[Weekly Review] Global Corporate Tax Reform and Semiconductor Crisis Concerns

National Debt Surpasses GDP for the First Time
Ruling Party Suffers Complete Defeat in April 7 By-Elections... Attention on Hong Nam-gi's Position

Sung Yun-mo, Minister of Trade, Industry and Energy, speaks about semiconductor support measures at the Semiconductor Industry Association Chairpersons' Meeting held on the 9th at the Westin Chosun Hotel in Jung-gu, Seoul. Photo by Moon Ho-nam munonam@

[Sejong=Asia Economy Reporter Moon Chaeseok] As the United States proposed a global corporate tax reform plan including the introduction of a minimum tax rate, South Korea has found itself in a difficult position. The government held meetings with the industry belatedly to prepare semiconductor supply measures, but shutdowns of global automobile manufacturers are spreading. Last year, the national debt approached 2,000 trillion won, surpassing the Gross Domestic Product (GDP) for the first time in history.

U.S. Proposes Introduction of Global Corporate Tax Minimum Rate

Janet Yellen, U.S. Secretary of the Treasury. (Photo by Reuters)

On the 5th (local time), U.S. Treasury Secretary Janet Yellen announced that she is cooperating with the Group of Twenty (G20) to set a floor for corporate tax rates at 21%. Then, on the 8th (local time), the U.S. government sent official letters to about 140 countries, including South Korea, proposing that multinational corporations pay corporate taxes in the countries where actual sales occur. The proposal also includes having multinational corporations pay corporate taxes in the countries where sales are generated.

The intention is to curb the practice of companies placing regional headquarters in tax havens or low-tax countries or shifting intangible assets to reduce tax payments. Because of this, large corporations such as Samsung Electronics and Hyundai Motor Company, which have expanded overseas, are likely to face increased tax burdens. Currently, it is expected that the reform plan will apply to IT platforms and consumer goods sales companies.

South Korea Holds 'Belated Meeting' Despite Global Semiconductor Crisis

On the 9th, Sung Yun-mo, Minister of Trade, Industry and Energy, held a meeting with the semiconductor industry for the first time this year. He announced plans to prepare various support measures, including tax credits, to respond to the semiconductor crisis. Critics pointed out that the response was slower than that of the U.S. and China, as the semiconductor supply crisis, which began with automotive parts at the end of last year, occurred four months ago.

The industry requested the government to expand the facility investment tax credit from the current maximum of 6% for large corporations to 50%, and to enact a "Special Act for Semiconductor Industry Promotion." Minister Sung responded by saying he would present the "K-Semiconductor Belt Strategy" to foster the domestic semiconductor industry. The government's comprehensive semiconductor plan to be announced next month is expected to include various support measures such as expanded tax credits for facility investments, infrastructure support for power and water, research and development (R&D) investment, and workforce training.

National Debt Approaches 2,000 Trillion Won

On January 22, when social distancing measures to prevent the spread of COVID-19 were ongoing, the underground shopping area near Mapo Station on Seoul Subway Line 5 showed a quiet scene. Photo by Jinhyung Kang aymsdream@

Last year, the national debt approached 2,000 trillion won, surpassing GDP for the first time in history. According to the "2020 Fiscal Year National Settlement" report deliberated and approved at the Cabinet meeting on the 6th, last year's national debt was recorded at 1,985.3 trillion won. This is a 13.8% (241.6 trillion won) increase from the previous year (1,743.6 trillion won), setting a new record. This amount exceeds last year's estimated GDP of 1,924.5 trillion won.

Excluding pension liabilities, the national debt that the central and local governments must repay was 846.9 trillion won, an increase of 123.7 trillion won from the previous year. The ratio of national debt to GDP rose from 37.7% to 44.0%. The integrated fiscal balance, which is total government revenue minus total expenditure, recorded a deficit of 71.2 trillion won. The managed fiscal balance, which excludes the four major social security funds from the integrated fiscal balance to show the 'real national finances,' showed a deficit of 112 trillion won.

Despite this situation, the government plans to continue an expansionary fiscal policy this year under the pretext of overcoming COVID-19. It plans to issue more than 100 trillion won in deficit bonds. Because of this, the national debt is expected to reach 2,100 trillion won by the end of this year.

Ruling Party Suffers Defeat in April 7 By-Elections... Attention on Hong Nam-ki's Position

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki delivering opening remarks at the 19th Real Estate Market Inspection Meeting held on the 8th at the Government Seoul Office in Jongno-gu, Seoul. Photo by Hyunmin Kim kimhyun81@

Last week, the ruling party suffered a complete defeat in the April 7 by-elections, raising expectations of a large-scale cabinet reshuffle. This is because there have been persistent rumors of a cabinet reshuffle replacing Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, after the by-elections.

If Deputy Prime Minister Hong vacates his position, candidates for his successor include Eun Sung-soo, Chairman of the Financial Services Commission (27th Administrative Examination), and Koo Yoon-chul, Director of the Office for Government Policy Coordination (32nd Administrative Examination), both known for their expertise in economic policy and budgeting. Recently, Ahn Il-hwan, former 2nd Vice Minister of the Ministry of Economy and Finance and a budgeting expert, was appointed as the Blue House economic chief, so it is expected to be difficult to appoint another budgeting expert like Director Koo as Deputy Prime Minister for balance. Other names mentioned include Ko Hyung-kwon, Ambassador to the OECD (30th Administrative Examination), Noh Hyung-wook, former Director of the Office for Government Policy Coordination (30th Administrative Examination), and Jung Eun-bo, Ambassador for the Korea-U.S. defense cost-sharing negotiations (28th Administrative Examination).

Some argue that with the Prime Minister's replacement likely and considering the time needed for approval of the successor, it may be burdensome to leave the Deputy Prime Minister position vacant. There is speculation that Deputy Prime Minister Hong, who has President Moon's trust, will remain in office. There is also a scenario where Hong is appointed as the successor to Prime Minister Chung.