Officials stress securing tax revenue, fiscal balance to ward off external risks


The government on Thursday decided to scrap plans to cut corporate tax rates for conglomerates, compromising following calls for fiscal balance and more spending on the poor.

In a meeting to discuss tax revisions for the next four years, the presidential office, the ruling Grand National Party and the Finance Ministry agreed to retain the 22 percent corporate tax rate, reversing earlier plans to lower it to 20 percent for companies making more than 50 billion won in taxable income.

“Lowering taxes is the government’s plan for the long-term but we need to prioritize on securing tax revenue for the growing welfare expenditure,” Baek Woon-chan, chief of the Finance Ministry’s tax division, told reporters after the meeting.

“Sound fiscal balance is especially important as the country faces external risks from worsening debt woes abroad,” he added.

The reversal comes as the Lee Myung-bak administration grapples with falling popularity ahead of next year’s general elections. The final tax revision also signals a shift in government policy away from lowering taxes to prioritizing job creation, supporting the poor and sound fiscal management. The new proposal aims to generate 3.5 trillion won of incremental tax revenue by 2015, mainly from high-income earners and conglomerates.

Corporate tax rates will be lowered to 20 percent from the current 22 percent for companies generating taxable income of between 200 million won and 50 billion won annually.

The highest tax rate of 35 percent for individuals with an annual income of more than 88 million won will stay in place.

There is a fresh plan to raise 100 billion won from companies generating profits by contracting with their affiliates ― a business practice disadvantaging smaller independent businesses fighting for deals. It is in line with the Lee administration’s push for shared growth and a fair distribution of wealth that emerged after the fast economic recovery from the 2008 downturn highlighted the persistent income gap between the haves and have-nots.

“Giving deals to affiliates under same corporation and illegal inheritance transfers will be subject to fresh taxes,” Finance Minister Bahk Jae-wan said.

The proposal however is controversial and fiercely opposed by major business groups.

Stronger tax tools will be introduced to encourage job creation. The temporary investment tax credit on corporations will be replaced by expanded tax incentives for companies creating jobs. Companies will be able to enjoy tax deductions of up to 6 percent on their investments if they increase hiring. For small-and-medium sized companies, tax deductions will be available on social insurance costs of hiring fresh workers for the first two years.

There will be more subsidies for low-income earners to stay employed. Those with less than 25 million won in annual income will be eligible for subsidies of up to 1.8 million won a year, up from the current 1.2 million won.

New taxes are planned to curb capital inflows into the country. They include imposing taxes on income earned from foreign currency bonds issued in Korea, often called kimchi bonds. Other measures to limit foreign capital include taxing some derivative products.

To stabilize rent prices, the revision bill calls for easing requirement for leasing with increased tax incentives. A sales tax reduction of up to 30 percent will be offered to those who own more than one home, a returning measure to encourage home transactions.

Income tax deductions for credit card use will be expanded with additional deductions given to credit card charges at traditional markets.

By Cynthia J. Kim (cynthiak@gmail.com)