Tax Credit Rate Up to 25%... Applause but Semiconductor Industry Frowns

Ministry of Economy and Finance to Push for Higher Semiconductor Tax Credit Rate
Industry "Welcomes" Move...But Some Say It's Not Enough

[Image source=Pixabay]

[Asia Economy Reporter Kim Pyeonghwa] The semiconductor industry has welcomed the government's announcement of an additional increase in the tax credit rate for semiconductor facility investments. The industry explained that this could help expand investments and foster the ecosystem amid global competition. With this measure, the tax credit rate for large corporations will rise to a maximum of 25%, with the basic rate set at 15%.

However, some argue that the proposed credit rate is not sufficient to enhance the nation's semiconductor competitiveness and that further increases are necessary. While applauding the move, their expressions remain cautious.

On the 3rd, the Ministry of Economy and Finance announced the 'Strengthening Tax Support Measures for Semiconductors,' stating that the tax credit rate for facility investments in the semiconductor sector, a national strategic technology, will be raised to 15% for large and medium-sized enterprises and 25% for small and medium-sized enterprises. This follows the passage of the amendment to the Restriction of Special Taxation Act, part of the K-Chips Act, in the National Assembly plenary session on the 23rd of last month, which increased the tax credit rate from 6% to 8% (for large corporations), and the additional increase was implemented immediately. They also announced plans to temporarily raise the additional tax credit rate for increased investments this year from 4% to 10%.

This move by the Ministry of Economy and Finance came after criticism from the semiconductor industry and academia regarding the previous tax credit rate increase, as well as President Yoon Seok-yeol's directive to "consider expanding tax support measures."

During discussions with ruling and opposition parties to pass the amendment to the Restriction of Special Taxation Act, the Ministry proposed an 8% credit rate, lower than the ruling party's 20% and the opposition's 10%, due to concerns over reduced tax revenue. The semiconductor industry and academia pointed out that this rate lags behind competing countries such as the United States (25%), Taiwan (planned 25%), and China (100%).

Upon the Ministry's announcement of the additional increase in the tax credit rate, the semiconductor industry immediately expressed a welcoming stance. They added that this increase could help expand large-scale manufacturing facility investments and foster the semiconductor industry ecosystem. The Korea Semiconductor Industry Association also stated plans to "make every effort with a sense of mission to become a global leading company." The Federation of Korean Industries described it as "a primer to rekindle the dwindling flame of private investment."

However, some insiders argue that the current level of tax credit rate increase is insufficient to secure global competitiveness. According to the Ministry's proposed plan, while the basic tax credit rate (15%) plus the additional credit rate (10%) can raise the rate for large corporations to a maximum of 25%, this is considered an optical illusion.

The additional credit rate is calculated only on the increase in investment compared to the three-year average, separate from the total investment amount. Except for special cases such as no investment in the past three years, it is practically impossible to expect a 25% credit rate, they explain. Furthermore, even applying the 25% rate only meets the minimum conditions to secure global competitiveness, as it is on par with the United States, and cannot be considered sufficient.

Since the additional credit rate is temporarily applied only for this year, there is a possibility of future changes. If the Ministry adopts a conservative stance going forward, the credit rate could be lowered. Some argue that, amid a downturn in the semiconductor market due to economic deterioration and a shrinking investment mood in the semiconductor industry, the government should have taken a more proactive approach to raising the tax credit rate.

Yang Hyang-ja, a member of the National Assembly and chairperson of the People Power Party's Semiconductor Special Committee, who proposed the K-Chips Act including the amendment to the Restriction of Special Taxation Act, expressed that "it is regrettable but welcome" regarding this matter.

On the same day, through her Facebook account, Representative Yang said, "15% is just the beginning. Korea's top experts say the global standard is 25%," and suggested, "Let's expand it in the National Assembly where it is lacking." She also added, "Let's promptly form a National Assembly Advanced Strategic Industry Special Committee to discuss raising the tax credit rate with 15% as the baseline."

The Ministry of Economy and Finance stated that it will prepare a new amendment to the Restriction of Special Taxation Act, including the announced tax credit rate increase plan, within this month and will work swiftly with the National Assembly for its passage.