FKI: "Korea's Energy Security Ranked Low... Tax Reform Needed for Resource Development"

[Asia Economy Reporter Park Sun-mi] South Korea's energy security, which is highly dependent on overseas energy, ranks only 24th out of 38 OECD countries, prompting calls for tax reform measures to activate investment in overseas resource development.

On the 13th, the Federation of Korean Industries (FKI) cited the World Energy Council's announcement, stating that South Korea's energy security index ranks 24th among 38 OECD countries, placing it in the lower-middle tier. South Korea relies on overseas sources for as much as 93% of its energy supply, making its energy security very vulnerable.

Insufficient support for overseas resource development and the resulting passive investment by companies are among the factors threatening energy security. In fact, financial and research and development (R&D) support for overseas resource development has been continuously reduced over the past decade, and tax support has almost entirely expired, with most special tax provisions that once existed now lapsed.

In this regard, the FKI announced that it has delivered 'Tax Reform Tasks to Activate Investment in Overseas Resource Development Projects' to the Ministry of Economy and Finance. First, to activate corporate investment in overseas resource development projects, it proposed expanding tax support at each stage of ‘investment - profit realization - loss compensation.’ At the investment stage, it emphasized the need to improve the integrated investment tax credit system and extend the sunset date of the overseas resource development investment tax credit system to promote resource development-related investments.

The integrated investment tax credit is a system that allows companies to deduct a certain amount of their investment in business-use tangible assets such as machinery and equipment from corporate tax. Currently, the integrated investment tax credit system only allows tax credits for domestic corporate investments, and except for some cases such as intellectual property investments by small and medium-sized enterprises, investments in intangible assets are excluded from the deduction target. Although there was a separate tax credit system for intangible asset investments such as mining rights and prospecting rights for overseas resource development, it expired in 2013, and companies can no longer receive tax benefits.

The FKI argued that many domestic companies establish local subsidiaries in resource-holding overseas countries to promote overseas resource development projects, and since investment in intangible assets such as mining rights and prospecting rights is essential for project progress, institutional support for this is necessary.

At the profit realization stage, the FKI requested a relaxation of taxation on dividend income generated from investments. There was a special provision that partially exempted corporate tax on dividend income received from investments in overseas resource development projects, but it expired after 2015. The FKI proposed extending the sunset date of this system until 2025 and reintroducing it.

Additionally, it requested that ‘foreign subsidiary foreign tax payments’ be included in the indirect foreign tax credit target. Most multinational companies hold subsidiaries (foreign subsidiaries) through overseas intermediate holding companies to minimize investment risks, and excluding corporate taxes paid by foreign subsidiaries from the indirect foreign tax credit target is considered unrealistic. Furthermore, at the loss compensation stage, the FKI called for rationalizing the tax adjustment system for losses incurred from resource development project failures and easing the burden of work-related explanations required to recognize loan investment losses as deductible expenses.

Choo Kwang-ho, head of the FKI Economic Headquarters, emphasized, “Overseas resource development projects have a low success rate but require large-scale, long-term investments and carry very high failure risks,” adding, “As the importance of resource security grows due to the sharp rise in international raw material prices, it is necessary to strengthen support measures so that companies can actively invest in overseas resource development.”

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