Tax, tariff threats push Korean firms to consider overseas supply chains

President Lee Jae Myung listens to Samsung Electronics Executive Chairman Lee Jae-yong during a meeting with leaders of Korea’s major conglomerates at the presidential office in Seoul, June 13. Joint Press Corps.

Korean firms, many of which are already grappling with U.S. tariff risks, are likely to face increasing pressure to relocate their supply chains abroad in an effort to avoid mounting tax burdens and other business-unfriendly regulations, experts and industry officials said Monday.

Local conglomerates — mostly from the manufacturing sector — face growing risks following the inauguration of President Lee Jae Myung in June. The pro-labor Lee administration is seeking to raise the maximum corporate tax rate to 25 percent from 24 percent. The figure is much higher than the OECD average of 21.5 percent.

The recent passage of a revision to the Commercial Act is also feared to weaken the management rights of many companies at a critical time, when they need to make bold and agile decisions amid unresolved tariff risks from the United States.

Experts warn that major firms may be forced to consider relocating their supply chains overseas unless the government eases its strict business regulatory stance.

“There is a growing need for local firms to relocate their businesses abroad to deal with the planned corporate tax hike and the U.S. tariff risk,” said Lee Jeong-hwan, professor of economics and finance at Hanyang University.

In addition to the planned corporate tax hike, the U.S. is threatening to impose a 25 percent "reciprocal" tariff on Korean exports to the U.S. unless Seoul and Washington reach an agreement in ongoing trade negotiations — a double threat that is putting mounting pressure on Korean companies.

Some business relocation seems inevitable, as the government maintains its basic stance of limiting corporate management rights by introducing relevant regulations, according to the professor.

“The government should never forget that economic growth is driven by companies. Authorities are advised to come up with measures to offer more subsidies to companies and ease unnecessary regulations getting in the way of their growth," Lee said.

Leaders from Korea's top four conglomerates attend a meeting with President Lee Jae Myung at the presidential office in Seoul, June 13. From left are Samsung Electronics Executive Chairman Lee Jae-yong, Hyundai Motor Group Executive Chair Chung Euisun, SK Group Chairman Chey Tae-won, then-Industry Minister Ahn Duk-geun and LG Group Chairman Koo Kwang-mo. Joint Press Corps

Other experts also took issue with the heavy regulatory pressure on companies.

“My view is that they are highly likely to consider relocating their supply chains abroad due to mounting regulatory risks,” said Choi June-sun, professor emeritus at Sungkyunkwan University Law School and an expert in corporate law.

The current corporate tax rate is still at a comparatively high level compared to the rest of the world, but the government is moving to increase it further at a time when a number of marginal firms are still teetering on the verge of collapse, according to Choi.

According to the latest revision to the Commercial Act, any controlling shareholders from companies with total assets over 2 trillion won ($1.45 billion) will have limited rights in appointing members to their audit committee.

“The largest shareholders are de facto owners from any companies, but they can exercise fewer management rights under the regulation,” Choi said.

“Big companies will become more vulnerable to any attacks for managerial rights from overseas funds, which violates the rights of the largest shareholders and clouds the outlook for their sustainable growth.”

An official from the nation’s manufacturing industry also urged the government to build an environment where companies can create more jobs for young people and expand investments in the local economy.

“The pro-labor administration is pushing to raise the legal retirement age, which blocks corporate sentiment from creating new jobs for young employees,” the official said. “The government also encourages companies to widen investment, but few will be willing to do so here amid the increasing tax burden.”