"Tax Credits Promoting R&D, Yet Latest Technologies Fail to Qualify"

[Asia Economy Reporter Choi Dae-yeol] There are concerns that the tax system is not keeping pace with the speed of technological advancement. The tax credit system designed to encourage research and development (R&D) is limited and does not broadly recognize eligible subjects, making it difficult for small and medium-sized enterprises (SMEs) developing cutting-edge technologies to benefit from it.

According to data released on the 14th by the Korea Chamber of Commerce and Industry (KCCI), which surveyed 336 large and small-to-medium enterprises about tax systems that do not fit the field, more than 8 out of 10 companies (81.3%) responding to the survey said that the latest technologies are not included in new growth technologies, which is problematic. A representative example is the new growth technology tax credit system. New growth technologies receive a tax credit of 20-40% depending on company size, which is more beneficial compared to the general R&D tax credit of 2-25%. To be recognized as a new growth technology, it must be reflected in the enforcement decree, but this has not been done, which is the issue.

Technologies such as green hydrogen and intelligent semiconductors are not designated as new growth technologies and thus are not eligible for tax credits. Green hydrogen is an eco-friendly hydrogen with zero carbon emissions during production and is considered a core technology for the upcoming hydrogen economy era. While next-generation memory semiconductors are eligible for tax credits as new growth technologies, intelligent semiconductors, which are regarded as the most advanced technology among memory semiconductors, are excluded.

A semiconductor parts manufacturer developing PIM, an intelligent semiconductor core technology spotlighted in artificial intelligence (AI), receives only the general R&D credit. A company official said, "Even a good system is just a pie in the sky if it cannot be utilized."

They are being unfairly disadvantaged because they are researching more advanced fields but are not reflected in the enforcement decree. Revising the enforcement decree requires going through certain procedures in the responsible department of the relevant ministry. This means that officials must designate each item one by one. The KCCI explained, "Overseas, new technologies eligible for tax credits are broadly recognized, and tax support is applied flexibly. In China, the preferential support target was changed in 2015 from a positive list method, which only listed eligible items, to a negative list method, which lists only ineligible items and allows everything else."

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Sometimes, measures to prevent loopholes act as obstacles. To receive the new growth tax credit, a dedicated new growth R&D personnel is required, but in SMEs, the same personnel often handle both new growth R&D and general R&D, resulting in frequent ineligibility. 70.5% of companies responding to the survey agreed with this concern. In the U.S. and Canada, there is no requirement for ‘dedicated personnel,’ and actual R&D activities are verified, with costs calculated based on personnel input time.

A KCCI official said, "Last year, about 34,000 companies applied for general R&D tax support, whereas only 197 companies, or 0.6%, applied for new growth R&D tax support, which is very low," and added, "It is necessary to promptly revise the system to align with the purpose of increasing new growth investment."

Companies also responded that tax support systems are difficult to utilize due to disadvantages such as tax credits only being granted when hiring career-interrupted women with experience in the same industry, exclusion of facility investments in the metropolitan area during the construction of new industry infrastructure, and tax credits only given to companies with research institutes, which disadvantages service sector businesses. Additionally, there are inconveniences caused by domestic tax regulations unique to Korea, such as gift tax on internal transactions forced by patents, restrictions on business type changes for seven years when applying inheritance tax credits for family businesses, and additional corporate tax on dividends considered as retained earnings, according to the survey results.

To improve this, it is necessary to collect field opinions, strengthen communication, and review and revise systems that are disadvantageous compared to competing countries. Song Seung-hyuk, head of the tax policy team at KCCI, said, "Tax systems involve many stakeholders and are complex, so revisions are not easy, but it is necessary to redesign them in a way that helps the business environment by maximizing field opinions and referring to major countries' cases."

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