"20 out of 25 National and Local Tax Items Are Double Taxed... Need to Abolish Spouse Inheritance Tax, etc."

KCCI's "Analysis of Double Taxation Issues" Report
"Separate Regulation of Double Taxation on Same Tax Items and Taxable Subjects"
"Abolition of Unrepatriated Income Corporate Tax and Spousal Inheritance Tax"

The business community has raised concerns about the need to improve the ineffective double taxation relief system. They argue that double taxation types should be regulated by dividing them into 'double taxation on the same tax item' and 'double taxation on the same taxable object.' The business community has called for the abolition of the Investment and Win-Win Cooperation Promotion Tax (unreturned income corporate tax) and the spouse inheritance tax system, as well as improvements to the issue of double taxation on dividends.

Exterior view of the Korea Chamber of Commerce and Industry building in Jung-gu, Seoul. [Photo by Korea Chamber of Commerce and Industry]

On the 16th, the Korea Chamber of Commerce and Industry (KCCI) released a report titled "Analysis of Korea's Double Taxation Issues," making these claims. In this year's International Institute for Management Development (IMD) competitiveness ranking of 67 countries, Korea's tax policy sector ranked 34th, dropping 8 places from 26th the previous year. This decline is attributed to the increase in the tax burden rate from 22% in 2021 to 23.8% in 2022.

Although there are double taxation relief systems such as tax credit for paid taxes, business succession deduction, and non-inclusion of income, the KCCI pointed out that their effectiveness is low. The KCCI argued that the types of double taxation should be divided into 'double taxation on the same tax item' and 'double taxation on the same taxable object' to properly address the issues.

Among the double taxation on the same tax item, corporate tax and property tax are representative. Companies must pay up to 24% corporate tax on annual income plus a 20% Investment and Win-Win Cooperation Promotion Tax. If there is a capital gain from the disposal of assets such as land, even after paying up to 40% capital gains corporate tax, corporate tax is imposed again. For property tax, a maximum of 0.4% applies to houses and up to 4% to buildings other than houses. Additionally, a 0.14% 'urban area property tax' is levied on real estate in areas designated by local government heads under the National Land Planning Act.

Double taxation on the same taxable object includes taxation on consumption activities, inheritance tax, and shareholder dividend taxation. Consumption activities are subject to indirect taxes such as individual consumption tax, liquor tax, transportation tax, leisure tax, and tobacco consumption tax. Surtaxes such as education tax, special rural tax, and local education tax are imposed at certain rates. On top of indirect taxes and surtaxes, a 10% value-added tax is additionally levied.

Applying inheritance tax on the spouse's inheritance portion and then again taxing the children upon the spouse's death constitutes double taxation. The Constitutional Court has also combined the amounts gifted by spouses to children when calculating the cumulative deduction of 50 million KRW over 10 years for gift tax, which is a property tax similar to inheritance tax. This means the court recognized spouses as a single economic community. Taxation on inheritance between spouses, who are members of an economic community, can be seen as double taxation. There are also concerns about double taxation between inheritance tax and income tax, as inheritance tax is imposed on assets formed after income tax has been paid.

When a corporate shareholder parent company receives dividends from a subsidiary, the subsidiary distributes profits after paying corporate tax. If the ownership is less than 50%, the parent company must pay corporate tax again on the dividend income. Individual shareholders must pay personal income tax when receiving dividends from profits after corporate tax payment.

The KCCI called for ▲abolishing the Investment and Win-Win Cooperation Promotion Tax ▲abolishing the spouse inheritance tax ▲resolving double taxation on shareholder dividends. The KCCI stated that dividends should also be interpreted as reinvested funds. Dividends should be excluded from the taxable base of the Investment and Win-Win Cooperation Promotion Tax. Ultimately, the tax item of the Investment and Win-Win Cooperation Promotion Tax should be abolished. They also urged active consideration of abolishing the spouse inheritance tax, as the spouse inheritance deduction is limited to a maximum of 3 billion KRW. Among countries that implement inheritance tax, the United States, the United Kingdom, and France do not impose inheritance tax on the spouse's portion.

Improvements are also needed for the issue of double taxation on dividends. For corporate shareholders, they proposed recognizing 100% non-inclusion of income for shareholding of 5% or more. For individual shareholders, they argued that the dividend gross-up rate should be calculated based on the effective corporate tax rate to completely eliminate double taxation.

Kang Seok-gu, head of the KCCI Research Headquarters, said, "Inefficient tax operations cause considerable side effects such as distorting economic agents' decision-making," adding, "At a turning point in industrial transformation, we must change our tax system into a framework that supports economic leap forward."