[What Do You Think] US-Originated Corporate Tax Increase, Welcoming International Cooperation

[濁流淸論(Takryu Cheongron)] US-Originated Corporate Tax Increase, Seemingly a Welcome Development

Takryucheongron is a column that provides in-depth analysis and diagnosis by experts in the relevant fields on socially contentious topics. This week's topic is ‘US-Originated Corporate Tax Increase’.

The discussion on raising corporate taxes originating from the US has emerged. This is because US President Joe Biden announced plans to increase corporate tax rates. The plan is to raise the corporate tax rate from 21% to 28% and apply a minimum tax rate of 15% on book profits for large corporations. Additionally, US Treasury Secretary Janet Yellen proposed international cooperation on the introduction of a global minimum corporate tax rate (21%). This is somewhat welcome for us as well, since about half of the foreign corporations operating domestically have been avoiding corporate taxes.

Large IT companies like Apple and Google have avoided taxes by establishing subsidiaries in tax havens. In the US, tax rates vary by state. Because of this, companies avoid taxes by setting up their headquarters not in the states where most of their revenue is generated, but in states with lower tax rates. In Korea, as the broadcasting advertising market has been reorganized into online and YouTube platforms, terrestrial TV advertising revenue has shrunk to less than half, and tax collection on platforms like YouTube, which have servers overseas, has been minimal. In Google's case, it has been quite some time since articles appeared stating ‘earning 5 trillion won annually but paying only a tiny amount in taxes.’

Until now, it has been difficult for corporate tax increases to become an international agenda because advanced countries, especially the US, aggressively lowered their tax rates. Former US President Donald Trump lowered the corporate tax rate from 35% to 21% under the pretext of stimulating the domestic economy. However, President Biden announced a $4 trillion infrastructure investment plan to boost the economy, and since financing solely through government bonds was difficult, he began considering raising corporate tax rates and requested international cooperation to block incentives for corporate tax avoidance.

There is no definitive answer to the corporate tax rate debate. In Korea, during the Lee Myung-bak administration, the top rate was lowered from 25% to 22% to stimulate the economy, but it was restored to 25% under the Moon Jae-in administration. Corporate tax rates vary significantly by country: US 21%, UK 19%, France 32.02%, Hungary and Ireland 9% and 12.5%, respectively. When planning a country's total tax revenue structure, the relationship between corporate tax, income tax, and value-added tax must also be considered.

The US proposal this time is not sudden. Discussions on digital taxes are already underway at the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU). Digital tax refers to the idea of taxing a certain percentage in the country where sales occur, regardless of the total profits of IT companies. Companies like Google Play and Apple App Store have avoided taxes by establishing separate corporations (or servers) in low-tax jurisdictions such as Bermuda or the Cayman Islands. The core of the digital tax is the ‘Pillar 1 and 2 drafts’: Pillar 1 focuses on taxation in the country where sales occur, and Pillar 2 aims to introduce a global minimum corporate tax to prevent multinational corporations from avoiding taxes. The minimum tax rate under discussion at the OECD is 12.5%, but the US is proposing to consider a higher rate of 21%.

There are concerns among domestic companies about the US-originated corporate tax rate increase. However, since the corporate tax rate was raised in 2018, a pace adjustment is necessary, and given that corporate investment and economic activities have been depressed due to the COVID-19 pandemic, it is still premature. Internationally, it is recommended to participate in the US-originated global minimum corporate tax increase discussions, but domestically, rather than raising corporate tax rates, it is advisable to secure tax revenue by reducing non-taxation and exemption measures and utilizing support systems for sincere reporting.

Han Jae-jun, Professor, Department of Global Finance, Inha University