With the Korean economy in a state of crisis due to a drop of 1,400 won per dollar due to a series of recent capital outflows, the reserves of foreign FDI companies idle abroad reached a record high of $90.2 billion (128 trillion won) on and cumulative basis Market experts agree that it is necessary to reduce or eliminate tax on dividends transferred by these companies to transfer foreign-related dollars and stabilize the decrease in the price earned. However, although a corporate tax reform bill containing this content has been submitted to the National Assembly, there is no discussion at all amid the conflict between the opposition parties.
As a result of an analysis of the Bank of Korea’s balance of payments for the past 41 years (1980-2021) by Maeil Business Newspaper on the 25th, it was found that the reserves (reinvestment income) of foreign corporations held by Korean companies have increased to the high to a total of $90.2 billion last year. Orders from foreign subsidiaries increased by US$10.4 billion (15 trillion won) last year alone, reaching an all-time high.
Reinvestment income refers to the money accumulated by foreign direct investment companies in which Korean companies hold 10% or more of their shares, without dividends or investments in the country. The government submitted a bill to the National Assembly to revise the Corporation Tax Act earlier this month to remove tax on dividends transferred by foreign corporations in order to attract such huge foreign funds, but there is no discussion at the moment regarding passing’ the law. Under current law, dividends received by foreign corporations are combined with the income of domestic corporations holding shares in foreign corporations to determine corporate tax. However, since the foreign corporation has already paid corporate tax locally, a portion of the foreign tax paid is deducted from the corporate tax to avoid the double taxation problem of tax reassessment in Korea. However, even with partial tax credits, dividends from foreign corporations are added to domestic corporate income, increasing overall income and increasing the corporate tax burden, so companies tend to keep money in foreign corporations and refuse to come with them in.
The problem is that it is not clear whether the corporate tax reform bill that includes such content will pass the National Assembly this year. This is because the Democratic Party of Korea clearly opposes the amendment to the law. Professor Hong Ki-yong of Incheon National University explained, “If foreign subsidiaries’ reserves flow into Korea, the supply of dollars will increase, which will help stabilize the won price and improve corporate performance .”
[김정환 기자 / 전경운 기자]
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