29 that the revision would not hurt firms that spent corporate funds on hiring, repayment of debt and research and development (R&D) among other investments.
“Law-abiding, job-creating corporate activities of tax-paying firms will not be affected,” Kim said during the meeting.
The revision, he added, would only affect those making income from dividends, interests and rent as well as transactions of real estate, shares and government-issued or corporate bonds, all of which the government deemed “passive income.”
For firms whose passive income was less than half of net income, the government would recognize net income spent for hiring, repayment of debt and R&D as deductibles, exempt from the 14 percent tax for the next two years. Also to be exempt are venture firms, whose corporate activities and spending can be clearly distinguished from tax-dodging firms.
For larger firms with more than 50 billion won in equity capital or 10 trillion ($8.8 billion) won in asset total, a 20 percent tax will be imposed on the remaining amount of 70 percent of their net income not spent for hiring, R&D, or other investment ― the activities that the government deems bolster “mutual growth.”
For example, a firm that had 10 billion won in net income but spent only 3 billion won for “mutual growth,” will pay 800 million won, 20 percent of 4 billion won ―― the difference between 7 billion won that should have been spent and 3 billion won that was actually spent.
The tax rate of 20 percent was increased from 10 percent in 2018, about a year after President Moon Jae-in took office in May 2017.
Seoul National University economist Kim So-young said the rapid corporate tax hike would become “unbearable.”
Corporate profit has largely tanked due to the COVID-19 pandemic, and forcing firms to spend more instead of putting it aside as reserves is extremely short-sighted, in his view.
“Businesses make investments after a thorough review of long-term prospect of corporate growth and possible risks entailed by a variety of uncertainties such as the pandemic among many other unforeseeable factors,” he said. “The government is forcing businesses to take risks without offering anything in return to bolster preparedness.”