Hankyungyeon "If Tax Credit Rate Increases by 1%P, Corporate Investment Will Increase by Over 1 Trillion Won"

There has been a call for tax law revisions to expand corporate R&D tax credits while alleviating excessive disparities based on company size.

On the 12th, the Korea Economic Research Institute under the Korea Economic Association reported in a commissioned study titled "Analysis of the Investment Effects and Implications of R&D and Human Resource Development Tax Credits," conducted by Professor Hwang Sang-hyun of Sangmyung University, that from 2003 to 2022, investments relative to total assets for non-financial publicly audited corporations averaged around 5%. Investments relative to total assets were higher for large corporations at an average of 6%, compared to small and medium enterprises (5%) and mid-sized companies (4%).

The report's regression analysis on the impact of the current period R&D and human resource development tax credit rates on investment revealed that a 1 percentage point increase in the tax credit rate results in a 0.037 percentage point increase in investment relative to total assets. Specifically, the investment effects of the tax credit rates were 0.068 percentage points for large corporations, 0.036 percentage points for mid-sized companies, and 0.034 percentage points for small and medium enterprises. The analysis showed that the investment effect of R&D and human resource development tax credits is twice as high for large corporations compared to mid-sized and small and medium enterprises.

Based on the total assets of companies in 2022, it is estimated that a 1 percentage point increase in the R&D and human resource development tax credit rate would increase investments by 479.3 billion KRW for large corporations, 361.2 billion KRW for mid-sized companies, and 338.8 billion KRW for small and medium enterprises, totaling 1.07 trillion KRW. Although the investment effect is greatest in large corporations, the R&D and human resource development tax credit rates for large corporations in South Korea are only around 0 to 2%, which is significantly lower than major countries such as France (30%), the UK (13%), and the US and Japan (up to 10%).

The Korea Economic Research Institute stated that simply applying differentiated R&D tax credit rates based on company size is not advisable because R&D investment carries significant risks regardless of company size. Furthermore, excessive disparities in credit rates by company size could suppress corporate investment. They pointed out that continuous reductions in R&D tax credits have caused South Korea’s R&D tax support to lag behind major overseas countries, risking the loss of global competitiveness and weakening the R&D investment and growth potential of Korean companies.

Professor Hwang suggested, “To enable companies to lead private R&D and promote investment, it is necessary to expand R&D tax credits in the future, especially by raising the R&D and human resource development tax credit rates applied to large corporations and revising tax laws to alleviate excessive disparities based on company size.”

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