Reverse Discrimination Against Local Firms to Be Corrected

The Korean government is set to revamp its current taxation regime which discriminates against local corporations by providing only foreign companies with tax cuts.

Since the government first adopted the current tax cut policy back in 1999 to attract foreign capital, it has reduced foreign firms’ tax rates, saving them 400 billion to 600 billion won per year.

After announcing its new policy to scrap industrial regulations including the controversial limits on cross-shareholding which have been exclusively applied to local firms, the government decided to correct reverse discrimination against local companies. It made such decisions since local firms suffering have increased their overseas investment while hesitating to invest domestically, which also caused brain drainage. Business circles have urged the government to help local firms to compete against foreign firms on a level playing ground.

The Strategic Planning and Finance Ministry said yesterday that it received a report ‘Measures to Improve Taxation Policies on Foreign Investment’ from the Korea Institute of Public Finance last month. The government had asked the institute to make a report on measures to deal with reverse discrimination against local firms. Measures to reduce tax cuts which have been provided for foreign-invested firms, as suggested in the report, will be included in the government’s taxation revamp policy to be released in the second half of this year. However, the ministry will phase in the new tax policy in order not to discourage foreign investment.

The government has exempted foreign-funded firms from tax amounting to 2.2 trillion won for the past four years. The annual amount reached to 633.7 billion won in 2007, up more than 200 billion won in 2006.

By contrast, China and Taiwan have recently decreased preferential tax treatments for foreign firms. For their part, Singapore, Hong Kong and the United Kingdom have treated foreigners and their own people equally.

The ministry decided to gradually reduce tax cuts for foreign firms while providing subsidies in cash for necessary foreign investment cases. Unlike the current tax concession regime, which lowers tax for all foreign investment cases, the new policy will enable the government to choose necessary foreign investment cases and provide different amounts of subsidy.

It will also consider measures to follow Hong Kong and drastically lower the corporate tax rate for both foreign and local firms, and allow local firms to be given equally preferential tax treatments if measures to abolish some of tax cuts for foreign firms are not available.

Hong Beom-gyo, KIPF’s senior researcher who conducted the research, said, “Foreigners invest in Korea not because of tax cuts for foreign firms but because of its accessibility to China. Foreign investment will not sharply decrease even when the government reduces its tax cuts for foreign investment.”

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