[2020 Tax Law] Korea New Deal Tax Credit Increased... 3% Additional Credit for Companies with Increased Investment

'2020 Tax Law Amendment Confirmed'
Incentives Offered to Companies Increasing Investment... But Effectiveness Remains Uncertain

[Asia Economy Reporter Jang Sehee] The government will simplify the nine specific facility investment tax credits by integrating them with the small and medium-sized enterprise (SME) investment tax credit to stimulate corporate investment, which has been sluggish due to the novel coronavirus disease (COVID-19). Additionally, companies that increase their investments will receive an extra 3% credit on top of the basic credit.

On the 22nd, the Ministry of Economy and Finance held a Tax System Development Deliberation Committee meeting at the Bankers Hall in Myeongdong, Seoul, and finalized the '2020 Tax Law Amendment' centered on these measures.

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated at a pre-briefing on the 2020 tax law amendment on the 20th, "We have integrated and simplified the current nine specific facility investment tax credits, which had different support targets and levels," adding, "The tax support target assets have also shifted from a positive list focused on specific facilities to a negative list, expanding the scope of tax-supported assets to all general business-type tangible assets." The tax revenue effect from this investment tax credit is estimated to reach 550 billion KRW.

The government's policy goal in the 2020 tax law amendment is to support early economic crisis recovery and underpin inclusion, coexistence, and fairness. First, ten facility investment tax credits will be consolidated into one. For general investments, a basic credit of 10% for SMEs, 3% for mid-sized companies, and 1% for large corporations will be applied.

To promote the Korean New Deal, preferential support will also be provided for investments in new industries. For investments in facilities for commercializing new growth technologies, basic credits of 12% for SMEs, 5% for mid-sized companies, and 3% for large corporations will be applied. The previously required conditions, such as total research and development (R&D) expenses being at least 2% of sales and maintaining regular employees, will be abolished.

◆Tax support target assets: everything except excluded items... shift to a negative list approach= The tax support target assets will shift from a positive list focused on specific facilities to a negative list approach. As a result, all general business-type tangible assets will be eligible for benefits. Furthermore, companies that increase their investments compared to the average of the previous three years will receive an additional 3% credit. This aims to actively support companies' future-oriented investments.

However, the tax-supported investment areas will be limited to investments outside the capital region's overconcentration control zones. A Ministry of Economy and Finance official said, "From the perspective of balanced national development, which is a government priority, investments within the capital region's overconcentration control zones will be excluded from tax support," adding, "Without such restrictions, there could be backlash from non-capital regions."

The government will also extend the carryforward period for tax credits from five to ten years. This is to ensure that companies can fully utilize credits even if it takes a long time to generate profits or if losses occur due to deteriorating business performance. To support adjustment of double taxation in international transactions, the carryforward period for foreign tax credits will also be extended from five to ten years. Foreign tax credits not utilized within ten years will be allowed as deductible expenses.

However, experts expressed uncertainty about the long-term effectiveness of these investment incentives. Hong Woo-hyung, professor of economics at Hansung University, said, "Most companies receiving investment tax credits are SMEs," and added, "To increase efficiency relative to investment, the credit rate for large corporations should be raised." He also stated, "To stimulate investment, the system should be designed so that all companies universally benefit." Sung Tae-yoon, professor of economics at Yonsei University, commented, "Because the economy is difficult, the investment tax credit is unlikely to be effective," and evaluated, "This tax law amendment is more focused on stimulating consumption rather than revitalizing corporate investment."