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Corporate taxes hit conglomerates where it hurts

Reduced R&D benefits may have worrying effects on investment

Sept 29,2018
Corporate tax burdens are rising for local businesses, and experts are worrying that the high tax rates could hamper the global competitiveness of Korean companies.

Samsung Electronics earned 31.58 trillion won ($28.45 billion) in the first half of this year in net profit before tax. From that, it paid 8.85 trillion won worth in corporate tax, which is about 28 percent of its before-tax profits. In the first half of last year, corporate tax took up roughly 23.8 percent of Samsung’s before-tax profits.

U.S. tech giant Apple, on the other hand, paid the equivalent of 4.57 trillion won in corporate tax after earning roughly 32.78 trillion won in the first half of this year. This means Apple paid only half the corporate tax of what Samsung paid after earning similar amount of profits. In the first half of last year, the amount of corporate tax Apple paid accounted for roughly 24 percent of its pretax profits. In the early half of his year, however, the ratio fell to 14 percent.

Samsung is not the only local company that saw an increase in the ratio of corporate tax to their pretax profits. Korea’s largest automaker Hyundai Motor and its largest steelmaker Posco also paid more corporate taxes compared to the previous year.

The main change is the corporate tax rate, which increased from 22 percent to 25 percent for companies with a taxable base of over 300 billion won last year, according to the Korea Economic Research Institute (KERI), a local think tank.

The institute said corporate tax paid by 450 listed companies that recorded surplus in pretax profits in the first half of this year amounted to 16.16 trillion won, a 49.3 percent increase over the first half of 2017. During the same period, operating profit increased by 27.7 percent.

The amount of corporate tax collected is far larger than what the Ministry of Economy and Finance had predicted. At the beginning of the year, the ministry projected that raising corporate tax rates would increase the amount of tax revenue by 2.3 trillion won this year. But the corporate tax collected from the 450 companies already increased by 5.3 trillion won over all of 2017.

“Changes in corporate tax policy has caused local companies to pay more corporate tax compared to global companies in competition,” said Choo Kwang-ho, a researcher for KERI. “To enable domestic firms to make a larger investment in business, it is necessary to ease the burden from taxes.”

Korean businesses are also concerned about the government’s move to reduce tax benefits to companies that are investing in research and development. With technology becoming a major driver for growth, countries like China, Japan and France are increasing tax benefits for firms that focus on R&D. The Korean government, however, is reducing benefits to avoid accusations that the government is giving special favors to conglomerates.

In 2013, the government deducted tax rates from three to six percent from firm’s R&D costs. But this year, government is deducting taxes by only up to 2 percent on R&D investments. Industry insiders say that such reduction in support for R&D investment could negatively impact the Korean economy as a whole by reducing employment or business opportunities.

“It is a short-sighted idea to reduce tax benefits on R&D investment just because the investment is made by conglomerates,” said Ahn Chang-nam, a taxation and finance professor at Kangnam University. “Developing technologies that will drive Korea’s growth in the long run can only be done through large R&D investments by conglomerates.”

Ahn added that while increasing corporate tax collection could happen, the government should strengthen support for corporate R&D investments.

“R&D investment is a lifeline for innovation-led growth,” said Yang Joon-mo, an economics professor at Yonsei University. “Though there are risks, the government should actively support R&D, considering the massive impact that investment could have on the Korean economy.”


BY KIM DO-NYUN [kim.jeehee@joongang.co.kr]


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