S. Korea may revise up tax credit on chip facility investment

[Photo by MK DB]

The South Korean government will seek to revise up the tax credit on new chip facility investments to lure more investments in the country’s semiconductor sector amid intensifying global competition for critical technology like semiconductor.

The government on Thursday proposed to increase the tax credit on facility investments in national strategic technologies like chips, batteries, vaccines, and display to 15 percent for large and mid-size companies from current 8 percent. The tax credit rate for smaller companies would go up to 25 percent from 15 percent.

The latest proposal comes less than two weeks after the National Assembly approved a 2-percentage-point increase in tax credit on semiconductor investments to 8 percent, which fell far short of expectations of the chip industry, as well as 10 to 20 percent proposals by the country’s two major parties.

In response to growing criticism that the 8 percent tax credit is too small to encourage investments, Korean President Yoon Suk-yeol on Dec. 30 ordered to review expanding tax credit support on chips and other national strategic industry sectors.

“Semiconductor is a critical industry of our economy and a strategic asset directly connected to future competitiveness of Korea, national security, and survival,” Economy and Finance Minister Choo Kyung-ho said Tuesday. “We will come up with innovative tax support plan to improve overall corporate investment sentiment and secure global competitiveness of national strategic industry.”

Economy and Finance Minister Choo Kyung-ho, far right, on Tuesday [Source : Yonhap]

The Ministry of Economy and Finance plans to introduce the revision in the tax law in January and seek parliamentary approval for the new tax credit on investments in national strategic industries.

Once it is passed, a large company investing on new chip facility this year could enjoy a maximum 25 percent tax credit thanks to the temporary 10 percent tax credit to be granted to on-year increases in investment on overall investment. The tax credit rate on chip investment for SMEs could go up to 35 percent.

The new tax credit on semiconductor investment is expected to be one of the highest in the world, said an unnamed government official.

Competition to win the leadership in the chip sector that initially started with the chip war between China and the United States has recently intensified.

The U.S. under its Chips Act, provides a 25 percent investment tax credit for semiconductor facility and equipment investments. Taiwan and China also offer generous tax benefits to critical technology investment like chips.

However, the new tax credit is expected to slash Korea’s corporate tax income by more than 3.6 trillion won ($2.8 billion) in 2024, which can bode badly for national finance.