Why South Korea is proposing stronger stimulus for its chip sector

The South Korean government plans to increase investment tax breaks for large chip companies to up to 25 percent after President Yoon Suk Yeol called for greater stimulus to boost the critical sector.

According to a Treasury Department statement, large companies will receive a 15 percent tax credit on investments in manufacturing facilities, up from the planned 8 percent passed last month. Smaller business capital expenditures receive a tax break of 25 percent versus 16 percent. Any additional investment in chip manufacturing in 2023 will receive an additional 10 percent tax break, the ministry said. The expanded plan, proposed this month, could reduce corporate tax burdens by more than US$2.8 billion (around Rs.23,170 billion).

Home of leading memory chip manufacturers Samsung and SK HynixKorea is locked in an escalating battle between the US and China over semiconductors that control key technologies from artificial intelligence to missile defense.

It is unusual for a government to propose significant changes so soon after a bill has been passed. Yoon just last week ordered his government to provide stronger stimulus to boost its chip industry, accusing opposition lawmakers of impeding that important effort as other countries spend billions to support semiconductor policies.

It is uncertain whether the revised bill will receive the necessary support from the majority opposition party in the National Assembly. Opponents argue that such incentives would jeopardize government finances and only benefit big firms.

In a sharply worded statement, Yoon blew up a law passed on Dec. 23 with a smaller-than-planned corporate tax cut. She called for an 8 percent tax break for large companies, falling short of the 20 percent previously recommended by a special committee of experts.

The US, China and Japan are pouring billions into building their own chip supply chains as more countries embrace technology protectionism after pandemic-related logistics problems have highlighted countries’ interdependence for key electronic components.

US sanctions on exports of advanced chip technology to China are putting increased pressure on Korea to choose between the US, its security ally, and China, its largest trading partner. Both have asked South Korea to expand chip-making partnerships, and Yoon’s ruling party has formed a 13-member special committee to find a solution.

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