As the government's Corporate Tax Act plan to raise the corporate tax rate by 1 percentage point across the board regardless of the size of corporations appears increasingly likely to be introduced at a plenary session of the National Assembly, there are growing concerns about a heavier tax burden on small and medium-sized businesses. With external risks expanding recently, such as China's low-price offensive and the United States' tariff hikes, an additional tax burden could further worsen not only cash pressure but also the capacity to manage operations, including reduced investment.
The National Assembly's Strategy and Finance Committee held a full session on Oct. 30 and, led by the Democratic Party of Korea, passed 11 budget-related bills for next year, including the Act on Restriction on Special Cases Concerning Taxation. The Corporate Tax Act and education tax reform plans, which the ruling and opposition parties failed to agree on, are expected to be introduced at the plenary session in their original government form.
In July, when the government announced its tax reform plan, it said it would raise the corporate tax rate by 1 percentage point in all brackets. The National Assembly Budget Office estimated that this would increase tax revenue by 18 trillion won over the next five years.
According to political circles, the current corporate tax has four brackets based on the tax base: ▲ 9% for 200 million won or less ▲ 19% for more than 200 million won to 20 billion won or less ▲ 21% for more than 20 billion won to 300 billion won or less ▲ 24% for more than 300 billion won.
The People Power Party argued that the bracket for micro and small and medium-sized businesses should be excluded from the corporate tax increase, but this was not accepted. The ruling and opposition parties engaged in last-minute negotiations between floor leaders on Oct. 30 but failed to reach an agreement. As of Nov. 1, they entered last-minute talks, but a deal does not appear likely.
If the Corporate Tax Act amendment to raise the corporate tax rate by 1 percentage point in all tax base brackets passes the National Assembly, there are concerns that the business environment of small and medium-sized businesses, which lack ample operating funds, could worsen further.
Small and medium-sized business circles say the proposed 1% corporate tax hike does not reflect the reality facing small and medium-sized businesses. With external risks expanding recently, such as China's low-price offensive and the United States' tariff hikes, an additional tax burden could further worsen their capacity to manage operations.
In particular, for small and medium-sized businesses whose revenue is not large, a heavier tax burden can immediately translate into pressure on cash flow. This can lead to reduced investment, limits on new hiring, and delays in facility investment, and in the mid to long term could connect to slower growth or pressure to exit the market.
A CEO of a manufacturing small and medium-sized business said, "The Lee Jae-myung administration has moved to 'normalize the tax system' by restoring the corporate tax rate, which was cut under the previous administration, to the 2022 level," adding, "At a time when closures, an increase in loss-making corporations, and worsening cash crunches are unfolding on the ground for small and medium-sized businesses, I'm not sure this is the right policy." The CEO added, "Policies that fit reality, not policies that simply run counter to the previous administration, should be implemented."
A CEO of a small and medium-sized auto parts manufacturer said, "If the corporate tax rate hike is implemented as is, we would have to consider cutting back on planned investment or hiring due to higher taxes," adding, "Given the domestic auto industry's structure of tiered subcontracting, for small and medium-sized businesses like ours at the very bottom, we cannot ignore the impact of changes in the business environment caused not only by our own tax burden but also by the tax burdens of upper-tier corporations such as large corporations and mid-sized corporations."
Chu Moon-gap, head of the Economic Policy Office at the Korea Federation of Small and Medium Enterprises, said, "While we agree with the basic intent of the government's tax reform plan, we must consider that due to worsening business conditions, the number of small and medium-sized corporations with net losses last year reached 400,000," adding, "For brackets up to a certain tax base threshold, including small and medium-sized businesses, we should consider keeping the current tax rates."