"K Chips Act, 'Minimum Tax System' Must Be Revised to Revive Semiconductors"

Corporate Investment Impact Reduced by Minimum Tax Rate Application
Jung Cheol: "Improvements Must Be Reflected in This Year's Tax Law Amendments"

To enhance the effectiveness of the so-called K-Chips Act (Amendments to the Act on National Advanced Strategic Industries and the Restriction of Special Taxation Act), which focuses on expanding tax credits to promote semiconductor investment, it has been pointed out that the 'minimum tax system' must be reformed simultaneously to ensure that companies can fully benefit from the tax credits.

The Korea Economic Research Institute under the Korea Economic Association announced this on the 10th through a report titled "Directions for Improving the Minimum Tax System to Utilize the K-Chips Act and Promote Investment," commissioned to Professor Hwang Sang-hyun of Sangmyung University.

With the recent passage of amendments to the Restriction of Special Taxation Act, high tax credit benefits have been granted for facility investments in national strategic technologies such as semiconductors, vaccines, secondary batteries, and displays. However, the report pointed out that large and medium-sized enterprises cannot fully enjoy these benefits due to relatively high minimum tax rates, which ultimately diminishes the investment promotion effect for national strategic technologies.

The minimum tax rate refers to the minimum corporate tax rate that corporations and individuals must pay. Even if tax reduction benefits such as investment tax credits are applied, if the actual tax payable does not reach the minimum tax amount, the difference must be paid excluding the tax reduction.

The report pointed out that South Korea’s highest minimum tax rate for large and medium-sized enterprises is 17%, which is higher than the global minimum tax rate of 15%. This is said to be an obstacle to expanding corporate investment.

The minimum tax system was introduced in 1991 with a single tax rate structure and shifted to a two-tier tax rate structure differentiated by company size in 1997. Since 2005, large and medium-sized enterprises have had a complex tax rate structure with progressive tax rates applied according to the tax base. In this process, the minimum tax rate for small and medium-sized enterprises decreased from 12% to 7%, but for large and medium-sized enterprises with a tax base exceeding 100 billion KRW, it increased from 15% to 17%. The 17% minimum tax rate is higher than the global minimum tax rate of 15%.

Employees of tenant companies are moving at the Korea Economic Association in Yeouido, Seoul. Photo by Kang Jin-hyung

Analysis of the impact of the minimum tax on corporate investment showed that a 1% increase in the minimum tax rate results in a 0.040% decrease in investment relative to total assets. In particular, for large enterprises, a 1% increase in the minimum tax rate led to a 0.069% decrease in investment relative to total assets. This means that larger companies are more significantly affected.

Regarding the effect of expanding corporate investment by lowering the minimum tax rate, it was found that when the minimum tax rate decreases by 1%, investment increases by approximately 2.2469 trillion KRW. For large enterprises, this was analyzed to be 1.7689 trillion KRW.

The report also expressed concerns that the minimum tax applied to research and development (R&D) and investment tax credits could hinder timely investment and continuous growth of companies. To improve the efficiency of the R&D and investment tax credit system for national strategic technologies including semiconductors, it pointed out the need to lower the minimum tax rate or at least exclude the application of the minimum tax to R&D and investment tax credits.

Jung Cheol, Chief Research Officer of the Korea Economic Association and President of the Korea Economic Research Institute, emphasized, "Improving the minimum tax system is essential to boost corporate investment vitality," and added, "This should be actively reflected in this year’s tax law amendments."

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