Lawmakers trim job-creation break

The government is pushing for increased tax revenue from conglomerates by reducing the exemption for investments that have no effect on job creation.

The Ministry of Strategy and Finance said yesterday, conglomerates will get 1 percentage point less in tax exemptions for investments that have no effect on employment starting next year. The decision was made past midnight Thursday when the ruling and opposition parties were bickering over passage of the $17.3 billion supplemental budget.

It was agreed upon by lawmakers as part of measures to increase fiscal soundness, while earmarking the additional revenue for extra budget.

The agreement is expected to be written into legislation and passed in June.

Under current law, conglomerates operating in Seoul metropolitan areas receive a 3 percent tax exemption when they make investments aimed at increasing jobs and 2 percent exemptions for costs of maintaining current employment. In total, large businesses have been getting 5 percent tax exemptions. Those operating in other provincial areas are eligible for 3 percent exemptions for both maintaining and increasing their employment.

If the law is revised, they will lose 1 percentage point off the current exemption percentages. Those in Seoul metropolitan areas will get 4 percent in total exemptions, while those in non-Seoul areas will get 5 percent off.

The Finance Ministry decided to halve the 2 percent exemption, because there is no reason for conglomerates to receive the benefit when they create no jobs. Large businesses have been enjoying the exemption even though some of the investments didn’t add jobs. About 90,000 large businesses are expected to be affected by the revision. The ministry estimates that lowering the exemption will bring in 20 billion won ($18.2 million) in tax revenue.

Some critics say the measure is intended simply to raise taxes on conglomerates.

“The government’s move is considered a measure to increase taxes on large businesses,” said Hong Sung-il, an official at the Federation of Korean Industries (FKI), the largest business lobby in the country. “Companies will have to cut back on employment-related investments as much as the tax exemption is reduced.”

An estimated 1.8 trillion won is planned to be invested by businesses this year, according to the FKI.

“It is unfortunate that the government measure lacks consistency considering that the president said only a few days ago that the government will provide tax incentives for companies,” Hong said. The FKI official said there needs to be more discussions with the business community before the government announces such measures.

But the government regards the action as aligned with its plan to reduce unnecessary tax exemptions.

“There is a need to downsize tax exemptions for such investments that don’t create jobs, since some conglomerates abuse the law in order to receive more tax exemptions,” said a ministry official.

For small businesses, the government will keep the current 4 percent exemption for maintaining workforces and 3 percent for increasing them. About 390,000 businesses are in this category.

By Song Su-hyun [ssh@joongang.co.kr]