South Korea hikes taxes for conglomerates, rich to tackle inequality, fund welfare programmes

South Korean President Moon Jae In presides over an emergency meeting with National Security Council members at the presidential Blue House in Seoul on July 29, 2017.
South Korean President Moon Jae In presides over an emergency meeting with National Security Council members at the presidential Blue House in Seoul on July 29, 2017.PHOTO: AFP/THE BLUE HOUSE

SEOUL (Reuters) - South Korea imposed stiff tax hikes on Wednesday (Aug 2), targeting leading conglomerates, high-income individuals and investors with large holdings of South Korean shares as President Moon Jae In seeks to tackle income inequality and fund increased welfare benefits.

The corporate tax changes will hit 129 companies in South Korea and are expected to increase government revenue from corporate taxes by 5 per cent or 2.6 trillion South Korean won (S$3.14 billion) from the 2018 tax year, the Finance Ministry said.

The top marginal corporate income tax rate will be raised to 25 per cent from the current 22 per cent for corporations with more than 200 billion won of taxable income a year, the Finance Ministry said in its annual statement on revisions to the tax code.

The proposed changes in the tax code are subject to parliamentary approval, posing a challenge for the government in passing the Bill as Mr Moon's ruling Democratic Party only holds 40 per cent of the 299 seats in the National Assembly.

The hike would put South Korea's top corporate income tax rate on par with the average of the world's 20 major economies, at 25.7 per cent.

To address growing income inequality, "those who are better off, and conglomerates could contribute more to achieve social integration," Finance Minister Kim Dong Yeon said at an embargoed briefing.

"Spent well, it could boost income for the socially marginalised and increase investment on manpower, and help create a virtuous cycle in the economy," Mr Kim said.

The government wants to raise more revenue to cover rising social welfare costs as a rapidly ageing population creates long-term problems for South Korea's economy.

South Korea is set to become a super-aged society by 2026, and has the fastest-rising average age among the Organisation for Economic Cooperation and Development (OECD) countries.

A super-aged society refers to nations where people of 65 years or older make up at least 20 per cent of population, according to the United Nations.

Boosting household income is also an urgent task for the Moon Jae In administration, as wages have failed to keep up with corporate earnings.

Household income as a proportion of aggregate corporate income fell to 62.1 per cent in 2016 and has fallen steadily from 69 per cent in 1995, government data shows.

The ratio of household debt to disposable income is rocketing towards 190 per cent, as weak income growth pushes Koreans to borrow more for housing and living expenses.

The government is counting on an 11 trillion won supplementary budget approved in July to support private consumption this year as corporate income failing to flow to households drags on growth.

To fund such spending and reduce income inequality, the government plans to broaden its revenue base by taking more from the affluent and less from the poor.

An income tax rate of 42 per cent will kick in on personal earnings exceeding 500 million won a year starting 2018, up from 40 per cent currently, Wednesday's statement said.

Income tax for annual earnings of 300 million won to 500 million won will be subject to income tax of 40 per cent from next year, up from 38 per cent.

The tax hike on high incomes will affect about 93,000 salary earners and entrepreneurs, the Finance Ministry estimated.

A capital gains tax that is applied only to large shareholders will also be raised from next year.

Large shareholders will pay a 25 per cent tax when their when they sell shares listed in the Korea Composite Stock Price Index (KOSPI) at a gain of more than 300 million won a year, up from current rate of 20 per cent.

Capital gains of less than 300 million won a year will continue to be subject to 20 per cent tax rate.

Capital gains tax will gradually be applied on a larger range of investors. By April 2021, individual shareholders with more than 300 million won worth of shares in companies in the KOSPI or a stake exceeding 1 per cent, will be subject to capital gains tax.

Currently, capital gains tax is only applied to large shareholders with a stake exceeding 1 per cent or holding 2.5 billion won worth of KOSPI-listed stocks.

Institutional investors will not be affected by the revised capital gains tax codes because they are subject to corporate income tax.

Companies hiring workers will receive tax exemptions proportional to the number of jobs created through 2020, with small- to medium-sized companies eligible for proportionately larger tax benefits than large businesses.

The revisions, which the Finance Ministry said would add 5.5 trillion won annually to government revenue, will be submitted to the National Assembly on Sept 1 for parliamentary approval. Revision of 13 tax codes will need to be approved, the ministry said.