Tax hikes on top companies, wealthy mooted

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Tax hikes on top companies, wealthy mooted

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Korea’s leading conglomerates including Samsung Electronics have been reporting good earnings - and their stock values have surged as a result.

Samsung Electronics has seen its market capitalization increase 31.6 percent as of Friday compared to the end of last year - to over 333 trillion won. That’s faster than the 23.5 percent the benchmark Kospi has risen during the same period.

But the go-go days for leading Korean companies could come to a screeching halt as politicians talk about raising corporate tax rates.

Democratic Party Chairwoman Choo Mi-ae and several top cabinet officials of the Moon Jae-in administration are pushing higher taxes on leading Korean businesses and the nation’s wealthiest people.

The ruling party chairwoman said this was an appropriate time to raise tax rates as the Moon government has strong public support and wants to spend more to create jobs.

Under the current tax code, a 22 percent tax rate is applied on the largest companies, defined as companies with 200 billion won or more in revenues. The ruling party is proposing to raise that to 25 percent. For the next tier - revenues of 20 billion won to 200 billion won - the rate would remain at 22 percent.

For income taxes, Korea’s wealthiest tax bracket is earnings of 500 million won or more. The current 40 percent tax rate would be raised to 42 percent.

If the Moon administration accepts the proposals, 116 companies from the top tax bracket will be affected.

The new income tax rate is expected to affect roughly 40,000 people.

According to the National Assembly Budget Office, Korea’s current corporate tax rate is still relatively low compared to OECD member countries and therefore has room to rise.

Korea ranks 17th out of 35 OECD countries when it comes to the maximum corporate tax rate.

The OECD average maximum tax rate on businesses is 22.7 percent. The highest rate is 35 percent in the United States followed by 33.3 percent in France. Japan’s maximum tax rate on businesses is 23.4 percent.

On the last day of a two-day fiscal strategy meeting attended by top government officials, politicians and market experts held at the Blue House, Moon said if there is a need to raise taxes, it would be limited to the nation’s wealthiest people and leading conglomerates.

“There will be no additional increase in taxation of those in the middle and lower income households and small and midsize companies,” Moon said.

Higher tax rates were suggested as a means of paying for the 178 trillion won in spending that was laid out in the Moon government’s grand five-year plan announced last week, which included an increase in welfare spending.

The government previously said it would fund that spending through normal tax collections and reductions in other government spending. The government stressed that its plan will reduce the burden on average Korean households by raising taxes. But there was skepticism about the plan’s feasibility.

Analysts speculated that the government would be forced to raise taxes by the middle or end of Moon’s term.

“It’s all been proven by the previous administration,” said Ju Won, senior analyst at Hyundai Research Institute. “By the end of the term, it is likely that the government will have to raise taxes in order for the administration to keep its promises.”

Will raising tax rates on the wealthiest and top conglomerates be effective?

The Finance Ministry estimated that when raising the corporate tax from the current 22 percent to 25 percent, it would be able to collect an additional 2.7 trillion won from 116 companies with annual revenue exceeding 200 billion won annually. When raising income taxes on people with annual incomes of over 500 million won from 40 percent to 42 percent, it would be able to collect an additional 1.8 trillion won.

That means under the Democratic Party plan, the government will be able to take in 3.8 trillion won in taxes annually.

The top 10 conglomerates by net profits will be paying most of the additional revenue.

Last year, those companies -- Samsung Electronics, Korea Electric Power Corporation, Hyundai Motor, Hyundai Mobis, SK Hynix, Korea Hydro & Nuclear Power, LG Chem, Kia Motors, Emart, SK Telecom -- paid 17.7 trillion won in corporate tax. That’s one third of the 52.1 trillion won that the government collected as corporate tax.

But a greater tax burden could prompt Korean companies to move plants overseas where labor costs are cheaper and corporate taxes lower.

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

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