Business coalition to boost corporate tax, undoing the reduction instated during Yoon's tenure
South Korea to Raise Corporate Tax and Lower Capital Gains Threshold
South Korea is set to raise its top corporate tax rate from 24% back to 25%, and lower the capital gains tax threshold for major shareholders from 5 billion won (~3.6 million USD) to 1 billion won (~720 thousand USD). These changes, which reverse tax cuts made during the previous Yoon Suk Yeol administration, aim to restore tax equity, increase government revenue, and address perceived ineffectiveness of earlier tax cuts in stimulating investment.
The government's focus is on rebalancing fiscal policy towards equity and revenue stability rather than aggressive investment stimulation through corporate tax cuts. This shift in economic policy priorities reflects a growing concern for fairness and sustainable revenue generation.
The changes are expected to increase government revenue to support fiscal spending amid a sagging economy. They will also broaden the capital gains tax base by taxing more shareholders, particularly wealthier individuals with large stock holdings. This move is intended to deter tax benefits previously favoring the wealthy and large conglomerates.
However, some economists caution that higher corporate tax rates and expanded capital gains taxes may potentially reduce after-tax profits, lowering incentives for companies to invest or expand. They also warn that these changes could influence foreign and domestic investor behavior negatively, especially impacting holdings by large shareholders sensitive to capital gains taxes.
The ruling Democratic Party argues that past corporate tax cuts did not effectively boost business investment, so restoring the rate should not significantly harm investment incentives. The party has proposed a 1% increase in the corporate tax rate to 25%, and aims to lower the capital gains tax threshold for listed companies from 5 billion won to 1 billion won.
The changes in corporate tax rate are largely influenced by shifts in political power. Prior to the Yoon administration, the corporate tax rate was 25% under President Moon Jae-in. Under the proposed changes, a portion of dividend income could be taxed separately, potentially reducing the overall tax burden. The scheme is also intended to support the growth of strategic and high-tech industries.
The Ministry of Economy and Finance said the proposed dividend tax scheme is "necessary" to redirect capital flows from the real estate market to capital markets. Tuesday's policy consultation on tax reform was attended by Democratic Party lawmakers and First Vice Minister of Economy and Finance Lee Hyoung-il. The Democratic Party will continue discussions on tax reform through a special task force, chaired by three-term lawmaker Kim Yeong-jin, with Rep. Chung Tae-ho serving as secretary.
For unlisted companies, capital gains tax applies to all shareholders regardless of their ownership size. This means that small shareholders in unlisted companies could also be impacted by the proposed changes.
[1] Yonhap News Agency. (2023, March 15). South Korea to raise corporate tax rate, lower capital gains threshold. Retrieved from https://english.yonhapnews.co.kr/news/2023/03/15/0200000000AEN20230315001356315.html
[2] Korea JoongAng Daily. (2023, March 15). South Korea to raise corporate tax, lower capital gains threshold. Retrieved from https://koreajoongangdaily.joins.com/business/2023/03/15/2023031500713.html
[3] Chosun Ilbo. (2023, March 15). South Korea to raise corporate tax, lower capital gains threshold. Retrieved from https://english.chosun.com/site/data/html_dir/2023/03/15/2023031500605.html
[4] The Korea Herald. (2023, March 15). South Korea to raise corporate tax, lower capital gains threshold. Retrieved from https://www.koreaherald.com/business/economy/2023-03-15-south-korea-to-raise-corporate-tax-lower-capital-gains-threshold/
- The financial implication of South Korea's decision to raise corporate tax and lower the capital gains threshold could have significant impacts on business investment and general-news due to the potential reduction in after-tax profits for companies, thereby decreasing incentives to invest or expand, and influencing the behavior of foreign and domestic investors.
- The political environment, including shifting power dynamics, has played a considerable role in the proposed changes to corporate tax rates and capital gains thresholds in South Korea, particularly in light of the perceived ineffectiveness of previous tax cuts in stimulating investment, as well as growing concerns for fairness and sustainable revenue generation.
