Lawmaker says Korea’s foreign tax credit is too generous

Korean companies have been raking in hefty revenue from foreign markets in recent years, and the amount of taxes they have paid to foreign governments has increased accordingly. But along with that, the foreign tax credit that companies receive from the Korean government is also going up, and one opposition lawmaker argues the deductions they’re receiving are unfair and undermine Korea’s tax revenue.

In 2015, the Korean government’s foreign tax credit for local companies grew much faster than their income from overseas, according to a report that Democratic Party Rep. Kim Jong-min released Monday based on data from the National Tax Service.

Korean companies made 238 trillion won ($209.3 billion) from abroad as of 2015, a 126 percent increase from four years earlier. As a result, the amount of taxes that Korean companies paid to foreign governments surged 186 percent to 4.69 trillion won. More than half of that amount, 3.95 trillion won, was eligible for a foreign tax credit from the Korean government, an increase of 147 percent from 2011.

The rise was most prominent for conglomerates, which saw their overseas revenue increase 136 percent, while small and medium-sized enterprises saw their tax credit shrink because of lower revenue from abroad.

As a result, the amount of taxes that conglomerates paid to foreign governments was over 4.58 trillion won as of 2015, up 206 percent from 2011. Out of that amount, more than 84 percent, or 3.88 trillion won, was subject to a tax credit by the Korean government.

By country, Korean companies paid the most taxes to China, a total of 6.51 trillion won between 2011 and 2015. The United States came in second with 1.74 trillion won, followed by Vietnam with 951.5 billion won.

The lawmaker who released the report expressed concern that the growing foreign tax credit from the Korean government is chipping away at the country’s “tax revenue foundation,” especially at a time when government spending demands, including for welfare, have been rising.

“There is a need to reform the system, such as applying a limit to the maximum tax credit claims that can be made,” Kim said.

He argued that the Korean government should raise corporate taxes, citing a finding that most foreign governments levy a corporate tax between 20 and 30 percent, relatively higher than the one applied by the Korean government.

The Ministry of Strategy and Finance rebutted Kim’s report, arguing that the foreign tax credit is an international standard designed to prevent double taxation while giving foreign governments priority in levying taxes on revenue generated from their respective market.

“It is an internationally recognized and recommended system and not a tax deduction system particularly provided to businesses,” said an official at the Ministry of Strategy and Finance.

The government argued that the increase in the amount subject to the tax credit was largely because of growth in direct overseas investment by Korean companies. It said investment has expanded 10 percent to $27.2 billion in 2015 from $24.6 billion in 2010.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]