Korea’s tax break proposal for strategic sectors passes parliament sub-committee

2023. 3. 17. 11:45
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A government-proposed bill to provide a bigger tax credit to companies that invest in national strategic industries, including semiconductors and batteries, passed a tax sub-committee in parliament on Thursday.

According to the bill for amendment of the special taxation act, often dubbed as the K-Chips Act, large corporations and middle-market companies that invest in semiconductors, batteries-related businesses, vaccines and displays will be able to receive tax credit of up to 15 percent from the current 8 percent. The lawmakers also agreed to include hydrogen and next-generation vehicles as part of the country’s strategic industries and will be eligible for the incentives.

The bill had been sitting in the National Assembly as lawmakers failed to reach an agreement in terms of coverage of the strategic industries that would benefit from the proposed tax credit. The opposition party has been calling for the inclusion of industries like renewable energy, carbon-neutral industries and future vehicles as strategic industries.

The ruling party and the government have been against the opposition party’s proposal on concerns of reduced tax revenues. The disagreement among lawmakers has been criticized for delaying the introduction of the bill, while key industries in the Korean economy, including semiconductors, face challenges.

The government hopes that the K-Chips Act will encourage investment in new technologies from businesses even during economically challenging times. A large tax cut under the new law could encourage businesses to make facilities investment, the government believes, as tax cuts are considered one of the best carrots to give to businesses that are suffering from increases in costs, growing uncertainty and a tax burden.

“A company that decides to invest this year will get record tax benefits, which will have a practical trigger effect for businesses to make the investment,” one government official said.

One of the most effective policy instruments to promote investment is tax cuts. According to an analysis of the relevance between tax credits and investment by the Korea Chamber of Commerce and Industry, a one-percentage-point increase in the tax credit rate could trigger an 8.4 percent increase in facility investment by middle-market and large companies in semiconductors, batteries, biotechnologies and display, and a 4.2 percent increase in facility investment by small- and mid-tier companies.

Based on those calculations, facility investment in the strategic industries by middle-market and large companies may grow by 59 percent, and that by small- and mid-tier companies could grow by 38 percent when the law is implemented. It’s estimated that the K-Chips Act will trigger a 56.7 trillion won ($43.4 billion) investment in facilities, according to an analysis jointly conducted by the Maeil Business Newspaper and the Korea Economic Research Institute. Looking at solely the semiconductor industry, the tax credit effect could reach 2.5 trillion won.

The only concern is that the new law will bring a reduction in tax revenue, which the government estimates could reach 3.3 trillion won next year. The government expects it can withstand the decline in the near future as it could see bigger revenues once businesses start seeing the benefits from their investments. The Ministry of Economy and Finance notes that one percent growth among businesses could add 20 trillion won to current income.

Meanwhile, the Ministry of Trade, Industry and Energy met with semiconductor industry players, including Samsung Electronics Co. and SK hynix Inc., on Thursday to discuss potential government support for the economy’s key industry amid an overall slump in the global semiconductor market.

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