Semiconductor Tax Credit Up to 25%... Choo "Revision Bill to Be Prepared Within This Month" (Comprehensive)

Significant Increase in Tax Credits for Large Semiconductor Companies... 8% to 15%
SME Tax Credit Rate Rises from 16% to 25%... Mid-sized Firms at 15%
Bold Measures Following Yoon's Directive... 3.6 Trillion KRW Tax Burden Reduction in 2024
Up to 35% with Additional Credits for Increased Investment

[Asia Economy Sejong=Reporters Junhyung Lee, Dongwoo Lee, Seungseop Song] The government is raising the tax credit rate for semiconductor facility investments up to 25%. This bold increase in the tax credit rate was announced just four days after President Yoon Seok-yeol ordered enhanced tax support for semiconductors on the 30th of last month. Analysts interpret this as the government’s active commitment to supporting national strategic industries such as semiconductors becoming full-fledged.

On the morning of the 3rd, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho announced the "Measures to Strengthen Tax Support for Semiconductors and Others" at the Government Complex Seoul. During the briefing, Deputy Prime Minister Choo said, "Semiconductors accounted for 18.9% of last year’s exports and are a core pillar industry of our economy, a strategic asset directly linked to Korea’s future competitiveness, national security, and survival. We have prepared groundbreaking tax support measures to restore overall corporate investment sentiment while securing the global competitiveness of national strategic industries."

The core of this plan is the increase in tax credit rates for facility investments related to national strategic technologies such as semiconductors and batteries. The Ministry of Economy and Finance decided to raise the tax credit rate for facility investments in national strategic technologies from 8% to 15% for large and medium-sized enterprises. The tax credit rate for small and medium-sized enterprises will also be raised from the current 16% to 25%.

Earlier, on the 23rd of last month, the ruling and opposition parties passed an amendment to the Restriction of Special Taxation Act to raise the tax credit rate for large enterprises’ semiconductor facility investments from 6% to 8%. Initially, the ruling party’s People Power Party Semiconductor Special Committee proposed raising the tax credit rate for large enterprises to 20%, but due to concerns over a sharp decline in tax revenue, the Ministry of Economy and Finance opposed it, and the government’s proposal (8%) was finally passed. This rate is 2 percentage points lower than the 10% rate proposed by the opposition Democratic Party. Additionally, the tax credit rates for small and medium-sized enterprises were frozen.

Yoon Orders Strengthening of Tax Support

Within the semiconductor industry, the view was predominantly that the tax credit rate increase passed by the National Assembly did not meet expectations. This is because it did not even reach half of the 20% tax credit rate ambitiously pursued by the People Power Party’s Semiconductor Special Committee under the "Semiconductor Industry Competitiveness Enhancement Act (K-Chips Act)." It is also a small level compared to major countries like the United States, which applies a 25% tax credit rate for semiconductor facility investments. Taiwan recently proposed an amendment to the Industrial Innovation Act to raise the tax credit rate for facility investments by semiconductor companies headquartered in the country from 15% to 25%.

In response, President Yoon Seok-yeol directly ordered the strengthening of semiconductor tax support at a staff meeting on the 30th of last month. This was based on the judgment that the 8% tax credit rate insisted upon by the Ministry of Economy and Finance was insufficient to support the current administration’s national agenda of "fostering a semiconductor superpower." It is also interpreted that repeated criticisms that the ruling party’s ambitious "Semiconductor Industry Competitiveness Enhancement Act (K-Chips Act)" ended in a disappointing manner influenced this decision.

Ultimately, the Ministry of Economy and Finance announced new tax support measures just ten days after the amendment to the Restriction of Special Taxation Act passed the National Assembly. In addition to raising the tax credit rate for facility investments, the Ministry will temporarily increase the additional tax credit rate for investment increments compared to the average of the previous three years to 10% this year. When including the additional credit for investment increments, the tax credit rate can reach up to 35%. Deputy Prime Minister Choo said, "Considering the tax credit rate for research and development (R&D) costs of 30-50%, this will provide support at the world’s highest level," and added, "We will prepare an amendment to the Restriction of Special Taxation Act within this month and push for its prompt passage in the National Assembly."

3.6 Trillion Won Tax Burden Relief in 2024

The dramatic increase in the tax credit rate has also raised expectations within the industry. According to the Ministry of Economy and Finance, the tax burden on industries related to national strategic technologies such as semiconductors is expected to decrease by about 6.4 trillion won over three years from 2024 to 2026. The expected tax burden reduction effect for 2024 alone is about 3.65 trillion won. Deputy Prime Minister Choo said, "(Companies) will expand investments, which will form the foundation for increasing exports, job creation, sales, and profits," and added, "I believe companies will significantly contribute to expanding tax revenue through growth in the future."

Experts also see the ripple effect of this tax support measure as significant. Professor Kim Jung-ho of the Department of Electrical Engineering at KAIST said, "The increase in the semiconductor investment tax credit rate is meaningful in that the government has shown an active commitment to strengthening the competitiveness of advanced strategic industries," and added, "It is expected to bring about widespread changes in related industries, including licensing issues for semiconductor factory establishment, which takes at least 4 to 5 years, and the expansion of insufficient workforce training."

There are also views that the government’s tax support increase was somewhat haphazard. Since this plan was announced just four days after President Yoon’s 'disapproval order,' there are criticisms that sufficient internal review regarding the impact of tax revenue reduction within the Ministry of Economy and Finance may not have been conducted.

From a corporate perspective, the inconsistency of government policy is also a burden. The fact that government policy can be reversed 180 degrees in just a few days inevitably increases management uncertainty. Regarding this, Deputy Prime Minister Choo said, "Because we could not reduce the corporate tax top rate by 3 percentage points but only by about 1 percentage point, we decided to significantly raise the investment tax credit rate," and added, "To secure a super-gap in national strategic industries such as semiconductors, strengthening such tax support is urgently needed, and we proceeded with legislation under this recognition."

Deputy Prime Minister Choo Kyung-ho Announcing Measures to Strengthen Tax Support for Semiconductors and Others
(Seoul=Yonhap News) Reporter Kim Seung-doo = On January 3, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho announced measures to strengthen tax support for semiconductors and other sectors at the government Seoul office briefing room, with Jang Young-jin, First Vice Minister of the Ministry of Trade, Industry and Energy, attending. 2023.1.3
kimsdoo@yna.co.kr
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