SEOUL/SEJONG, Feb. 9 (Korea Bizwire) – South Korea’s tax earnings from the country’s 30 largest conglomerates are expected to shrink 15 percent this year, economic sources said Monday, as the business community claims rates are already high for a trade-dependent nation.
Official data by Financial Supervisory Service (FSS) and corporate tracker Chaebul.com said the business groups are due to pay a little under 15.26 trillion won (US$13.89 billion) in taxes for their earnings last year. This would be 2.78 trillion won, or 15.4 percent, less than the 18 trillion won collected in 2014.
The estimate excludes state-run enterprises and financial firms and is based on consolidated financial statements filed by the companies.
Findings showed combined sales of the 30 conglomerates reached 1,092 trillion won last year, down 1 percent from 2013. Operating profits dropped 18.5 percent on-year to 65.59 trillion won, with net earnings standing at 49.45 trillion won, a drop of 18.6 percent vis-a-vis the year before.
By individual companies, Samsung Electronics, the world’s largest mobile phone and memory chip producer, is expected to pay 4.48 trillion won in taxes, a plunge of 43.2 percent from the year before. Samsung Electronics is the flagship of Samsung Group, South Korea’s No. 1 family-run business group.
Others such as S-Oil, KT, SK Networks and Doosan will not pay corporate taxes because their before-tax earnings were in minus territory last year.
Pre-tax earnings of the business groups stood at 64.08 trillion won, an 18.5 percent collapse from the year before.
The FSS data and Chaebul.com said numbers for smaller companies will be even more dismal, since they were hit harder by last year’s weak growth that may have reached 3.3 percent.
Others revenue sources such as income tax, import duties and surtax are expected to fall below targets due to poor overall growth.
Based on the numbers, South Korea’s tax earnings for the 2014 year will hover at 205.4 trillion won, with the budget expenditures hitting 216.5 trillion won for an 11.1 trillion won deficit. This marks the third year in a row that expenditures exceeded earnings.
The deficit has become a bigger issue from the growing need for state-funded welfare benefits promised by the Park Geun-hye administration. Politicians and some of the opinion leaders are demanding an increase in corporate tax rates to pay for the rise in welfare spending, but the business community argues that the current rate is already high and that any hike would be detrimental to competitiveness in the international market.
According to separate data provided by organizations such as Statistics Korea, the country’s degree of dependence of foreign trade stood at 87.3 percent, placing it at eighth among the 34-member Organization for Economic Cooperation and Development (OECD).
Trade dependency is measured by adding the sum of exports and imports and dividing it by gross domestic product (GDP). For South Korea, exports made up 44.8 percent of the GDP, with imports accounting for 42.5 percent.
“South Korea’s real corporate tax rate of 24.2 percent is roughly on par with 26 percent for Britain whose trade dependency ranking stands at 30th place,” a business insider argued.
He said excluding South Korea, the top 10 trade dependent nations had an actual average corporate tax rate of 21.65 percent, while the bottom 10 countries numbers reached 29.25 percent.
Of seven countries with deeper dependency on trade, only Belgium and the Netherlands had higher tax rates.
Others say local policymakers should look to Japan for reference and guidance.
Japan’s trade dependency ratio stands at 28.4 percent, or the second lowest in the OECD, and it maintains a 39.5 percent corporate tax rates as of 2012, which is the highest.
Observers said Tokyo, in the past, maintained a policy aimed at building up a value-added domestic economy that reduced its foreign dependence, but this has caused national companies to relocate abroad and hurt inflow of foreign direct investment (FDI).
To deal with this problem, the Japanese government and ruling party agreed to lower rates by 2.5 percent this year and to mark this down further to the 20 percent range in the coming years.
“South Korea needs to find appropriate corporate tax rate levels that can fuel the global competitiveness of its companies and help attract FDI,” a representative from a leading business organization said.
Finance Minister Choi Kyung-hwan said last week the government intends to collect taxes from the underground market and reduce expenditure waste before considering tax hikes and after there is a public consensus for such hikes.
Improving welfare without raising taxes has been a key policy goal set forth by President Park, although this has come under fire, even by lawmakers from the ruling Saenuri Party.