Opposition pushes for stronger semiconductor support legislation

[Graphics by Song Ji-yoon]

The Democratic Party of Korea, South Korea’s main opposition party, has proposed an ambitious support plan for the local semiconductor industry, signaling a strong intent to take the lead in policy-making. This move comes amid competitive global efforts to boost semiconductor companies through subsidies and tax incentives, ensuring the party is not seen as obstructing crucial industry support.

With major economies like the United States, Japan, and the European Union actively supporting their semiconductor sectors, there is concern that insufficient support from South Korea could lead to reduced domestic investment in semiconductor manufacturing and research and development. This could weaken South Korea’s overall semiconductor industry, making it imperative for both the government and political parties to find common ground on this issue.

On Tuesday, the Democratic Party unveiled the so-called “K-Chips Act,” a comprehensive proposal aimed at significantly increasing support for the semiconductor sector to prevent South Korea from falling behind in the global semiconductor race. Key provisions of the bill include raising the tax credit rate for semiconductor facility investments from the current 15-25 percent to 25-35 percent, and adjusting the R&D tax credit rate from 30-50 percent to 40-50 percent. The proposal also includes extending the tax credit period, set to expire this year, by 10 years and expanding the scope of national strategic technologies.

The ruling People Power Party (PPP) has also presented a semiconductor support plan with similar objectives. The PPP’s proposal differs in extending the tax credit period by six years and maintaining current tax credit rates. Additionally, the PPP suggests establishing a “Special Committee for Enhancing Semiconductor Industry Competitiveness” directly under the President.

The South Korean government has recently announced a semiconductor support plan totaling 26 trillion won ($18.7 billion), including 17 trillion won in financial support, focusing on fabless, materials, parts, and equipment sectors.

This flurry of proposals reflects a shared recognition among political and governmental leaders that South Korea cannot afford to lag in the global semiconductor competition. Countries worldwide are aggressively supporting their semiconductor industries through subsidies and tax incentives. For instance, the U.S. offers subsidies covering 5-15 percent of semiconductor facility investments and a 25 percent tax credit for such investments. Japan provides subsidies for up to 50 percent of semiconductor investments and a 20 percent tax credit for equipment investments. The EU has agreed on a 43 billion euro semiconductor subsidy plan.

However, one notable limitation in both the ruling and opposition parties’ proposals, as well as the government’s plan, is the absence of direct subsidy provisions. Industry and academic experts have called for subsidies, especially for sectors where domestic companies are less competitive, such as fabless, packaging, and materials, parts, and equipment sectors. They argue that more aggressive incentives are necessary to significantly enhance industrial competitiveness.

Paik Woo-yeal, a political science and diplomacy professor at Yonsei University, emphasized the importance of building a robust semiconductor ecosystem amid intensifying technological competition. “There is a need to provide subsidies focused on fabless companies, post-processing, and materials, parts, and equipment sectors,” he said.

The Democratic Party’s proposal will join the ruling party and government plans on the parliamentary discussion table. While there is a broad consensus among the parties and the government on the need to expand semiconductor support, differing views on specific details such as tax rates and credit periods suggest that extensive discussions and negotiations will be required. This process could take several months.

Concerns have also been raised about potential government revenue losses due to the significant increase in tax credits proposed by the opposition party.