How to Cut Corporate Tax Rates for Balanced Regional Development

Among the recently proposed partial amendments to the Corporate Tax Act are bills that seek to use the corporate tax rate as a tool to generate momentum for balanced regional development. The first bill proposes applying corporate tax rates under a three-tier structure depending on where a corporation’s head office or principal office and factory are located among the various regions nationwide (introduced by Representative Lee Wonwook).

If a corporation is located in the Seoul metropolitan area or in a metropolitan city, the existing corporate tax rate would apply. If it is located in another region, however, a rate set at 75% of the existing corporate tax rate (based on the top marginal rate) would apply; and if it is located in a depopulation area, a rate set at 50% of the existing corporate tax rate (again based on the top marginal rate) would apply. The second bill (introduced by Representative Koo Jaguen) divides corporate tax rates into two categories, applying rates that are 5% lower than the existing corporate tax rates to local enterprises under the Special Act on Promotion of Local Investment. In other words, while the details differ from bill to bill, the basic thrust is to institutionalize a system in which corporate tax rates are flexibly applied according to the region in which a corporation is located.

Of course, firms do not decide where to locate based solely on the corporate tax rate. This can already be seen in the United States, where tax competition exists among the states, as many Big Tech companies are located in California despite its relatively high corporate tax burden. Yet there is another side to this: if businesses can reduce their tax burden, they are willing to bear the costs of moving to other regions where various forms of infrastructure can be put in place.

This is evident from cases in which some Big Tech companies formerly based in California relocated to other U.S. states, such as Texas. Meanwhile, in Korea, the Korea Chamber of Commerce and Industry (KCCI), together with the Korea Institute for Industrial Economics and Trade, recently surveyed firms in the Seoul metropolitan area regarding their intentions to relocate to non-metropolitan regions or expand new facilities there, and found that around 30% had either relocated or were considering relocation. Here as well, infrastructure-related costs—such as lower site costs and ancillary policy support—were identified, and tax benefits such as tax reductions or credits were shown to serve as effective policy support tools that companies can tangibly feel. In other words, regardless of the country, corporations—as instruments for making investments and generating profits on that basis—tend to display similar patterns of thinking.

Up to now, Korea has had a different institutional device that allows each local government to adjust the tax burden on corporate income. Article 103-20(2) of the Local Tax Act provides for a flexible rate system under which local governments may increase or decrease the standard local corporate income tax rate by ordinance within a range of 50%, but in practice this mechanism has not been actively utilized. Of course, since the standard local corporate income tax rate ranges from 0.9% to 2.4%, even a 50% adjustment within that range would still involve fiscal leakage, while at the same time likely being insufficient to generate a relatively large economic effect in attracting businesses. If the national corporate tax were used to reduce firms’ tax burdens while establishing, in a simple structure such as the tax rate itself, an institutional incentive system under which corporate income in each region could increase, then such a simple framework could produce the effect of expanding and contributing to regional economic infrastructure through tax expenditures in each region.

At the same time, changing the corporate tax rate provisions in this way may run into objections concerning discriminatory tax burdens based on corporate location. In this case, however, Article 123(2) of the Constitution provides that the state has a duty to foster regional economies for balanced development among regions, and this can be presented as a basis for explaining such amendments. In addition, for the shift to a flexible corporate tax rate structure based on corporate location to be rationally supported, tax credit systems for corporate relocation to non-metropolitan regions under the Restriction of Special Taxation Act and similar laws should be significantly reduced, so as to eliminate double benefits and the complexity of the tax system. Also, as many would worry, institutional safeguards should be put in place to prevent any particular region from functioning as a domestic tax haven. That is because cases in which national fiscal spending—a resource belonging to everyone—is used meaninglessly must be blocked.

If the recently proposed amendments to the corporate tax rate provisions are enacted as they are, cities seeking to develop as business hubs in regions that already have, or are willing actively to build, a certain level of infrastructure could accelerate their development. If local governments in each region establish institutional infrastructure, succeed in attracting businesses, and increase population inflows, they may be able to keep pressing the accelerator pedal of development. If not, they are likely to lose their development momentum. Put simply, a corporation is an instrumental entity engaged in economic activity—that is, in making money.

Accordingly, because the corporation as an instrumental entity is something created by people, the possibility is always inherent that people, too, will move along with the movement of firms. Of course, proper incentives should also be provided not only to relocating firms but also to talented individuals who move to or settle in each region. It is hoped that flexible corporate tax rate provisions based on corporate location will reduce tax complexity while also revitalizing regional economic development, and ultimately lay the cornerstone for balanced regional development.

Seungyoung Jeong, Professor at Changwon National University

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Original title: 지역균형발전 위한 '법인세율 인하' 방안

Author: Seung-young Jung

Date: 2023-05-22

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=10&idx=25687