Earlier Move to Cut Tax

The government will reduce corporation tax from the current 25 percent to 20 percent by 2011, two years earlier than expected. It made the decision in an effort to boost corporate competitiveness amid worsening economic conditions.

The Ministry of Strategy and Finance released the “Revised Bill on Tax Law and Enforcement Ordinance for 1H 2008,” Tuesday. The revised bill will be introduced at an extra session of the National Assembly in late June after being passed by vice ministers and the Cabinet council.

○ Earlier Tax Cut

While reporting economic measures to President Lee Myung-bak in March, the Finance Ministry said it would cut corporation tax from the current 25 percent to 22 percent in 2009 and to 20 percent in 2013 for firms whose standard of assessment for annual income exceeds 200 million won.

The revised bill, however, has shortened the period to cut corporation tax to the 20 percent mark by two years. But the government will reduce corporation tax to 22 percent in 2009, as scheduled.

On the other hand, corporation tax for companies with annual income of 200 million won or less will be lowered to 11 percent next year and 10 percent in 2011.

The ministry will apply the reduced corporation tax to corporations that pay the tax in advance.

For example, corporations that settle their accounts in December can be subject to the lowered corporation tax of 22 percent from March 2009. However, they will be allowed to pay 22 percent corporation tax if they temporarily calculate profits for 2008 in August. Also, they can pay 20 percent of corporation tax if they prepay the tax in August 2010.

The ministry had initially announced that it would cut the minimum tax rate (the level at which firms should pay even when they are exempted from tax) for smaller firms to 8 percent next year. Recently, it announced that it would further cut the rate to 7 percent in 2011.

The minimum tax rate for other firms will be gradually cut from the current 13-15 percent to 10-13 percent by 2011.

○ R&D and smaller firm investment

In an effort to encourage corporate R&D, the government will raise tax deductions for facility investment from the current 7 percent to 10 percent. Creative research centers belonging to corporations will also be deducted from tax. Under the new measure, the R&D activities of publishers, game corporations, and advertising firms will benefit from the tax deduction.

Currently, large corporations, which invest in smaller firms and receive dividends, can get a 30-50 percent corporation tax exemption for the dividends. However, they will soon be able to enjoy a 100 percent corporation tax exemption for the dividends. However, the government will provide tax benefits only for non-voting shares to prevent large corporations from buying shares of suppliers and strengthening their influence.

The measure will encourage large corporations to invest more proactively in smaller firms, easing the capital shortage of smaller firms.

Moreover, smaller firms will get a tax credit amounting to 300,000 won per person if they convert non-regular workers who were hired as of late 2007 to regular workers.

Museums, botanical gardens, spas and pools will be added to the list of industries that will get temporary investment tax credit in a move to support the tourism industry and improve service balance.

Local golf courses will be exempted from individual consumption tax by late 2010 and relieved from the burden of comprehensive property tax imposed on land. The Finance Ministry estimates that the measure will contribute to lowering golf course fees by 30,000-40,000 won.

legman@donga.com