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Ministry plans to boost tax breaks for chip, battery, vaccine makers

Revision aims to more than double tax cuts on facility investments by Samsung Electronics, SK hynix, world's top two memory chipmakers

Jan. 3, 2023 - 16:16 By Park Han-na

Finance Minister Choo Kyung-ho speaks during a press briefing session held at the government complex in Seoul, Tuesday. (Yonhap)

The government seeks to sharply raise tax incentives for semiconductor manufacturing facilities days after President Yoon expressed dissatisfaction over smaller-than-envisioned tax cut that lags behind subsidy plans offered by other countries racing to bolster their chip industries.

The tax code revision plan proposed by the Ministry of Economy and Finance, big corporations that make investment into “national strategic technologies” such as semiconductors, secondary batteries, and vaccines will be entitled to tax credits of up to 15 percent. This is almost double the 8 percent stipulated in a revision bill passed on Dec. 23.

The tax credit rate for small and medium-sized enterprises will be sought to be raised from 16 percent to 25 percent. In addition, the government announced that it would temporarily increase the additional tax break for the increase in investment to 10 percent. By adding the two tax schemes, the government said that large companies can receive tax benefits of up to 25 percent and SMEs up to 35 percent.

“As seen in the shortage of semiconductors for vehicles, semiconductors are the core of the global manufacturing supply chain, and future industries such as artificial intelligence, big data, and electric vehicles cannot gain an edge without semiconductor competitiveness,” Finance Minister Choo Kyung-ho said during a press briefing session.

Calling semiconductors a “backbone industry,” Choo said the industry accounts for 18.9 percent of exports and 17.7 percent of facility investment in 2022. “It is a strategic asset that is directly related to Korea's future competitiveness, national security, and survival.”

Factoring in the tax deduction rate of 30-50 percent for research and development expenditures, the country offers “the world's best level of support” for the industries, he added.

The ministry expects that the plan will reduce taxes by a total of more than 3.6 trillion won ($2.84 billion) for the semiconductor industry and others.

The new revision push came only four days after President Yoon Suk-yeol directed the Finance Ministry to come up with stronger tax benefits for national high-tech strategic industries following the passage of the amendment bill that fell short of industry expectations of a 20 percent reduction.

“As I have emphasized several times, we must break through this complex crisis involving exports. Cutting-edge technologies and industries should be nurtured and supported to sharpen their competitiveness in the global market,” Yoon said while presiding over this year's first Cabinet meeting at the presidential office on Tuesday.

The finance minister presented the tax revision plan at the meeting.

The Finance Ministry initially opposed a tax reduction of more than 8 percent, expressing concerns that it would cause tax revenue to fall by several trillion won in 2024.

“This (the tax incentive) will soon be able to contribute greatly to the increase of tax revenue through the growth of companies in the future as exports and job creation will be expanded,” the minister said.

The government plans to come up with a detailed revision within this month and send it to the National Assembly for approval.

The country is one of the chip powerhouses and home to Samsung Electronics and SK hynix. With the tax break scheme, it joins other countries seeking to retain or steal leading position in semiconductor manufacturing.

The US provides a 25 percent investment tax credit for capital expenses for manufacturing of semiconductors and related equipment. Taiwan proposed an amendment aiming to raise the corporate income tax break to 25 percent from 15 percent for technology companies including chipmakers.

Business lobby groups hailed the Finance Ministry's plan, calling it an “appropriate measure” in a situation where the investment burden is high due to the global economic downturn and companies losing their will to invest.

“In strategic industries such as semiconductors, batteries, and vaccines, competition over economy, security, and technological hegemony is intensifying. Bold tax support that does not lag behind competitors not only help securing a competitive edge, but also leads to investment expansion into mid-sized and small businesses,” the Korea Chamber of Commerce and Industry said in a statement.