hankyoreh

Corporations making over US$460 million (500 billion won) in profits saw their effective corporate tax rate drop by 4.35 percentage points over the past five years, recent data show.

Critics are calling for a higher corporate tax rate and an improved tax structure to combat the increasingly severe problem of regressive taxation, with large corporations paying a lower effective tax rate (taxes as a percentage of profits) than smaller businesses, due to various exemptions and other benefits. Demands for a higher corporate tax rate are especially high amid an ongoing tax hike equity debate as a result of the higher income taxes paid in the recent 2014 filing.

Analysis by the Hankyoreh on Jan. 26 of national tax statistical yearbooks for 2010 to 2014 showed a 16.37% effective tax rate on taxable income in 2013 for the highest bracket of businesses - those making 500 billion won (US$463 million) or more - which includes most chaebol and large corporations. The rate was down 4.35 percentage points from 20.72% in 2009. After a steep drop to 16.91% in 2010, the rate rose slightly to 17.03% in 2011 and 17.13% in 2012 before falling below 17% again in 2013.

Regressive taxation was also increasingly evident, with less profitable small businesses paying a higher effective tax rate While the effective tax rate for businesses making over 500 billion won was 16.37% in 2013, it stood at 18.67% for those making between 100 billion and 500 billion won (US$93 million-463 million), 18.6% for earnings of 50 billion to 100 billion won (US$46 million-93 million), 17.62% for earnings of 20 billion to 50 billion won (US$19 million-46 million), and 16.44% for earnings of 10 billion to 20 billion won (US$9 million-19 million). The numbers mean chaebol earning over 500 billion won are shouldering a lower tax burden relative to their tax-paying abilities than businesses making 10 billion to 20 billion won.

The problems of declining effective tax rates and regressive taxation stem largely from the corporate tax rate being lowered by 3% and various tax benefits established under the administration of former President Lee Myung-bak. The Lee administration (2008-13) lowered the tax rate for the top corporate tax bracket from 25% in 22% in 2008 as a measure intended to stimulate the economy.

Another issue is the fact that most of the tax benefits apply mainly to large businesses. According to recent data from the Ministry of Strategy and Finance, corporate tax benefits in 2013 amounted to 6.7 trillion won (US$6.2 billion), not including a foreign taxed income deduction to prevent duplicate taxation. Thirty-nine percent of the benefits went to companies ranking in South Korea’s top ten. Tax benefits for increased research and development, facility investment, and employment are also going mainly to the large businesses that can afford them.

“If economic conditions are too harsh for an across-the-board corporate tax hike, then the large businesses that have the means should at least pay more in taxes so that corporate income turns into household income and stimulates consumption and domestic demand, opening up the blockages so the economy can thrive again,” said Kang Byung-goo, a professor of economics at Inha University.

For now, the administration has no plans to consider a corporate tax hike, which it says would “throw cold water on the economy.”

“The minimum tax rate for large corporations was raised from 14% to 16% in 2012, and again to 17% in 2013,” said a source with the Ministry of Strategy and Finance. “We’re also improving the tax exemption and benefit system, for example with our adjustments to the job creation investment tax credit.”

“The effective corporate tax rate is expected to go up a bit with the 2014 filing,” the source added. “We just have to wait a little while to see the effects.”

By Kim So-youn and Kim Kyung-rok, staff reporters

Please direct questions or comments to [english@hani.co.kr]