South Korea to expand tax benefits for R&D spending to drive new growth

[July 28, 2016]  SEOUL (Reuters) - South Korea's government plans to expand tax benefits for research and development of robotics and other technologies as it seeks out industries that could become new economic growth engines.

Up to 30 percent of R&D expenses will be tax deductible for companies across 11 key sectors starting 2017, the Ministry of Strategy and Finance said in its annual review of the tax code on Thursday.

Spending on development of artificial intelligence technologies, flexible displays, 3-D printing, and hyper-plastics are some of the areas subject to the tax code revision, it said.

"Regardless of company size, we're trying to give benefits to those taking risks," Vice Finance Minister Choi Sang-mok told reporters before the revisions were released. "In a difficult economic situation with a lack of growth drivers, this could become a breakthrough in terms of taxation."

South Korean conglomerates such as Samsung Electronics Co Ltd and LG Electronics Inc spend billions of dollars a year on R&D investment, but smaller companies have been skittish in doing so due to limited resources and economic uncertainties, leading to a severe downturn in capex in the first quarter.

The Park Geun-hye administration has also been increasingly looking to technological developments and the service sector to provide a new growth engine for the economy as China continues to challenge South Korea's traditional strength in manufacturing.

The government's push for restructuring of indebted companies in shipbuilding and shipping industries is adding to growth woes when exports remain weak.

Earlier this month, the government announced an 11 trillion won ($9.73 billion) extra budget following the Bank of Korea's decision to lower its policy rate to a record 1.25 percent in June.

Under Thursday's revisions, an existing income tax benefit on credit card spending introduced to encourage consumption will be extended three years past a 2016 deadline, through 2019.

A penalty tax on corporate income not spent on wages, investment and dividends will be modified to encourage wage increases.

Companies using their cash reserves to raise wages will face less tax than those which use reserves to pay out dividends or make investments, a measure aimed at boosting household income.

An employee takes photographs of LG Electronics' organic light-emitting diode (OLED) TV sets, which are made with LG Display flat screens, at its store in Seoul January 28, 2015. REUTERS/Kim Hong-Ji/File Photo

Benefits for childbirth and childcare support will also be expanded to boost the birth rate, currently at record lows. The maximum tax credit for those with a second child will be 500,000 Korean won ($443) a year, up from 300,000 won, starting 2017.

Nevertheless, the government sees its tax base expanding nearly every year until 2020 as tax breaks deemed unnecessary or ineffective will be allowed to expire.

The special 17 percent flat income tax rate for foreigners will expire in 2019 and be raised to 19 percent from 2020 onwards, according to the statement.

The finance ministry will submit the tax review to parliament on September 2 for approval from lawmakers.

(Reporting by Cynthia Kim; Editing by Christine Kim and Eric Meijer)

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