Local companies given fewer corporate tax breaks than US, Japanese firms

Korean companies have tax deduction rates that are less than half the rates of American and Japanese companies. (Yonhap)

South Korean companies are given far fewer tax breaks compared to their counterparts in Japan and the US, a report said Wednesday.

According to an analysis by the Korea Economic Research Institute, the corporate tax deduction rate in South Korea in 2019 was 8.4 percent, while the rate in Japan was 24.8 percent and 18.6 percent in the US.

This means that for every 100 won of tax paid, firms in the US get 18.6 won back and 24.8 won back in Japan, while in South Korea, corporations only get 8.4 won back.

The report also pointed out that while South Korea has continuously reduced tax incentives, the US has moved in the opposite direction to give more breaks to corporations.

Between 2015 and 2019, the tax break rate went from 12.5 percent to 8.4 percent in South Korea. In the US, it moved from 10 percent in 2015 to 18.6 percent in 2018. The report didn’t have US data for 2019.

In Japan, the number slightly dropped from 26.1 percent in 2015 to 24.8 percent in 2019.

Due to the low corporate tax deduction rate, the gap between the nominal tax and effective tax rate for South Korean companies was limited to 1.4 percentage points. American and Japanese companies enjoyed an average 3.3 percentage-point discrepancy.

The think tank pointed out that an “effective tax rate is the actual tax paid after legitimate deductions and credits applied. So having less of a gap between nominal tax and effective tax rate means South Korean corporates benefited less from tax deduction.”

“Looking into tax incentive rate by corporate sizes in South Korea, large to midsized companies received 5.1 percent deduction, just a quarter from what SMEs have deducted. To bring the corporate tax incentive rate up to the level in the US and Japan, tax credit must be increased for research and development, which is where around half of what tax incentives are given for,” the institute added.


By Hong Yoo (yoohong@heraldcorp.com)