Global Trends in Corporate Tax Reform and Their Implications

Although it did not attract much attention, the tax reform proposal for next year was announced in early August. It included the plan to increase the corporate tax burden, which had been the subject of much controversy for some time. Korea’s current corporate tax system has a three-tier progressive marginal tax rate structure, but from next year the number of tax brackets will increase and the top tax rate is also set to rise further.

1)

The stated justification for the corporate tax reform is to improve equity in the tax burden while also increasing tax revenue, but there is considerable room for debate over its effectiveness and its validity from the standpoint of tax theory. Moreover, strengthening the corporate tax burden runs counter to the broad direction of economic policy aimed at improving economic vitality, and it is also being criticized as being out of step with the global trend in corporate tax reform. This article examines developments in corporate tax reform across countries and considers their implications.

Corporate tax is a type of income tax levied on a company’s net profits, and in most countries it is a major central tax item that occupies a significant place in tax policy. Unlike other tax policies, which are largely domestic in character, corporate tax is highly sensitive to changes in the international environment. This is because the sphere of business activity subject to corporate taxation has become globalized. From the standpoint of profit-seeking firms, all else being equal, they will prefer locations where the corporate tax burden is lower. Therefore, to ensure the international competitiveness of a corporate tax system, it is necessary to closely monitor trends in corporate tax reform in other countries.

What, then, is the global trend in corporate tax reform? The corporate tax easing policies that began in the United States in the 1980s triggered a global race to the bottom in corporate tax rates. Governments around the world competitively lowered corporate taxes after recognizing that easing the corporate tax burden was effective in attracting multinational corporations and expanding foreign direct investment (FDI), as well as in creating jobs and stimulating the economy. In response, the OECD even published a report expressing concern about excessive competition.

2)

This trend of corporate tax cuts continued through the 2008 global financial crisis and persists to this day. In fact, compared with 2008, as many as 21 OECD countries had lowered their corporate tax rates (including local taxes) by 2016. Separately, the United States recently announced a dramatic plan to cut its current corporate tax rate from 35% to 15%. In fact, the scale of rate reductions in countries that have lowered corporate tax rates is hardly less striking. Looking at the size of reductions in corporate tax rates by country from 2008 to 2016, Japan recorded the largest cut at 9.6%p. (5.4%p. in national tax and 4.2%p. in local tax), followed by major moves in advanced economies such as the United Kingdom (8%p. in national tax), Sweden (6%p. in national tax), and Spain (5%p.). During the same period, Korea also lowered its corporate tax rate by 3.3%p. (including local taxes).

Of course, there are countries that moved in the opposite direction. Over the same period, six countries raised their top national corporate tax rate: Chile (7%p.), Greece (4%p.), Iceland (5%p.), Mexico (2%p.), Portugal (3%p.), and Slovakia (3%p.). Why did they raise corporate taxes? As is well known, Greece, Mexico, and Portugal are countries that experienced fiscal collapse due to severe fiscal deficits. Iceland likewise experienced serious fiscal difficulties in the process of overcoming the global financial crisis. In other words, the countries that raised corporate taxes were generally in situations where increased tax revenue was absolutely necessary. This suggests, ultimately, that most countries whose economies are operating within a normal range are lowering corporate tax rates. In short, it is no exaggeration to say that the international trend in corporate tax reform is converging on “burden reduction.”

In the past, Korea was in a position to lead global trends in corporate tax reform. It had secured the competitiveness of its corporate tax system by consistently maintaining tax rates below the OECD average. However, as governments around the world have steadily pursued rate cuts, it is also true that the international competitiveness of Korea’s corporate tax system can no longer be taken for granted.

3)

That is why this tax reform proposal is all the more disappointing, as it was announced at a time when further rate reductions were needed.

1) The current corporate tax structure consists of 10% (tax base: KRW 0–200 million), 20% (KRW 200 million–20 billion), and 22% (over KRW 20 billion). However, the proposed tax reform for next year plans to create a new bracket for taxable income exceeding KRW 200 billion and apply a 25% tax rate.

2) Harmful Tax Competition: An Emerging Global Issue, OECD, 1998.

3) As of 2016, Korea’s corporate tax rate, including local taxes, stood at 24.2%, similar to the OECD average of 24.8%.

Sangkyum Kim / Department of Economics, Dankook University

---

Original title: 법인세개편의 세계적 동향과 그 시사점

Author: Sang-gyeom Kim

Date: 2017-09-12

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=17&idx=10730