U.S. tariff deadline looms amid Korean tax debate

With just one week remaining before the U.S. tariff deferral deadline, high-level talks between South Korean and U.S. officials have suddenly been canceled. The U.S. abruptly called off the Korea-U.S. 2+2 trade dialogue scheduled for July 25 in Washington, increasing pressure on Seoul. If negotiations stall, a 25 percent tariff will be imposed on all exports to the U.S. starting August 1.

South Korean companies now face another challenge as the Lee Jae-myung administration plans to raise corporate tax rates. The government is expected to unveil tax reform measures as early as the end of this month. For businesses, this means receiving a “corporate tax letter” from Lee’s government just as the threat of U.S. tariffs grows. Raising corporate taxes amid a global tariff war could backfire, increasing burdens on domestic firms.

High tariffs risk not only reducing exports but also hollowing out the manufacturing sector. Like Hyundai Motor Group’s move to localize production in the U.S., increased overseas investment weakens South Korea’s domestic production base and endangers the ecosystem of small and mid-sized suppliers. Unlike large corporations, smaller firms cannot afford the costs of overseas localization and may fall behind in global supply chains. The manufacturing sector, a key driver of South Korea’s economic growth, faces a serious threat.

While U.S. President Donald Trump used tariffs to attract competitive foreign firms, the South Korean government is pushing corporate tax hikes that may drive companies abroad. South Korea’s top corporate tax rate stands at 24.0 percent, which is higher than the U.S. (21.0 percent), Japan (23.2 percent), Taiwan (20.0 percent), and the OECD average (21.5 percent).

New Deputy Prime Minister and Finance Minister Koo Yun-cheol said during a parliamentary hearing that “corporate tax cuts led to a sharp decline in tax revenue” and that “tax cuts do not necessarily guarantee growth.” Corporate tax revenue fell by 41 trillion won over the past two years, but the main cause was the economic downturn and weak earnings among large corporations. Samsung Electronics and SK Hynix reported trillion-won losses in 2023 and paid zero corporate tax last March. Business circles ironically note that if the largest corporate taxpayer this year is not an export company but the Bank of Korea, it highlights the severity of the recession.

The government estimates that a 1 percentage point increase in the corporate tax rate could generate about 2 trillion won in annual revenue. However, without an improvement in business investment sentiment, that goal will be difficult to reach. The government’s target of a “KOSPI 5,000” era will remain out of reach without a recovery in corporate earnings and market value.

What is needed now is not a tax rate hike but a revival of corporate vitality. The government should begin by reforming unnecessary tax exemptions and deductions to broaden the tax base. At the same time, bold incentives like production tax credits similar to those in the U.S. Inflation Reduction Act should be offered to strategic industries such as semiconductors, batteries, artificial intelligence and electric vehicles. The Lee administration’s first tax reform plan must lay the foundation for restoring corporate competitiveness and enabling industrial restructuring.