CONTRIBUTION How can tax policy help Korea become hub for foreign businesses?

Robert Browell, tax partner at Samil PwC / Courtesy of Samil PwC

By Robert Browell

Tax policy is an important tool for any government to help achieve its economic objectives. Successive Korean governments have announced that one of their key economic policy aims is to attract foreign investment and make Korea a more attractive location for companies to use as a regional business hub for East Asia. So just how can tax policy help attract foreign investment and promote Korea as a hub location?

Tax reform package

President Yoon Suk-yeol's first tax reform package since taking office earlier in the year proposes some important measures highlighting the government's intention to make Korea more attractive for businesses. Although some of the details of how the new tax laws will work are still to be released, the key headlines that will benefit companies include the reduction in the top rate of corporate income tax from 25 percent to 22 percent, the introduction of a partial tax exemption for overseas dividends received and a simplification of how domestic source dividends are taxed. The announcement that the government is proposing not to extend the additional tax on excess corporate earnings when it sunsets at the end of 2022 is further good news for companies.

How does this compare to other countries?

If passed by the National Assembly later in the year this package of reforms will go some way towards increasing the attractiveness of Korea on the international landscape. But just how does Korea compare to other countries globally including those in Asia?

Over the past several decades, corporate tax rates globally have been declining. The average corporate tax rate of OECD member countries was 32 percent in 2000, reduced to 23 percent by 2021. This trend is perhaps most notable in the U.S. where the top federal rate of corporate tax was cut from 35 percent to 21 percent in 2017 as part of U.S. tax reforms to modernize U.S. international tax rules.

Other key economies have made similar reductions including the UK where rates were cut to 19 percent and France where rates are planned to be cut to 25 percent. While the trend has been a reduction in rates, there are more recent proposals in certain countries, including the U.S., to increase rates as governments face budgetary difficulties arising from the unprecedented levels of support given during the COVID-19 pandemic.

The headline tax rate is, however, just one factor of overall corporate tax policy. Another key part of the modernization of the U.S.' tax rules was to move towards a more territorial tax system where profits earned overseas are generally not subject to U.S. tax, although certain foreign earnings can still be taxed. This was, in part, achieved by introducing an exemption from tax for overseas dividends received. Other countries such as Germany, the UK and France have similar full or partial dividend exemption regimes. These countries also go further and provide a full or partial exemption from capital gains tax for gains realized on the disposal of shares in qualifying subsidiary companies.

The proposed reduction in Korea's top rate of corporate tax to 22 percent will therefore make the rate more comparable to the OECD average of other global economies. The introduction of a partial dividend exemption for overseas dividends will also move Korea towards a more territorial tax regime as seen in other key countries.

When considering the attractiveness of Korea in Asia from a tax perspective, comparisons will also of course be made with Singapore and Hong Kong. Both countries provide low corporate tax rates of around 17 percent and provide for exemptions from tax for foreign profits realized through the receipt of overseas dividends and capital gains on a sale of shares in qualifying subsidiaries.

So what can be improved in Korea?

While the reduction in rates and introduction of a partial dividend exemption goes some way to make Korea more comparable to other key economies, other countries offer a full dividend exemption and provide exemptions from capital gains tax on the disposals of shares in qualifying subsidiaries making them more attractive hub locations from a tax perspective. The government could therefore consider introducing similar exemptions to make Korea more attractive.

The headline tax rate and treatment of dividends and capital gains are, however, just several elements of an overall tax policy framework that makes a country an attractive location for companies to invest in. Companies in Korea often find it difficult to do business because of uncertainties in the application of the tax law on international transactions and the general tax audit environment where companies are often faced with having to pay significant unexpected tax assessments. Providing companies with greater certainty of tax treatment on cross-border transactions through more comprehensive guidance issued by the tax authority and improving the advanced tax ruling system would help overcome these challenges.

Overall

The new government's tax reform proposals certainly go some way toward making Korea's tax regime more attractive to foreign businesses. It is also evident that the government is listening to the concerns and recommendations of businesses to try and improve the tax environment in Korea. More though, can be done to truly put Korea on a more equal footing with other countries in Asia.

Tax is also, of course, only one factor that is considered by foreign businesses when deciding where to invest in a region. Other important factors include the overall regulatory environment including labor and foreign exchange regulations, workforce quality and the general cost and ease of doing business. All these factors taken together must therefore be attractive to businesses for them to commit to investing in Korea and using the country as a hub location.

Robert Browell is a tax partner at Samil PricewaterhouseCoopers and Chairperson of the Taxation Forum at the European Chamber of Commerce (ECCK). Any opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of Samil PricewaterhouseCoopers or the ECCK.