Korea urged to slash corporate taxes

Higher taxes dampen firms' R&D investment

By Lee Kyung-min

Korea should lower corporate taxes to provide an impetus for the country's economic growth amid fast-deteriorating business conditions in the global market, experts said Friday.

They stressed that the government should promptly revise its tax policies to favor businesses here, noting that a drop in corporate profits leads to slower-than-expected growth of Asia's export-reliant fourth-largest economy.

Corporate taxes being much higher than the Organization for Economic Cooperation and Development (OECD) average is one of the key drawbacks for a country already beset by the drawn-out U.S.-China trade dispute among other global uncertainties. The OECD is a group of 36 economically well-off countries.

Lee Kyung-geun

“Korea is the odd one out,” Lee Kyung-geun, a senior tax attorney at Yulchon LLC said.

“Most economies ― both advanced and developing ― have lowered and will continue to lower the rate to help their firms gain a competitive edge in the global market. Korea is the only one going backwards.”

The chairman of the International Fiscal Association of Korea, a group of 10,000 international tax experts, said the government's job creation efforts would be severely undercut without a law revision to lower the current corporate tax that maxes out at 27.5 percent.

This is higher than the OECD average of 23.5 percent. In 2016, Korea's corporate rate of 24.2 percent was below the OECD average of 24.4 percent.

Korea is among nine countries that have increased the rate over the past decade, including Greece, Turkey, Chile and Latvia, mostly nations that are undergoing a slowdown.

The government in his view has to understand that companies are job creators and a combination of unfavorable businesses conditions is forcing companies out, having them seek more tax-friendly environments that are more conducive to profit generation.

Otherwise, it will be too late.

“A slew of policies that companies consider anti-business and labor-friendly continues to weigh on firms, for which labor cost reduction is always an option. If companies decide to shut down here and move somewhere overseas, the jobs lost here would mean major economic hardship for ordinary people. The government should understand this,” Lee said.

The Trump administration lowering the corporate tax rate to 21 percent from 35 percent in 2017 can be a sobering reminder of what would happen if the status quo continues.

The biggest change in U.S. tax policy in about three decades came after tech giants such as Google left the country in search of lower-tax jurisdictions, a move Lee sees could very well be replicated in Korea.

“Korea should learn from this and act fast,” the former economy and finance ministry senior official said, adding the country should look to Japan's drastic rate cut from 39.5 percent to 29.7 percent.

“Japan is experiencing a jobs boom as of late with some young Korean jobseekers headed there seeking employment. A case study could help show how the economy that experienced lost decades managed to take a turn for the better.”

Korea Economic Research Institute (KERI) economic policy team head Hong Sung-il

Opportunity wasted

High corporate taxes undermine efficient corporate management because what would otherwise be spent on research and development (R&D) is diverted to pay tax, according to another expert.

“The price of semiconductors for example will be the same in the global market, but Korean firms having to pay higher taxes means greater growth potential for their global competitors that have more money in hand ― due to lower taxes ― to spend on R&D and other investments,” said Korea Economic Research Institute (KERI) economic policy team head Hong Sung-il.

“Technological advancement and innovation requires long-term vision and planning, the success of which would mean nothing unless it is backed by a stable source of funding. The government needs to understand that money saved from tax cuts can and will be put to a more efficient, proper use to bolster corporate profits,” Hong said.

The finance ministry has no immediate plans to make any changes to the corporate tax rate, according to a senior ministry official.

“We do not have any plans to change the corporate tax rate,” he said.