"Need for Tax System Shift to Drive Investment and Technological Innovation in Mid-sized Companies"

Junggyeonryeon Announces 'Top 10 Tax Proposals for Mid-sized Companies to Lead Private Sector Innovation Growth'

Choi Jin-sik, Chairman of the Korea Federation of SMEs

[Asia Economy Reporter Kim Cheol-hyun] It has been argued that changes in the tax environment to drive investment and technological innovation by mid-sized companies are urgently needed for the success of 'private sector-led growth,' a core government economic policy direction.

The Korea Federation of Mid-sized Enterprises (KFME) announced on the 18th that it submitted the 'Top 10 Tax Proposals for Mid-sized Enterprises for Private Sector-led Innovative Growth' to the Ministry of Economy and Finance. KFME emphasized, "Signs of unprecedented crises such as global inflation, supply chain disruptions, and intensified US-China competition are expanding," adding, "The alternative to overcoming the crisis is a strong economic foundation, with the core being the restoration of corporate dynamism based on innovation."

Through this tax proposal, KFME explained, "Investment and technological innovation by mid-sized companies, which form the backbone of traditional industries, materials, parts and equipment (SoBuJang), ICT, and pharmaceutical bio sectors, will lead to a structural transformation of our entire industry," and added, "Bold measures are needed to expand the foundation for activating mid-sized company investments, such as resolving the discriminatory provisions in the Restriction of Special Taxation Act and the mechanical closure of the integrated investment tax credit."

The current Restriction of Special Taxation Act excludes companies with an average sales revenue of 300 billion KRW or more over three years from support. KFME argued that the current restriction criteria should be abolished and the KOSDAQ listing requirement for the new growth R&D tax credit should also be removed. Additionally, KFME pointed out the irrationality of the current integrated investment tax credit and R&D tax credit, which are drastically reduced from 7% to 10%?17% when a company grows into a mid-sized enterprise. A KFME official stated, "The two most utilized systems by mid-sized companies are instead acting as factors that hinder growth," emphasizing, "Expanding the current credit rates of only 3% and 8%?15% to at least 7% and 13%?20%, respectively, will prevent the weakening of mid-sized companies' innovation will and restore smooth circulation of the growth ladder."

The proposal also included the need for progressive changes in tax policies related to corporate succession to support the long-term sustainability of capable companies as a foundation for national economic growth. Specifically, it suggested lowering the highest inheritance tax rate of 60% on the premium valuation of shares held by the largest shareholder to the OECD average of 15%, and allowing collateral for tax payment on unlisted shares in the case of installment payments.

KFME also proposed expanding income tax reductions as a measure to increase disposable income for workers to resolve the workforce mismatch that has deepened among mid-sized companies since the COVID-19 pandemic. Unlike many mid-sized companies that provide salaries and welfare comparable to large corporations, early-stage mid-sized companies face difficulties in securing talent, as the starting salary for university graduates is 33.72 million KRW, only 66.3% of that of large companies, KFME explained. To enhance the innovation capacity of early-stage mid-sized companies, the 'new employee income tax reduction,' currently applied only to small and medium enterprises, should be expanded at least to mid-sized companies with sales under 300 billion KRW.

Choi Jin-sik, Chairman of KFME, stated, "In a situation where structural low growth is feared due to demographic and industrial environment changes, compounded by excessive regulations reducing private sector vitality and external adversities such as global inflation triggered by the Ukraine war," he emphasized, "We must establish a stable framework for private sector-led growth as a long-term national economic foundation by escaping regulatory constraints that limit growth across this year's tax reform bill and the entire legal and institutional system, and by spreading a progressive policy direction aimed at promoting corporate dynamism."

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