South Korean president Moon Jae-in’s Democratic Party government has announced that it intends to increase the tax rates for high-earning corporations and wealthy individuals as of next year. The estimated Won5500bn won ($4.9bn) collected annually will go towards job creation and income support for families with children.
For companies whose net profits exceed Won200bn won, the tax is set to increase from 22% to 25% in 2018, affecting 129 companies (based on 2016 filings). However, approval is needed by the National Assembly, in which Mr Moon’s ruling party has only a slim majority, meaning that delays in implementing the levy are likely.
The announcement may cause unrest among South Korea’s chaebols, the large, family-run corporations like Samsung and LG which wield great social and political influence. The decision could be considered risky at a time when countries are competing to lower taxes in order to increase FDI.
Because the tax reform will target only the largest businesses, small and medium-sized businesses could reap benefits in the form of new tax breaks, financed by the hikes.
“With SMEs making up around 99% of all businesses and employing 88% of South Korea’s workers, this policy move is also designed to enable the government to deliver on its job creation agenda, and adds onto the recent hike in minimum wage,” says Agata L’Homme, South Korea analyst at the Economist Intelligence Unit.
She adds that there is room for more action to tackle South Korea’s current socio-economic inequality.
“This will help conditions for Korean SMEs and the government is serious in implementing much-needed reform on social safety nets," she says. “However, a stronger policy push will be necessary to tackle labour market reforms and addressing issues related to a rigid dual system consisting of a privileged segment of regular workers and a less protected set of irregular workers.”