Controversy over the Global Corporate Minimum Tax, Tax on the Wealthy, and their Implications

Controversy over the Global Corporate Minimum Tax, Tax on the Wealthy, and their Implications

In 2019, the OECD has suggested an implementation of digital tax and a global minimum tax, which gained support by the US implementation of the global minimum tax early this year, constraining international tax competition. Together with this, the Biden administration is planning on increasing corporate tax and tax on the wealthy in order to pursue policies that would reconstruct the US. South Korea’s companies are also expected to be significantly impacted by the rapidly progressing discussions on the global corporate tax, and the South Korean government’s effective response is necessary. This essay has altered and improved the “The discussions on the global corporate tax and tax on the wealthy and their implications” from the “Post COVID-19, South Korea’s strategies against the changes in macroeconomics and trade policies of key countries” on 25 May 2021. ✉Dong-Won Lim dwlim@keri.org 1Research Fellow, Korea Economic Research Institute, Seoul, Korea Firstly, the implementation of the digital tax will not only affect South Korean IT industries that offer services abroad, but also domestic companies that manufacture automobiles, mobile phones, and home appliances that are sold abroad. This would mean that it is ideal to exclude manufacturing and consumer-facing businesses from being applicable to the digital tax. According to what is being discussed currently, it will be reasonable to tax automated digital services and consumer-facing businesses differently. In South Korea, the effect of the global minimum tax will be minimal, as there already is a high level of corporate tax rate (maximum 27.5%). However, domestic companies that are abroad will be negatively affected by the implementation of the global minimum tax as the increase of costs of corporate tax will negatively affect employment and investment. Given the minimal negative impacts on businesses, the OECD 12.5% minimum tax seems justifiable as the limit to which tax avoidance is not encouraged. Most importantly, tax increases should be refrained as it may transfer the government’s tax revenue shortfall, resulting from the increase in corporate tax (digital tax and global minimum tax), onto the businesses. Further increases in corporate taxes or cuts in tax credits will hinder South Korea’s both its international competitiveness and its national competitiveness. Furthermore, following the US example of increasing tax on the wealthy and large companies for financial resources will bring economic losses such as labour and capital outflow instead of increased tax revenue, as there already is a high tax burden.

In 2019, the OECD has suggested an implementation of digital tax and a global minimum tax, which gained support by the US implementation of the global minimum tax early this year, constraining international tax competition. Together with this, the Biden administration is planning on increasing corporate tax and tax on the wealthy in order to pursue policies that would reconstruct the US. South Korea’s companies are also expected to be significantly impacted by the rapidly progressing discussions on the global corporate tax, and the South Korean government’s effective response is necessary. This essay has altered and improved the “The discussions on the global corporate tax and tax on the wealthy and their implications” from the “Post COVID-19, South Korea’s strategies against the changes in macroeconomics and trade policies of key countries” on 25 May 2021. ✉Dong-Won Lim dwlim@keri.org 1Research Fellow, Korea Economic Research Institute, Seoul, Korea Firstly, the implementation of the digital tax will not only affect South Korean IT industries that offer services abroad, but also domestic companies that manufacture automobiles, mobile phones, and home appliances that are sold abroad. This would mean that it is ideal to exclude manufacturing and consumer-facing businesses from being applicable to the digital tax. According to what is being discussed currently, it will be reasonable to tax automated digital services and consumer-facing businesses differently. In South Korea, the effect of the global minimum tax will be minimal, as there already is a high level of corporate tax rate (maximum 27.5%). However, domestic companies that are abroad will be negatively affected by the implementation of the global minimum tax as the increase of costs of corporate tax will negatively affect employment and investment. Given the minimal negative impacts on businesses, the OECD 12.5% minimum tax seems justifiable as the limit to which tax avoidance is not encouraged. Most importantly, tax increases should be refrained as it may transfer the government’s tax revenue shortfall, resulting from the increase in corporate tax (digital tax and global minimum tax), onto the businesses. Further increases in corporate taxes or cuts in tax credits will hinder South Korea’s both its international competitiveness and its national competitiveness. Furthermore, following the US example of increasing tax on the wealthy and large companies for financial resources will bring economic losses such as labour and capital outflow instead of increased tax revenue, as there already is a high tax burden.