South Korea to Enhance Tax Benefits for R&D Spending to Stimulate Growth, by Reuters

SEOUL (Reuters) – The South Korean government is set to broaden tax incentives for research and development in robotics and various technologies as it aims to identify potential new engines of economic growth.

Starting in 2017, companies operating in 11 key sectors will be able to deduct up to 30 percent of their R&D expenses, according to the Ministry of Strategy and Finance’s annual tax code review released on Thursday.

Among the areas benefiting from this tax code update are the development of artificial intelligence technologies, flexible displays, 3D printing, and hyper-plastics.

"We want to provide incentives to companies of all sizes willing to take risks," stated Vice Finance Minister Choi Sang-mok prior to the revisions. "In a challenging economic environment with a shortage of growth drivers, these changes might represent a significant breakthrough in taxation policy."

Larger South Korean corporations like Samsung Electronics and LG Electronics invest billions annually in R&D; however, smaller firms have hesitated due to limited resources and economic uncertainties, resulting in a considerable downturn in capital expenditures during the first quarter.

The administration has increasingly turned to technological innovations and the service sector for new economic opportunities, particularly as China poses growing competition to South Korea’s historical strengths in manufacturing.

Additionally, the government’s efforts to restructure heavily indebted companies in the shipbuilding and shipping industries have intensified economic challenges as exports remain weak.

Recently, the government announced a supplementary budget of 11 trillion won (approximately $9.73 billion) after the Bank of Korea reduced its policy rate to an all-time low of 1.25 percent in June.

Among the tax revisions announced on Thursday, an existing tax benefit on credit card spending aimed at encouraging consumption will be extended for an additional three years until 2019, beyond its original 2016 deadline.

Changes will also be made to a penalty tax on corporate income not allocated for wages, investment, or dividends, in order to promote wage increases. Companies that utilize their cash reserves to raise salaries will face lesser taxes compared to those that use those reserves for dividends or investments, which aims to raise household income levels.

Furthermore, the government will expand benefits related to childbirth and childcare in an effort to address the currently low birth rates. Beginning in 2017, the maximum tax credit for families with a second child will increase to 500,000 Korean won (about $443), up from the previous 300,000 won.

Despite these changes, the government expects its tax base to continue expanding nearly every year until 2020, as certain tax breaks considered unnecessary or ineffective will be phased out.

The special 17 percent flat income tax rate for foreigners is set to expire in 2019, with an increase to 19 percent beginning in 2020.

The finance ministry plans to submit the tax review to parliament for legislative approval on September 2.