March 20, 2017 9:00 pm JST

Corporate tax debate heats up in South Korea amid presidential race

Mayor of Seoul suburb suggests raising it to 30% while others more cautious

KIM JAEWON, Nikkei staff writer

Teheran Road at the Gangnam district in Seoul © AP

SEOUL -- Raising corporate tax is a hot issue in South Korea where corporations contribute one fifth of the country's tax revenues. As Asia's fourth-largest economy needs more money to fund its welfare costs, some presidential candidates aiming to fill the vacuum left by impeached former leader Park Guen-hye have suggested raising the tax or cutting tax credits to corporations.

The mayor of Seongnam, one of the satellite cities of Seoul, is leading the debate. Lee Jae-myung of the center-left Democratic Party of Korea has promised to raise the corporate tax rate to 30% from 22% to fund his ambitious basic income welfare plan, which would pay 1 million won ($894) to every child and senior citizen. The lawyer-turned-politician says that the tax hike will also boost the country's tax revenue by 15 trillion won a year, helping fund the basic income plan which requires 43.6 trillion won.

His idea has drawn criticism from other candidates, including frontrunner Moon Jae-in, as well as business lobby groups. Moon said that such a drastic hike will burden corporations, suggesting that cutting tax credits for corporations a more appropriate first step.

South Korean companies enjoy a wide range of tax credits for their investments in research and energy-efficient facilities, among other things. South Korean corporations' real corporate tax rate, excluding such benefits, comes to less than 20%, according to government data.

Another candidate, governor of South Chungcheong province, Ahn Hee-jung, says that it is more important to set up a mid- and long-term fiscal plan than to increase corporate tax. Ahn's corporate tax policy is similar to that of Moon, focusing on raising the real tax rate.

But Yoo Seung-min from the center-right Bareun Party agrees with mayor Lee, saying corporations should pay more tax to increase the level of the country's welfare provision. He has argued that corporate tax, income tax and property tax should be raised first as it is fair to impose more tax on the rich and on profitable companies.

The Organisation for Economic Co-operation and Development agrees that the country needs to raise taxes, but it suggests raising value-added tax or property tax rather than corporate tax to avoid a negative impact on growth.

"Gradually raise tax rates to finance rising social spending, focusing on taxes with a less negative impact on growth, such as the VAT and environment-related taxes," said the Paris-based organization in a report. "In addition, higher taxes on property would reduce inequality."

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