Korean opposition party agrees on higher tax incentives for chip industry

[Photo provided by SK hynix]

South Korea’s main opposition Democratic Party (DP) on Tuesday embraced a revised bill to raise the tax credit rate on facility investments in the chip industry to 15 percent from 8 percent, which will pave the way for the country to become more competitive in the global chip war.

“We will accept the revised bill concerning the restriction of special taxation act that was proposed by the government to the National Assembly in January,” said Kim Sung-hwan, chairman of DP’s policy planning committee, on Tuesday, after a closed-door meeting with members of the parliament’s strategic and finance committee.

The sub-committee on tax credits under the strategic and finance committee is projected to vote on the revised bill on Thursday after a final review of the proposals of the government and the DP. A passage from the sub-committee will allow the revised bill to be put to a vote at a plenary session on March 30.

The tax credit scheme involves providing grants to investments in 43 national strategic technologies in four sectors – chips, vaccines, secondary battery, and display.

The Korean government proposed a bill in January to raise the tax deduction rate to 15 percent from 8 percent for large and mid-size companies and to 25 percent from 16 percent for small- and mid-size companies after judging that national support on key technologies is needed. The revision also contains an additional tax deduction of 10 percent on the average excess investment over the last three years for this year.

The DP proposed expanding the scope of the technologies eligible for the tax deduction to include renewable energy, green hydrogen, and next-generation vehicles.

Kim Sung-hwan, chairman of DP’s policy planning committee, on Tuesday [Photo by Yonhap]

An analysis by Maeil Business Newspaper and The Korea Economic Research Institute (KERI) on 32,507 business entities subject to external audits from 2009 to 2021 showed that a 1-percentage point rise in the tax deduction rate for facility investments leads to a 0.168-percentage point increase in the share of facility investment as to their total assets. A 1-percentage point rise in the deduction rate will lead to an 8.1 trillion won ($6.2 billion) increase in investment given that the total asset of Korean companies stands at 4,843 trillion won in 2021.

The proposed tax credit rate of 15 percent is estimated to bring about facility investments worth 56.7 trillion won.

The conglomerate circle has high hopes that the reduced tax burden will have a positive impact on the industry ecosystem as a whole.

A 1-percentage point rise in the tax deduction rate is estimated to help reduce corporate tax by 360 billion won for the country’s top 10 chipmakers including Samsung Electronics Co. and SK hynix Inc. A steep rise to 15 percent from 8 percent will lead to 2.5 trillion won in reduced taxes.

Industry insiders note that Korea should introduce its own version of a Chips Act given that the U.S., Japan, and other rivaling countries offer up to 25 percent tax deductions and trillions of won in subsidies to attract global players like Taiwan Semiconductor Manufacturing Co.

“The U.S.-China conflict that focuses on nationalism can be an opportunity for Korea,” said Lee Jong-hwa, a professor at Korea University. “Raising the tax deduction rate on chip investments is a good option.”