[2021 Tax Reform] Focus on Supporting New Industries and Overcoming Crises...Significant Increase in Employment and Investment Credits

Government Announces 2021 Tax Law Amendment Proposal

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance (center), is conducting a detailed briefing on the '2021 Tax Reform Bill' at the Government Seoul Office Main Building on the 23rd.

[Sejong=Asia Economy Reporter Kim Hyunjung] The tax law amendment announced by the government on the 26th focused on tax support for overcoming the crisis caused by COVID-19 and transitioning to a leading economy. It also emphasized strengthening the taxation infrastructure to alleviate the polarization accelerated after the pandemic and to prevent tax evasion.

On the 26th, the government announced the '2021 Tax Law Amendment' containing these details.

Separate Support for Semiconductors, Batteries, Vaccines... New Tax Credit for OTT Production Costs

The core of this year's tax law amendment is tax support for companies to accelerate the transition to a future-leading economy. In particular, a separate support track was established for the three national strategic technologies?semiconductors, batteries, and vaccines?to strengthen tax support for their R&D costs and facility investments.

First, for the 34 selected national strategic technologies, the tax credit rate for research and development (R&D) investment will be increased by 10 percentage points (p) compared to the current new growth and original technology rates, providing a substantial preferential tax credit of 30-50%. For the newly established 31 target facilities, the tax credit for facility investment will be increased by 3-4%p compared to the current new growth and original technology rates, supporting tax credits of up to 10-20% of the facility investment amount.

Tax incentives will also help venture companies and startups attract excellent talent. The scope of non-taxation on stock option exercise gains for venture companies will be expanded, and a detailed tax support plan will be finalized through the forthcoming 'Comprehensive Supplementary Measures for the Venture Ecosystem.'

Furthermore, tax incentives will be expanded to activate transactions of intellectual property such as patents, beyond technology development and commercialization. The investment tax credit, currently limited to tangible assets, will include acquisition costs of intangible assets such as intellectual property (IP), and the scope of tax reductions on income from the transfer and rental of technologies like patents developed by companies will be extended from small and medium enterprises (SMEs) to medium-sized enterprises. Additionally, to support video content production using media platforms, a new tax credit for online video service (OTT) content production costs will be introduced, and the scope of special tax treatment for business restructuring will be expanded to support companies' active entry into new industries through business restructuring.

Support for Crisis Overcoming Including Tax Payment Extensions and Penalty Exemptions for Self-Employed and Farmers

Tax support for various groups such as SMEs, workers, self-employed, and farmers to overcome the crisis is also a key direction of this tax law amendment. To support SMEs that suffered significant losses due to COVID-19, income tax and corporate tax refunds will be allowed for this year's losses up to the amount of taxes paid in the previous two years. Support for business recovery of closed businesses will be expanded by extending the payment deadlines for overdue national taxes and exempting penalties for small-scale SMEs and micro-businesses, as well as deferring seizure and sale.

To alleviate the living expenses burden of workers, self-employed, and farmers, the application period of tax exemptions will be extended for ▲value-added tax exemption on housekeeping services provided by housekeeping service institutions ▲income tax reduction for employees of SMEs ▲fuel tax refunds on compact cars ▲value-added tax and individual consumption tax exemptions on petroleum products for agriculture and fisheries.

Tax support to promote early job recovery and domestic demand activation will also be strengthened. The application period of the so-called employment increase tax credit, which provides a tax credit of up to 11 million KRW per person when companies increase employment, will be extended by three years. For youth, disabled, and elderly employment in non-capital region companies, an additional tax credit benefit of 1 million KRW will be granted compared to the current amount. The requirements for tax credits for companies employing women with career interruptions will be relaxed from three years after retirement to two years or more.

To promote startups, the application period of the startup SME tax reduction system, which reduces 50-100% of income tax and corporate tax for five years after startup, will be extended, and the eligible target for preferential reduction will be significantly expanded from annual sales of 48 million KRW to 80 million KRW or less. In addition, the application period for tax reductions for returning companies will be extended by three years, and the relocation deadline requirement for business sites will be relaxed from the current one year to two years.

Earned Income Tax Credit Extended to 300,000 More Households... New 40% Income Deduction for Youth Long-Term Funds

The government will also directly support income for low-income households. The income ceiling for each household type under the Earned Income Tax Credit (EITC) will be raised by 2 million KRW each, allowing single, single-earner, and dual-earner households with annual incomes between 22 million and 38 million KRW to receive related credits. It is estimated that about 300,000 additional households will benefit, with an expected tax revenue decrease of 260 billion KRW. In addition to low-income households, a special 9% separate taxation on interest income from government bonds for personal investment will be introduced to support asset formation for general households.

Moreover, to support asset formation for youth, a new 40% income deduction for youth long-term funds will be introduced, tax exemption on interest income for Youth Hope Funds will be established, and the income tax reduction on the Tomorrow Filling Deduction for employed youth will be expanded from 50% to 90%. Income requirements for subscribing to the youth-preferred comprehensive housing subscription savings will also be relaxed, strengthening support for youth housing stability.

Furthermore, to reduce rent burdens on small business owners hit by COVID-19, the scope of the Good Landlord tax credit support will include closed small business owners, and the application period will be extended until June 2022.

This year, the donation tax credit rate will be increased by 5 percentage points from the current 15-30% to 20-35%, and tax support for win-win payment systems between primary and subcontracting companies and performance-sharing systems between workers and companies will also be expanded.

Deputy Prime Minister Hong Nam-ki emphasized regarding this tax reform, "It is expected to greatly help overcome the crisis and recover the economy, further strengthen the core competitiveness and future growth engines of our economy, and serve as a buffer to alleviate the widening gap in our society." He added, "We will make every effort to ensure that taxes collected from the public and expenditures through budget projects are used most efficiently and rationally based on fiscal principles."

Meanwhile, the 16 tax law amendments, including the Income Tax Act amendment and Corporate Tax Act amendment reflecting the announced tax reform, will be submitted to the National Assembly along with the 2022 government budget bill after legislative notice and Cabinet meeting on September 3.

This content was produced with the assistance of AI translation services.