Fierce Competition Among South Korea, Japan, and China to Cut Corporation Tax Rate

South Korea, China, and Japan are keen to cut corporation tax rate in an effort to attract more corporate investments. Japan has already been reviewing cutting corporation tax from a current rate of 30 percent to 25 percent, while China and South Korea have followed Japan’s lead and have also strived to come up with measures that can help reduce corporation tax rate.

Fierce competition among three Northeast nations to cut tax rate:

Japan has taken the initiative in this race. Japanese Prime Minister, Junichiro Koizumi, announced a review to slash corporation tax rate last September when the Liberal Democratic Party (LDP) held a race to elect chief of the party. He maintained that reduced corporation tax would help Japanese companies to shed some burden and help strengthen their competitiveness overseas. Enhanced overseas competitiveness will make it easier to revive the Japanese economy, which has suffered from increased red ink in finance mainly due to the sluggish economy for last 10 years.

Many economic experts forecast that Koizumi’s plan to cut corporation tax rate will materialize in the near future since he has announced it to the public, though a specific date has not been set yet.

The Chinese government also plans to cut corporation tax rate for domestic companies from a current 30 percent to 25 percent as early as next year. As for corporation tax rate for foreign companies conducting business in Special Economic Zone in China, the Chinese government, however, plans to raise it from a current 15 percent to 25 percent, the same rate applied for domestic corporations.

This move can be interpreted as the Chinese government’s determination to play an active role in fostering domestic companies, as well as to induce foreign investments in consideration with China’s enhanced economic status.

South Korea also passed legislation to cut corporation tax rate by two percent from a current 27 percent starting 2005 in Treasury Board on November 20.

The need for South Korea to advance the date to start applying reduced rate:

If Japan and China apply the reduced tax rate for corporations as early as next year, South Korea, which plans to apply reduced corporation tax rate from 2005, will lose its competitive power in taxation.

However, it is hard to advance the starting date as early as next year, since the legislation has already passed in the National Assembly, the government said. Regarding another reason to defer the plan, government officials went on to say that the government has not been fully prepared to compensate decreased tax revenues.

Kim Young-yong, manager for the taxation team in the Ministry of Finance and Economy, said, “It is impossible to accelerate the date to apply a reduced rate, since it is expected that the government has significantly decreased revenues coming in from next year’s corporation tax mainly due to companies’ poor performance in this year’s ailing economy.”

A great number of taxation pundits, however, have argued that the government should hasten the day to apply curtailed corporation tax, since reduced corporation tax rate is a current trend around the globe.

Lim Joo-young, a professor at Graduate School of Science in Taxation, University of Seoul, said, “Many corporations have asked the government to slash corporation tax rate from as early as this year. The leading figures in the government, however, have been opposed to their requests, delaying the plan and dampening companies’ enthusiasm for investments.” He added, “It is much better for the government to play an aggressive role in bringing the plan forward because it is the government’s job that needs to be done sooner or later anyway.”

Jin-Hup Song Kwang-Hyun Kim jinhup@donga.com kkh@donga.com