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Sunday, January 29, 2023

Hankyeonyoung: “We need to simplify the taxation of corporate income abroad”

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Overseas reserves of Korean companies approach 121 trillion won
Hurry up to tax the underlying assets

Changes in the surplus of foreign reserves in the balance of payments.

It has been argued that taxation of foreign-sourced income should be relaxed to allow companies to transfer overseas reserves to Korea.

On the 29th, the Korea Economic Research Institute (Han Kyung-yeon) stressed the need to introduce the “holding at source” method of taxation in a report titled “Six Reasons to Switch to Holding at Source Taxation” dated the 29th.

The “hold at source” method of taxation means that among foreign income, business tax and dividend income are exempt from taxes, and only domestic income is taxed. In the case of Korea, in contrast, it is the “principle of residence” method. Income earned abroad is also taxed, and a portion of the tax paid abroad is deductible.

Hankyungyeon noted that Korea’s method of taxation creates a “blocking effect” in which Korean companies’ earnings are tied overseas.

Last year, overseas reserves of foreign subsidiaries of Korean companies (reinvestment income) amounted to $90.2 billion (approximately 121 trillion won). Overseas reserves have been steadily increasing since 2010 as Korean companies’ foreign direct investment has increased, and in particular, they have grown by $10.43 billion (approximately 13.9553 trillion won) over the past year.

Hankyungyeon cited the residence-based taxation method as one of the main reasons for this increase in overseas reserves. Assuming that a UK company, which is the source holding company’s country of taxation, opens a branch in Ireland and remits all 500 billion won of pre-tax profits earned locally, the company’s corporate tax payment is 62.5 billion won. However, if the same conditions are applied to companies headquartered in Korea, which is a resident taxable country, the tax burden would double to 125 billion won.

Lim Dong Won, a researcher at Hankyung-yeon, stressed, “Taxation of residents is a factor that hinders the return of profits from overseas investments in countries with low taxes.”

Some point out that this is out of step with the international trend. According to Hankyung-yeon, most OECD (Organization for Economic Co-operation and Development) countries follow the method of holdings at source. In 2009, Japan switched to a taxation method based on holdings at source, and dividends from overseas subsidiaries more than doubled. As for foreign reserves, in 2010 the level of internal profitability increased to 95.4%. In the case of the United States, about 77% of US foreign exchange reserves were repatriated to Korea through the transfer of taxation to the withholding principle.

Lim noted, “In order to increase the tax competitiveness of domestic investment companies, we need to change the taxation of the original holding company to exempt foreign income from taxation.”

Reporter Lee Kun-om [email protected]

Source: Economist

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