South Korea to Offer Increased Tax Incentives to Strengthen Its Semiconductor Industry

South Korea's government plans to increase tax breaks for big chip companies' capital expenditures to as much as 25%. This comes after President Yoon Suk Yeol called for bigger incentives to fuel the critical sector.

According to a finance ministry statement, big companies will get a tax credit of 15% on investments on manufacturing facilities, up from the planned 8% under legislation passed last month. Smaller companies’ capex spending will get a tax break of 25%, up from 16%. Any additional investment in chipmaking in 2023 will get another 10% tax break, the ministry said. The broadened plan, which will be proposed this month, could reduce the tax burden on companies by more than 3.6 trillion won ($2.8 billion).

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

It's not common for an administration to suggest significant changes shortly after legislators pass a bill. Last week, Yoon instructed his government to come up with more powerful incentives to boost its chip industry, blaming opposition lawmakers for hindering that vital effort as other nations pour billions of dollars into semiconductor policy support.

The fate of the revised bill is uncertain, as it does not have the support of the majority-wielding opposition party at the national assembly. Opponents of the bill argue that such incentives would endanger government finances and would only benefit big firms.

In a strongly worded statement, Yoon criticized a bill passed on Dec. 23 that included a smaller-than-envisioned tax cut for corporates. The bill called for a tax break of 8% for big companies, which falls short of the 20% that a special committee of experts had previously recommended.

The United States, China, and Japan are all investing billions of dollars into building up their own chip supply chains. This comes after pandemic-driven logistics snarls highlighted just how dependent countries are on one another for key electronic components. With more and more countries embracing tech protectionism, it's becoming increasingly important for each nation to be self-sufficient in this area.

As the United States imposes sanctions on exports of advanced chip technology bound for China, South Korea is feeling increased pressure to choose between its two biggest trading partners. Both the US and China 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.