[Exclusive] National Strategic Technologies like Semiconductors Get Radical Tax Benefits and Exemption from Preliminary Feasibility Study... 'Speeding Up'

Amendment to the Special Tax Treatment Control Act... Exemption from Preliminary Feasibility Study Evaluation at the Cabinet Meeting on the 17th
Semiconductor Tax Credit Rate Dramatically Increased... Up to 15% for Large Corporations
"Semiconductor Investment Expected to Decline... Urgent Need for Full Support"

[Asia Economy Sejong=Reporter Lee Jun-hyung] It has been confirmed that the preliminary feasibility evaluation for tax benefits under the Restriction of Special Taxation Act amendment, which provides unprecedented tax benefits for national strategic technologies such as semiconductors, has been exempted. This comes just two weeks after the government proposed the amendment to significantly strengthen tax support for national strategic technologies. The government plans to push for the passage of the amendment as early as the next extraordinary session of the National Assembly.

According to a comprehensive report from our coverage on the 19th, the government deliberated and resolved at the Cabinet meeting on the 17th to exempt the preliminary feasibility evaluation for tax benefits regarding the amendment to the Restriction of Special Taxation Act. Earlier, on the 3rd, the Ministry of Economy and Finance announced plans to amend the act to raise the tax credit rate for semiconductor facility investments up to 25%. The exemption of the preliminary feasibility evaluation came just two weeks after the Ministry announced the amendment plan. This clearly indicates the government's strong commitment to supporting national strategic technologies such as semiconductors.

The preliminary feasibility evaluation for tax benefits is a system that assesses the economic and policy validity of newly introduced tax benefit measures. The evaluation is conducted by national research institutions such as the Korea Development Institute (KDI) and the Korea Institute of Public Finance, and takes several months at minimum. The evaluation applies when a new system is introduced with an annual tax reduction exceeding 30 billion KRW or when an existing tax benefit is modified resulting in an additional annual reduction exceeding 30 billion KRW. Initially, the Ministry of Economy and Finance analyzed that the amendment would reduce tax revenue by approximately 3.3 trillion KRW next year.

"Urgent Need for Full Support for Semiconductors and Others"

Nevertheless, the government exempted the preliminary feasibility evaluation for the amendment. This decision was based on the judgment that ‘support fire’ such as tax benefits is urgently needed as global competition surrounding national strategic technologies like semiconductors intensifies. According to Article 142, Paragraph 5 of the Restriction of Special Taxation Act, when introducing tax benefits in response to economic and social circumstances, exemption from the preliminary feasibility evaluation can be granted after Cabinet deliberation. Additionally, Article 8 of the Guidelines for the Operation of Preliminary Feasibility Evaluation for Tax Benefits stipulates that exemption is possible if there is a risk of significant contraction in the overall economy. A Ministry of Economy and Finance official explained, “Domestic corporate investment including semiconductors is expected to experience a sharp decline this year,” adding, “With intensified global technological hegemony and supply chain competition, full support for strategic items with high economic and security value such as semiconductors is urgently needed.”

The government’s goal is to pass the amendment during the next extraordinary session of the National Assembly. Accordingly, the Ministry plans to submit the amendment to the National Assembly soon. If the amendment passes as planned, the tax credit rate for facility investments in national strategic technologies such as semiconductors will increase up to 25%. Specifically, the rate will rise from 8% to 15% for large and medium-sized enterprises, and from 16% to 25% for small and medium-sized enterprises.

High-Intensity Support Measures Followed by Major Countries

If the government’s plan is approved, a temporary investment tax credit will be introduced for the first time in 12 years. The temporary investment tax credit provides additional tax benefits for corporate investments regardless of the industry or purpose and has been suspended since 2011. Upon passage of the amendment, the tax credit rate for general investments will increase by 2 percentage points from the current 1-10% to 3-12%. The tax credit rates for new growth and core technologies will increase by 3 percentage points for large enterprises, 4 percentage points for medium-sized enterprises, and 6 percentage points for small and medium-sized enterprises. A 10% tax credit rate will apply to the increased investment by companies.

Calls are growing for the National Assembly to support the government’s commitment to backing national strategic technologies such as semiconductors. This is because major countries are consecutively introducing high-intensity support measures to secure semiconductor dominance. The Taiwanese government, which recently passed the so-called ‘Taiwan Semiconductor Act,’ is a representative example. The act includes raising the tax credit rate for R&D expenses of domestic technology companies from 15% to 25%. The Japanese government has decided to provide approximately 4.6 trillion KRW to attract the world’s largest foundry company, TSMC, to build a factory.