Firms investing in US, Southeast Asia hit by global minimum tax

Korea’s implementation of the OECD’s global minimum corporate tax initiative, the first of its kind in the world, has become an additional financial burden on companies that have invested in the U.S. and Southeast Asia when seeking tax benefits, according to industry officials, Wednesday.

Petrochemical firms that possess battery and solar panel manufacturing units are considered major victims of the new taxation regulations, as they have already suffered worsening profits due to the oversupply of Chinese products amid the global economic slowdown.

The new rule forces parent firms of multinational companies that generate over 750 million euros ($811 million) in global revenues to pay additional taxes if their foreign subsidiaries pay corporate taxes falling short of 15 percent of their earnings.

For example, a Korea-based multinational firm’s subsidiary that paid a corporate tax equivalent to 10 percent of its earnings in a Southeast Asian country can be forced to pay an additional tax equivalent to 5 percent of its earnings to the Korean government.

Korea stands out as the first country among OECD and G20 members to fully implement the new tax system, aimed at preventing multinational companies from evading taxes, after the agreed-upon timeline of 2023. The new regulation took effect here on Jan. 1.

“LG Chem, Samsung SDI, SK Innovation, Hanwha Solutions, Hyosung and Lotte Chemical are major examples of companies subject to the new tax system,” Meritz Securities analyst Roh Woo-ho said.

In particular, LG Chem is anticipated to be obligated to pay an additional 150 billion won ($112 million) to the Korean government.

This is due to the fact that the company holds over an 80 percent stake in LG Energy Solution (LGES), which is projected to benefit from approximately 2 trillion won in tax incentives in the U.S. under the Inflation Reduction Act.

“Whether LG Chem will pay additional taxes or not depends on its decision to sell its share in the subsidiary,” Roh said.

In 2023, LG Chem’s operating profit suffered a year-on-year decline of 15.1 percent, falling to 2.5 trillion won. Consequently, an additional corporate tax could significantly impact its profitability. Despite this, the chemical firm has refuted speculation suggesting that it may sell its stake in LG Energy Solution (LGES).

“The global minimum tax will not be significant, but we will consider various factors, including our fundraising and strategic M&As,” LG Chem Chief Financial Officer Cha Dong-seok said during a conference call on the company’s 2023 earnings held on Jan. 31.

Hanwha Solutions, which suffered a 37.4 percent year-on-year decline in operating profit last year, is also expected to have only limited tax benefits in the U.S., where it has made investments into the solar panel business.

Lotte Chemical is another petrochemical firm that seems to face hurdles in its strategy to enhance profitability by leveraging U.S. tax benefits. The company incurred a 333.2 billion won operating loss in 2023, following a loss of 762.6 billion won in 2022.

“Korean firms are grappling with the challenges of the minimum tax ahead of their competitors, given the government’s expedited implementation of the policy,” a Korea Chamber of Commerce and Industry official said. “For Korean firms to maintain their global competitiveness, the government should revise the Enforcement Decree of the Adjustment of International Taxes Act.”

The Federation of Korean Industries also pointed out that the minimum tax will curb investments and employment opportunities.