South Korean companies paid 67.59 trillion won in quasi-taxes in 2019. It is a significant amount equivalent to 93.7 percent of the corporate taxes paid in the same year, which were 72.17 trillion won. Quasi-taxes refer to social insurance fees, such as national pension, waste and other charges, and involuntary contributions. They are not necessarily all bad. What’s problematic is the excessive amount and the speed of increase beyond businesses’ capabilities to pay them.
Comparison with net profits clearly shows how burdensome these taxes are for South Korean businesses. South Korean companies’ current net profits decreased to 111 trillion won in 2019, down by 50 trillion won from the previous year. However, quasi-taxes rose 7.4 percent in the same year. Such a trend is not limited to 2019. The economic growth rates of the country were between 2.0 and 3.2 percent from 2015 to 2019 while quasi-taxes’ rates of increase were 5.1 to 8.3 percent. This is why businesses are heavily complaining about them.
The problems are not just limited to quasi taxes’ amounts and rates of increase. They sometimes become major challenges for business activities. According to The Dong-A Ilbo’s research, there was even a case in which a company that built a plant in a non-development-restricted area was requested to pay the charges of over 180 billion won as the company tried to expand its plant and the area was designated as a development-rested area. In another example, Lotte Confectionery, which has been paying two to three billion per year in waste charges since 2012, saw a big increase in waste charges even though the consumption of gum is on the decline with few people spitting out gum on the street.
In particular, involuntary contributions among quasi-taxes can be significant threats to business management as the scope of their compulsion is vague. Large companies feel more compulsion than small- and medium-sized ones regarding the requests of the central or local governments for contributions.
Despite such a situation, the ruling party is focused on imposing even more quasi-taxes on companies on the excuse of COVID-19. The social solidarity contribution law, which is being pursued by the ruling party in the February provisional session of the National Assembly, is intended to collect funds from businesses and individuals to help small business owners who are heavily affected by COVID-19. The cooperative profit-sharing system, which is also being pursued by the ruling party along with the law, contains a measure in which large companies that achieve over-the-target profits are required to share their profits with their smaller partners. Even though the ruling party is presenting it as a voluntary decision by companies, it is likely to be practically mandatory for companies, which need to constantly please the political circles.
Companies that have to pay unreasonable and risky contributions will be hard to find the necessary vitality. Unreasonable charges and involuntary contributions among quasi-taxes need to be removed. They are better to be collected as taxes in accordance with the principle of no taxation without law, which will increase predictability for companies and, therefore, help with their business.