[Exclusive] "Less Investment Co-prosperity"... 10 Trillion Won More Taxes Collected from Companies Last Year

Tax Calculated on 4,382 Corporations Last Year
Output Tax on Undistributed Earnings 1.0685 Trillion Won

Companies Barely Surviving COVID
20% Tax if Spending Less on Investment, Wages, and Cooperation

Rep. Kim: "Undistributed Earnings of Large Corporations Should Be Directed to Productive Investment to Promote Economic Circulation"

[Asia Economy Reporters Kim Hyunjung and Jang Sehee] The government collected over 1 trillion won in taxes from companies last year due to insufficient investment and win-win cooperation. This is related to the Investment and Win-Win Cooperation Promotion Tax System, which aims to actively circulate cash by releasing corporate retained earnings. However, there are criticisms that in the context of the COVID-19 pandemic, productive investment should be encouraged through comprehensive support rather than punitive taxation.

According to the 'Investment and Win-Win Cooperation Promotion Tax System Status' submitted by the National Tax Service to Kim Jooyoung, a member of the National Assembly's Planning and Finance Committee from the Democratic Party of Korea, the calculated tax amount on non-recirculated income (retained earnings of 7.2056 trillion won) of 4,382 taxable corporations last year was 1.0685 trillion won. This represents a sharp increase of 24.7% (211.4 billion won) compared to last year (854.4 billion won), marking the first time the related calculated tax amount exceeded 1 trillion won.

◆If companies spend less on investment and wages, 20% tax applies= The Investment and Win-Win Cooperation Promotion Tax System, stipulated in the Restriction of Special Taxation Act, imposes additional corporate tax on non-recirculated income when corporate investment, wage increases, or win-win cooperation fund support fall short of a certain amount of current income. The previous 'Non-Recirculated Income Tax System,' which imposed a 10% tax on non-recirculated amounts based on investment, wage increases, and dividends for three years starting in 2014, was renamed the 'Investment and Win-Win Cooperation Promotion Tax System' in 2017, with the tax rate raised up to 20%. Last year, the sunset clause was extended by two years through tax law amendments. Since 2019, the dividend item was changed to win-win cooperation expenditure, placing more emphasis on cooperation with small and medium-sized enterprises.

In particular, corporate retained earnings increased from 6.1313 trillion won in 2016 to 13.2339 trillion won in 2018, then decreased to 7.6161 trillion won in 2019 and 7.2056 trillion won last year.

However, with the tax rate doubling and the weighting of each item adjusted, the calculated tax amount has been rising sharply every year. It rose from 53.3 billion won in 2016 to 427.9 billion won in 2017, 719.1 billion won in 2018, 854.4 billion won in 2019, and 1.0685 trillion won in 2020, nearly a 20-fold increase over five years. The increase in the number of taxable corporations from 3,425 to 4,382 during the same period also had an impact.

The Investment and Win-Win Cooperation Promotion Tax System was introduced during the process of corporate tax cuts in major advanced countries, which led to strong opposition from the business community. During the extension of the sunset clause last year, the Korea Economic Research Institute released a report titled 'Review of Issues in Extending the Investment and Win-Win Cooperation Promotion Tax System,' advocating for the abolition of the related tax system. Last month, they also submitted a tax law amendment opinion including rationalization of the system to the Ministry of Strategy and Finance.

◆Corporate investment rather decreased= Despite the tax system, the investment amount, which accounts for the largest share among current recirculation items, has not increased, leading to calls for institutional reform. The investment amount of taxable corporations recorded about 126 trillion won in 2018 but decreased to 105 trillion won in 2019 and 98 trillion won in 2020. The recirculation amount in the investment item of the top 100 companies dropped from about 1.81 trillion won in 2019 to the 300 billion won range last year.

Assemblyman Kim explained, "Through a long-term tax system, non-recirculated income of large corporations should be guided into productive investment to induce economic circulation."

Some criticize this dual taxation as excessive and argue that the unprecedented crisis of COVID-19 should have been reflected. Professor Hong Woohyeong of Hansung University’s Department of Economics stated, "It is a punitive tax system that imposes excessive burdens on companies contrary to the economic situation." Professor Oh Moonsung, president of the Korean Tax Policy Association and professor of Tax Accounting at Hanyang Women’s University, emphasized, "Wages and investments are difficult to increase by tax pressure alone. Especially for wages, once raised, it is difficult to reduce, so it should naturally occur linked to productivity." Regarding the sharp decline in investment by the top 100 companies, Professor Oh added, "If there is an internal judgment that the multiplier effect of investment does not occur, companies may invest less. There are cycles depending on the industry, so it cannot be forced."

It is also problematic that medium-sized enterprises and general companies other than mutual investment-restricted companies cannot actively invest and hire due to excessive tax burdens. Researcher Lim Dongwon of the Korea Economic Research Institute pointed out, "In the case of last year, due to the COVID-19 crisis, companies actually needed to hold retained earnings. Comprehensive support is needed rather than negative regulation, and it should be clearly recognized that we are no longer in an era where companies invest following government policies."