This photo shows a researcher of a pharmaceutical company in the city of Seongnam, Gyeonggi Province, conducting a test to develop new products. (Yonhap)
SEOUL, July 27 (Korea Bizwire) — South Korea unveiled its tax code revision bill Thursday, focusing on providing tax cuts for businesses and reducing financial burdens for the people to counter a prolonged slowdown and revive economic vitality.
But the latest tax-cut measures will likely stir up concerns over falling tax revenue. In the first five months of 2023, tax revenue decreased by 36.4 trillion won compared with the previous year, due mainly to weak corporate earnings.
“To enhance the vitality of the economy, our focus will be on expanding support for businesses’ investments and job creation, led by the private sector and the market,” Finance Minister Choo Kyung-ho said during a press briefing on the tax code revision.
The revision includes programs to give tax deductions for the expenditures spent during the production of TV programs, movies and streaming content by major producers.
The government will offer tax deductions of up to 15 percent on such spending, and the rate will increase to as high as 30 percent for small-sized companies.
The update marks a significant rise from the current rate of around 3 to 10 percent, depending on the size of the company.
But the finance ministry noted that to be eligible to benefit from the new incentive, a certain portion of the expenditures must be made at home.
Additionally, as part of plans to promote its future growth engine, South Korea will add the biopharmaceutical industry to the state-selected list of six strategic sectors to give local drugmakers additional tax cuts for their R&D spending and investment.
Currently, such selected industries are chips, batteries, vaccine, display, hydrogen, and future cars.
To encourage domestic manufacturing of such high-tech industries, the finance ministry added that companies engaged in reshoring — relocating their businesses back home from abroad — will qualify for a full tax cut in both income and corporate taxes for the initial seven years.
They will be eligible for a 50-percent tax reduction for an additional three-year period.
Companies involved in overseas resource development projects will get a 3 percent tax cut based on the amount of their investment.
(image: Korea Bizwire)
The government also decided to support business succession by lowering the gift tax rate on stakes to 10 percent from the current 20 percent for the tax bracket of 6 billion won (US$6.68 million) to 30 billion won, when parents hand over their companies to their children.
To qualify for this tax reduction, the companies should have a valuation of under 500 billion won, and the children receiving the stakes must commit to maintaining their ownership and actively leading the business for a minimum of five years.
Additionally, the heir will be allowed to pay the gift tax over 20 years, compared with the current limit of five years.
Moreover, South Korea revealed a series of measures aimed at alleviating the financial burden of low-income and middle-class people.
In response to the soaring housing costs, which have been identified as a significant obstacle to the country’s low birth and marriage rates, the government has chosen to waive gift tax on wedding funds of an additional 100 million won supported by parents.
Currently, parents are only allowed to give 50 million won to adult children without a gift tax for every 10 years.
The policy will only be applied two years before and after marriages.
The government will also increase financial support for households with an annual income below 70 million won, providing up to 1 million won per child, a substantial increase from the current 800,000 won offered to those with earnings under 40 million won.
Children aged six and below will benefit from a 15 percent tax cut on all their medical expenses, up from the current limit of 7 million won.
The ceiling on tax cuts for donations exceeding 30 million won will be raised to 40 percent, up from the current 30 percent, to induce more people to make charitable contributions.
This file photo taken July 2, 2023, shows an apartment complex in southern Seoul. (Yonhap)
The finance ministry estimated the combined set of measures announced Thursday will lead to a decrease in tax revenue of 471.9 billion won (US$368 million) over the next four years, casting concerns over the government’s future collections.
The finance minister, however, said additional tax cuts were necessary in order to add new energy to Asia’s No. 4 economy and ease burdens for the low-income bracket.
“While the conditions for tax revenue this year present significant challenges, we aim to extend benefits to critical areas, encompassing investment, job creation, low-and middle-income brackets, and the future generations,” Choo said.
The government noted the amount of benefits provided to the low-income and middle classes is expected to reach 630 billion won.
“As people are aware, the economic situation is very challenging,” the finance minister said.
“In light of the challenging situation, it is appropriate to lower the tax burden, creating greater opportunities for the private sector, companies, and middle- and low-income classes to spend and invest,” he added, emphasizing that now is not the right moment to consider a tax hike.
Tax revenue, meanwhile, amounted to 160.2 trillion won during the January-May period, down from 196.6 trillion won tallied a year earlier.
In May alone, the government collected 26.2 trillion won in taxes, down 2.5 trillion won from the previous year.
The proposal unveiled Thursday calls for an approval by the Cabinet in late August, which will subsequently be submitted to the National Assembly in September before its implementation.
(Yonhap)
