South Korea Plans First Corporate-Tax Rise Since 1991

By Kwanwoo Jun Features Dow Jones Newswires

South Korea's left-leaning government is planning to raise taxes on wealthy individuals and large companies, the first increase in the country's corporate-tax rate since 1991, as President Moon Jae-in seeks to fund a massive expansion in public-sector hiring.

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The move by the three-month-old government bucks the prevailing global trend of falling corporate tax rates. Countries such as the U.S., France and the U.K. have either slashed or have considered lowering rates in recent years in a bid to boost competitiveness and business investment.

Mr. Moon, who took office in May, envisions a larger role for government in boosting household income and creating jobs, rather than his conservative predecessor's reliance on growth driven by large manufacturing exporters.

Mr. Moon's government estimates that fulfilling its policy agenda priorities will require an additional $160 billion in fiscal spending over the course of its five-year presidency.

For example, Mr. Moon has promised to create 810,000 public-sector jobs over that time span, including firefighters, policemen and social workers.

Mr. Moon's government has already passed a $10 billion supplementary budget and a 16% increase in the minimum wage, both of which are aimed at stimulating the economy.

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The Ministry of Strategy and Finance, which unveiled the newly revised tax bill on Wednesday, said the overhaul was focused on "redistributing income and expanding the tax-revenue base."

The ministry expects the tax-code revision, which includes tax breaks and higher levies on the wealthy, to generate additional revenue of about $5 billion a year.

Under the new tax code, individual rates will increase by 2 percentage points for the two highest tax brackets, to a maximum rate of 42% for those who earn about $444,000 or more a year. Rates for individuals who earn less than $270,000 will remain unchanged.

Corporate-tax rates, meantime, will rise by 3 percentage points to 25% for companies whose net profit tops about $180 million a year. Tax rates for businesses earning less will remain the same.

Samsung Electronics Co., which paid more than $2 billion in corporate tax last year, is all but certain to pay hundreds of millions of dollars in additional taxes under Mr. Moon's plan. The company declined to comment on the government's tax-revision bill.

Park Ju-gun, head of Seoul-based corporate-governance firm CEO Score, estimated Samsung's additional tax bill under the revised tax code at 300 billion won ($260 million) a year.

"For the business point of view, the corporate tax is an extra unwelcome cost," Mr. Park said.

The country's ceiling on corporate tax rates has been untouched since 2009, when the conservative government under then-President Lee Myung-bak lowered rates to 22% from 25% to help boost business investment and spur sluggish economic growth. The corporate tax rate hasn't gone up in a quarter-century.

The Moon government plans to send the new tax bill to the legislature next month for lawmakers' scrutiny. If approved, the law would take effect in 2018.

Passage isn't certain. Mr. Moon's ruling party holds 120 seats in the 300-seat National Assembly, which requires a simple majority to pass the tax increase. Mr. Moon struggled to convince members of other parties to support his extra budget bill before eventually succeeding in July.

The Moon administration argues that the tax increase is necessary to support the greater role of fiscal policy in propping up an economy that is losing steam after decades of rapid growth.

Officials argue that the private sector is no longer creating as many jobs as it once did, while the country struggles with demographic challenges such as an aging population and one of the world's lowest birthrates.

Critics, however, say the taxation overhaul, particularly the corporate tax rise, could backfire, possibly stifling investment and employment or having businesses raise goods prices and stoke inflation.

In a recent report, the Korea Institute of Public Finance estimated that a one-percentage-point corporate tax increase would reduce jobs and income by up to 0.5% and 0.6%, respectively.

Write to Kwanwoo Jun at kwanwoo.jun@wsj.com

(END) Dow Jones Newswires

August 02, 2017 02:14 ET (06:14 GMT)