On July 28, 2016, the Ministry of Strategy and Finance has announced tax law changes to be implemented from 2017. The proposed tax law changes will be finalized after the National Assembly passes the bill. We summarized the major proposed tax law changes in 2017 to keep you updated as follows:
■ R&D Tax Credit for New Growth Engine Business and Core Technology
Several changes are proposed to reorganize the existing R&D tax credit for new growth engine businesses and core technologies. One of the proposed changes is to adjust the eligible scope with an increased focus on new technologies in 11 emerging industries such as future-generation motor vehicles, intelligent information, next-generation software and security, etc. Currently, the R&D tax credit is available for 75 categories of technologies in 12 new growth engine industries and 50 types of technologies in 17 core technology areas. Details of qualifying technologies and industries will be specified in the Presidential Decree of the Special Tax Treatment Control Law (STTCL).
It is also proposed to increase the R&D tax credit rate for non-SMEs (small and midsize enterprises) from 20% up to 30% (depending on the R&D expenditure spent on new growth engine industries and core technologies). However, no change is proposed to the existing 30% rate for SMEs.
In addition, the tax credit for expenses incurred for R&D activities subcontracted or performed jointly is currently allowed for the R&D activities subcontracted to or performed jointly with qualifying R&D centers, R&D-dedicated departments of a company or R&D service businesses. The tax credit will be available in respect of expenses incurred for subcontracted or joint R&D activities with an expanded scope of organizations. They will include domestic universities or colleges, public research organizations, domestic or foreign non-profit corporations (including laboratories affiliated with non-profit corporations), research organizations of domestic or foreign corporations, and industry technology research associations sponsored by government ministries.
■ Tax Credit for Facility Investment for Commercialization of New Growth Engine and Core Technology
It is proposed to allow a tax credit in respect of investment in facilities designed to promote commercialization of new growth engine or core technology (e.g., facilities for manufacturing of new drugs for which patents are obtained by a company based on clinical tests). The proposed new incentive will allow an investing individual or company to claim a credit at a certain percentage of its investment amount in such facilities against its individual or corporate income tax payable. The tax credit rate is proposed to be 10% for SMEs, 8% for medium-scale companies and 7% for large corporations. Details on the qualifying facilities will be set forth in the Presidential Decree of the STTCL through consultations with the relevant government ministries.
To enjoy the new tax credit, the following conditions must be met: i) a company’s total R&D expenditure must represent at least 5% of total sales and the proportion of R&D expenditure relating to new growth engine or core technology must satisfy certain criteria to be specified by the Presidential Decree; and ii) a company must not reduce the number of regular employees from the preceding year.
The proposed tax credit will not be available for investment in a designated metropolitan area (e.g., Seoul). In addition, the tax credit claimed will be recaptured in the cases where: i) a company reduces the number of regular employees within a period of two years following the year the tax credit is claimed (i.e., KRW 10 million per employment reduced); ii) an entire amount of the tax credit will be recaptured if the qualifying facilities are used for purposes other than the authorized use of commercialization in three years from the date when the investment is completed.
The proposed tax credit will be temporarily available for investments made on or after January 1, 2017 through December 31, 2018.
■ Reform of Foreign Investment Tax Exemption for High-Technology Businesses
A comprehensive reform of the existing foreign investment tax exemption for high-technology businesses is proposed as follows:
• The scope of businesses eligible for foreign investment tax incentives (which currently include 497 types of high-technology business and 153 types of industry-supporting service business) will be reformed with a main focus on new growth engine industries (to be aligned with those which qualify for the foregoing R&D tax credit for new growth-engine industries).
• Currently, the tax exemption is based on the proportion of the income from the qualifying high-tech business to total tax base. Under the proposal, the tax exemption will be based on the total tax base if the income from the business utilizing new growth engine technologies accounts for 80% or more of total tax base.
• The tax exemption or reduction which is currently limited to 90% of the amount of foreign investment (i.e., 50% based on the investment amount and 40% based on the employment) will increase to 100% of the foreign investment amount (i.e., 50% based on the investment amount and 50% based on the employment).
• A foreign investor will be subject to a new requirement for minimum investment.
• The eligible scope of new growth engine technologies will be decided through consultations with respective committees as specified by the Presidential Decree instead of government ministries.