Business-friendly environment is key to competition

Under OECD and G20 initiatives, 136 countries around the world agreed to tax 25% of the largest multinationals' so-called excess profit - defined as profit in excess of 10% of revenue, with annual sales exceeding 20 billion euros (about 27.7 trillion won), which takes effect from 2023.

Samsung Electronics and SK Hynix would be subject to these new rules. Countries around the world will apply corporate tax of several trillions of won on Samsung Electronics, which is estimated to achieve 300 trillion won in sales and 60 trillion won in operating income. The Korean government will be able to tax Google, Apple and other multinational companies operating local businesses but failing to pay taxes.

The Ministry of Economy and Finance said that the new rule would not increase burdens for individual Korean companies as they provide tax deductions if the companies had already been taxed in another country and expects to see more tax income after taxing multinational companies in Korea. However, it is questionable whether the government can collect enough tax from foreign companies that can fill the gap of corporate tax applied on Samsung Electronics, which account for 15% of corporate tax in Korea. Also, since the minimum tax rate applied on multinational companies of annual revenue of 750 million euros is fixed at 15%, companies operating in countries with lower tax rates may face larger tax burdens domestically.

The new alignment puts a stop on competition between countries to attract companies by reducing lower corporate tax rates. However, the global competition to win companies leading in the fourth industrial revolution such as semiconductors, batters, bio by deregulation, subsidies and resources will become ever more intense. Instead of being complacent about less than expected tax impact from the new rule, the government should move quickly to come up with strategies to help Korea gain an upper ground in the global competition to attract promising companies.