Gov't plan to scrap double taxation on businesses raises concerns

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho speaks during a meeting with the press corps at the Government Complex in Sejong, Tuesday. A recent feasibility study carried out by an outside research group on behalf of the ministry showed that tax revenue will decrease by 780 billion won ($629.8 million) per year if Korea scraps its policy taxing domestic corporations on all taxable income from their domestic and foreign operations. Yonhap

By Yi Whan-woo

The government is considering waiving taxes on the income that domestic corporations earn through their overseas businesses, in line with President Yoon Suk-yeol's vision to create a market-driven economy through regulatory reform.

However, the plan is raising concerns over a sharp decline in tax revenues, estimated to be up to 780 billion won ($629.8 million) per year, amid the snowballing national debt.

The plan is also casting doubt over whether it will help the Korean businesses find their own country less burdensome in terms of taxation and accordingly, induce massive corporate investments using offshore cash reserves.

Korean companies currently pay taxes on all taxable income from their domestic and foreign operations, whereas tax liabilities of foreign companies are limited to Korea-sourced income.

Regarding taxable income outside of Korea, domestic companies are taxed on the amount remaining after deducting the amount of corporate income tax that they paid to the host country.

Korean companies are most likely to be subject to double taxation, considering that the nation's maximum corporate income tax rate ― 25 percent in 2021 ― is higher than that of some other countries.

If the government waives taxes on domestic corporations' overseas income, a recent feasibility study carried out by an outside research group on behalf of the Ministry of Economy and Finance showed that the government's overall tax revenue will decrease by up to 780 billion won.

The study referred to a case in the United Kingdom in 2009 in which a similar tax policy was implemented.

Citing another case in Japan, the study hinted that the possibility is slim for offshore cash reserves to be used for domestic investments.

Japan scrapped the double taxation policy in 2009. The offshore cash reserves of Japanese firms fell slightly that year, but have been rising since then. For instance, offshore cash reserves accounted for 0.5 percent of the national GDP in the early 2000s, but the ratio rose to 1.25 percent in 2016.

“This is because keeping the assets in U.S. dollars outside the country brought higher benefits than tax incentives offered by the government,” according to the report.

Nevertheless, the Ministry of Economy and Finance is gearing up to propose a tax overhaul bill that will include the disputed double taxation policy by the end of July at the latest.

According to sources familiar with the matter, the waiving of double taxation can be seen as a “rational move to meet international standards,” given the fact that Korea is among only five OECD members that adheres to such a policy. The other four are Chile, Ireland, Israel and Mexico.

Nevertheless, an official of the main opposition Democratic Party of Korea (DPK) said that the government's plan is “likely to meet fierce opposition from the party.” The official added, “Its effect remains certain at this point.”

A member of the Citizens' Coalition for Economic Justice told The Korea Times, “Revising and improving the double taxation, rather than scrapping the entire policy, can be a possible choice on the path to regulatory reform.”

Among the OECD member nations, France has the highest corporate tax rate of 28.4 percent, followed by Japan at 23.2 percent, the United States at 21 percent, the U.K. at 19 percent and Germany at 15.8 percent.