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It is widely known that there are two things humans cannot avoid: death and taxes. Everybody dies at some point and people have to pay taxes when making money to live. Many often go to great extents to not pay any tax or to pay only the minimum. Tax significantly influences how we behave and the same goes for corporations.
Companies want to build plants, hire workers and produce goods in a place where they pay less taxes. Given this simple fact, the National Assembly's recent passage of the drastically modified "K-Chips Act" was such a disappointment as it deals decisive blow to Korea's semiconductor industry when Samsung Electronics and SK hynix struggle to compete with TSMC, Intel and other foreign rivals on the global stage.
Under the initiative of President Yoon Suk-yeol, the ruling People Power Party (PPP) launched a special committee to enhance the competitiveness of the domestic semiconductor industry. After a series of deliberations, the committee chaired by independent lawmaker Rep. Yang Hyang-ja finalized the act and submitted it to the Assembly for ratification.
The bill allows Samsung, SK and other large chipmakers to claim tax credits as high as 20 percent when making facility investments, up from the current 6 percent. This means companies can deduct 20 percent of their facility investments from taxable income. Many industry analysts have said this would certainly encourage Samsung and SK to build more manufacturing plants in Korea rather than go abroad.
However, the main opposition Democratic Party of Korea (DPK), which has 169 seats in the 300-member Assembly, refused to agree, arguing that the bill would benefit the nation's major conglomerates, not small businesses. Even more disappointing was that the Ministry of Economy and Finance defied President Yoon's drive by saying the tax credit should not be more than 8 percent, insisting tax revenue is expected to start falling sharply in 2025. On Dec. 23, lawmakers ratified the modified version of the K-Chips Act, raising the credit to only 8 percent.
Yang lamented the passed bill is tantamount to a death sentence for the Korean semiconductor industry when global competition to attract high-tech plants has been intensifying in line with the realignment of the global supply chain initiated by the United States. The former Samsung Electronics executive was right that Korea desperately needs to provide larger incentives to chips and other key high-tech industries to curb the ongoing hollowing out of manufacturing, which had been accelerating under the previous labor-friendly Moon Jae-in administration.
According to the Federation of Korean Industries, the U.S. offers a 25 percent tax credit for semiconductor facility investments, while the Taiwanese government has proposed a bill to increase tax credits for investments by Taiwan-headquartered semiconductor firms to 25 percent from 15 percent. China and Japan have also been moving to revise their laws to increase tax credits for chip facility investments, on top of providing tens of billions of dollars in other non-tax incentives.
The DPK must realize that Samsung and SK hynix are in competition with their American, Taiwanese, Japanese and Chinese rivals, not with local small companies. Giving bigger tax credits to the two chipmakers in itself benefits small firms because they will have more business dealings when more plants churn out semiconductors here. The opposition party's politically motivated slogan of "only-for-the-rich" has no grounds and is not well-received by the public as Korean companies, large or small, compete not among themselves, but with their global rivals.
Officials at the Ministry of Economy and Finance, which manages the state coffers, should also break with convention and think outside the box. Giving larger tax credits may lead to an immediate fall in tax revenues as companies are allowed to deduct more from their taxable income. But if chipmakers decide to build more plants and hire more workers than initially planned thanks to tax incentives, the government will be able to collect new corporate and individual income taxes, in addition to other accompanying economic benefits.
Only after being censured by President Yoon, the ministry belatedly announced Tuesday that it will increase the tax credit for large semiconductor makers to 15 percent from 8 percent, adding it will forward the revised bill to the Assembly for approval this month. This is a belated but welcome move and the opposition party must not block the bill from passing this time.
DPK lawmakers should set aside political differences with PPP and the Yoon administration and act for the sake of the country. If they plan to run for reelection in 2024, they should remember they were elected to serve the people and do what's right for the nation. The people are watching.
The writer (leehs@koreatimes.co.kr) is business editor of The Korea Times.
