Tax Credit for Used Semiconductor Equipment... Legislative Push for 'Second K-Chips Act'

Distribution of Joint Proposal Request from Representative Yang Hyang-ja's Office
Includes Amendments to Special Tax Treatment Control Law such as Extension of Sunset for Tax Credits on Used Equipment and R&D Tax Benefits... Industry Welcomes

A revision to the Restriction of Special Taxation Act reflecting industry demands to include used semiconductor equipment in the tax credit targets will be proposed next month. It has been confirmed that Yang Hyang-ja, an independent lawmaker, has sent a joint proposal request to secure more than nine co-sponsoring lawmakers to introduce the 'K-Chips Act (Semiconductor Special Act) Season 2' legislative bill next month. According to the National Assembly Act, at least 10 lawmakers must agree to propose a bill. If the policy to expand tax credits for used equipment included in the bill, which consists of six amendments, is realized, it is expected to help activate investment in the semiconductor industry and increase production capacity.

According to reporting from Representative Yang Hyang-ja's office, a joint proposal request has been sent to each lawmaker's office to propose six amendments, including revising Article 24, Paragraph 1 of the Restriction of Special Taxation Act to remove the exclusion of used equipment from tax credit targets, by the end of next month at the latest. The legislative amendment work has been steadily ongoing since the first half of the year aiming for a proposal by the end of this month, but the timing was postponed to next month due to preparations for the founding convention of the New Party Korea's Hope held on the 28th.

The joint proposal request includes six amendments: two clauses from the Advanced Strategic Industry Act, two from the Restriction of Special Taxation Act, one from the Local Finance Act, and one from the National Land Planning Act. The amendment to the Advanced Strategic Industry Act includes provisions for confidentiality protection of foreign government data submissions, and for the state and local governments, rather than corporations, to establish specialized complexes and dismiss workers who steal critical technologies. The Restriction of Special Taxation Act amendments include expanding tax credit targets to used equipment and extending the sunset date for tax credits on national strategic technology R&D and facility investment costs, which expire at the end of next December, by six years. The Local Finance Act amendment prioritizes the allocation of special adjustment grants to local governments near specialized complexes equipped with industrial infrastructure such as industrial water and electricity. The National Land Planning Act amendment relaxes the maximum floor area ratio for industrial areas from 350% to 450%.

A member of the SK Powertech Quality Team conducting a final inspection of a 6-inch wafer product before shipment on May 16.
[Photo by SK Inc.] [Image source=Yonhap News]

The most notable provisions are the Advanced Strategic Industry Act to prevent overseas technology leakage and the Restriction of Special Taxation Act to expand tax credits for used equipment. In particular, the amendment to the Restriction of Special Taxation Act, which focuses on expanding tax credits for used equipment, is welcomed not only by material, parts, and equipment companies but also by large corporations. The amendment changes the clause in Article 24, Paragraph 1 of the Restriction of Special Taxation Act, which currently states, "Investments in used goods and leases are excluded from tax credits," to "Lease investments prescribed by Presidential Decree are excluded from tax credits."

The lead time for semiconductor equipment (the time from order to delivery) has lengthened, slowing the import speed of used equipment as well. According to industry reports, new 8-inch (200mm) wafer equipment takes 24 months (previously 10 months) for delivery, and deep ultraviolet (DUV) and extreme ultraviolet (EUV) lithography equipment takes 18 months (previously 6 months). This means that if equipment import work starts now, it will only arrive in 2025. When new equipment delivery is delayed, used equipment must be brought in, but since it is excluded from tax credit targets, the cost burden has been significant. The price of used equipment is about 80% of new equipment. The 8-inch wafers are used to manufacture power semiconductors, display driver ICs (DDI), and automotive semiconductors. DUV and EUV lithography equipment are necessary for drawing circuits on substrates.

The K-Chips Act 2 Restriction of Special Taxation Act amendment also includes extending the sunset date for R&D and facility investment tax credits by six years, reflecting industry wishes. The industry has consistently requested the government and political circles to extend or completely remove the sunset date for equipment tax credits. Even if the tax credit benefits for used equipment increase, it would be ineffective if the sunset date for tax credits on R&D investment costs expires, so there has been a strong call to revise both at once.

Procedures such as passing the bill through the National Assembly standing committee and government approval remain. The Ministry of Economy and Finance has maintained a position that it is difficult to increase tax benefits, citing ambiguities in defining the scope of used products eligible for tax savings, concerns about overlapping tax benefits between new and used products, and potential controversy over reverse discrimination against industries other than semiconductors.

An industry official said, "There is a welcoming atmosphere for the proposal of this bill among both large and small-to-medium enterprises." They explained, "Since the COVID-19 pandemic, equipment lead times have lengthened, somewhat dampening investment sentiment, but if the K-Chips Act 2 proposal coincides with the recovery phase of equipment demand, it will be a great help to management."