If 'SME Loss Carryback' Extended to 3 Years... "Annual Tax Burden Reduced by 118.2 Billion Won"

Korea Federation of SMEs Announces Research Results on 'Retroactive Deduction of SME Losses'
SMEs Reduce Tax Burden by 114.1 Billion KRW Annually... Average 34 Million KRW per Company
7 out of 10 Companies "Want Tax Support"

The Korea Federation of Small and Medium Business located in Yeouido, Seoul.

[Asia Economy Reporter Junhyung Lee] A study has found that expanding the carryback period for loss deductions for small and medium-sized enterprises (SMEs) from 1 year to 3 years would reduce the tax burden by 118.2 billion KRW annually. The number of beneficiary SMEs would increase by 4,605, from the current 7,399 to 12,004.

The Korea Federation of SMEs announced on the 16th that this analysis was derived from a study on the "Carryback of Losses for SMEs." The carryback of losses is a system that allows corporations or businesses that paid taxes on profits earned last year to receive a refund of taxes paid in the previous year if a loss occurs in the current year.

Previously, the government extended the carryforward period for loss deductions from 10 to 15 years by 5 years to support companies affected by COVID-19. However, Professor Eunseon Ki of Kangwon National University, who conducted the study, pointed out in the report that "the carryforward of losses is difficult for SMEs to immediately feel the tax support effect if profits do not occur the following year."

Professor Ki suggested expanding the carryback period for loss deductions as an alternative to the carryforward system. Unlike other tax support systems, the carryback of losses facilitates business operators' financing and promotes reinvestment when losses occur, thereby automatically stimulating the economy, according to Professor Ki. It also has the advantage of providing liquidity support without additional funding.

According to the report, expanding the carryback period to 3 years would allow corporate SMEs to receive an average cash refund of 34 million KRW per company, reducing the total annual tax burden by 114.1 billion KRW. For individual SMEs, an average cash refund of 11 million KRW per company would result in a total annual tax burden reduction of 4.1 billion KRW.

Advanced countries are already utilizing the carryback of losses to improve corporate liquidity. Canada uses a 3-year period, while France, Germany, and the UK use a 1-year period for this system. Additionally, countries like France and Norway, which previously did not allow carryback of losses, introduced this system in response to COVID-19.

Meanwhile, according to Professor Ki, 76.2% of SMEs?8 out of 10?suffered damage such as decreased sales due to the COVID-19 impact. Furthermore, 67.6% of SMEs expressed a desire for tax support measures such as reductions in income and corporate tax rates.

Seungwon Seo, Executive Vice President of the Korea Federation of SMEs, said, "Expanding the carryback period for SME loss deductions from 1 year to 3 years can help companies respond flexibly to rapidly changing economic conditions," adding, "We will continuously propose and persuade the government and the National Assembly to promptly revise the legislation."