South Korea Proposes Stronger Incentives, Bigger Tax Breaks to Boost Critical Chip Sector

South Korea plans to give big companies a tax credit of 15 percent on investments on manufacturing facilities in the country.

By Sohee Kim, Bloomberg | Updated: 3 January 2023 13:04 IST

South Korea Proposes Stronger Incentives, Bigger Tax Breaks to Boost Critical Chip Sector

Photo Credit: Unsplash/ Daniel Bernard

South Korea has been under pressure to choose between its allies, China and the US

Highlights

Big manufacturing companies will get 15 percent tax credit on investments
Smaller South Korean companies will get a 25 percent tax break
Opponents argue that such incentives endanger government finances

South Korea's government plans to hike tax breaks for big chip companies' capex to as much as 25 percent, after President Yoon Suk Yeol called for bigger incentives to fuel the critical sector.

Big companies will get a tax credit of 15 percent on investments on manufacturing facilities, up from the planned 8 percent under legislation passed last month, according to a finance ministry statement. Smaller companies' capex spending will get a tax break of 25 percent, up from 16 percent. Any additional investment in chipmaking in 2023 will get another 10 percent tax break, the ministry said. The broadened plan, which will be proposed this month, could reduce the tax burden on companies by more than $2.8 billion (roughly Rs. 23,170 crore).

Home to leading memory chipmakers Samsung and SK Hynix, Korea has been caught between the US and China in an escalating fight over semiconductors, which control key technologies from artificial intelligence to missile defenses.

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It's unusual for an administration to propose substantive changes so soon after lawmakers pass a bill. Yoon ordered his government just last week to devise stronger incentives to drive its chip industry, accusing opposition lawmakers of impeding that critical effort as other countries spend billions on semiconductor policy support.

It's uncertain whether the revised bill will gain the necessary support of the majority-wielding opposition party at the national assembly. Opponents argue that such incentives endanger government finances and would only benefit big firms.

In a strongly worded statement, Yoon blasted a bill passed on December 23 with a smaller-than-envisioned tax cut for corporates. It called for a tax break of 8 percent for big companies, falling shy of the 20 percent that a special committee of experts had previously recommended.

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US, China and Japan are pouring billions into building up their own chip supply chains, as more countries embrace tech protectionism after pandemic-driven logistics snarls highlighted countries' dependence on one another for key electronic components.

US sanctions on advanced chip technology exports bound for China are putting increased pressure on Korea to choose between the US, its security ally, and China, its biggest trade partner. Both have asked South Korea to expand chip production partnerships, and Yoon's ruling party has formed a 13-member special committee to brainstorm a solution.

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