Manufacturing renaissance is hindered by tax regulations

A company that specializes in manufacturing display-related goods recently considered investing in a “new growth” technology and applying for a government tax deduction.

But the company had to cancel its plan, as its research and development (R&D) spending on new growth technologies had to account for more than 10 percent of its overall R&D to be qualified for the benefit. Its investment fell short.

“Because the size of our existing R&D investment was so large, the R&D expenses on new growth technologies couldn’t meet that level,” said a company spokesman. “Such regulations are holding back investments.”

A logistics conglomerate in 2017 invested 290 billion won ($248.6 million) in constructing a production-improvement facility. The company received 8 billion won of tax deductions on its investment.

Last year, the company made a similar investment, of 280 billion won. But it was only able to get a 2.8-billion-won of deduction from its investment.

“It is true that the lowered tax deduction rate is reducing the will to expand facility investments,” said a company’s official.

President Moon Jae-in last month laid out a grand vision for a “manufacturing industry renaissance.”

The goal is to turn Korea into one of the world’s top four manufacturers, increasing the manufacturing value-added ratio from 25 percent to 30 percent. To achieve the goal, Moon promised to expand the implementation of the latest technologies, including smart factories run by artificial intelligence (AI), Internet of Things (IoT) and big data. He also promised deregulation.

The business community argues that the biggest obstacle to the government’s “manufacturing industry renaissance” is the regulations currently in place that discourage companies from expanding business.

They say without reform of tax regulations limiting the activities of private businesses, the government’s vision may only end in broken dreams.

The Korea Chamber of Commerce and Industry (KCCI) Monday submitted a proposal to the government and the National Assembly to change the tax code to help companies increase their investment.

This is the 16th proposal that the business lobby group has submitted to the current National Assembly and the government.

One of the KCCI recommendations was that the government ease the tax deduction on new growth facility investments, as well as expand the definition of new growth technologies while also raising the deduction rate.

The KCCI also proposed easing the tax deduction for investments in the commercialization of new growth technologies. Currently a 5-percent to 10-percent tax deduction is offered when investments are made in R&D related to 173 new growth engines, including AI.

However, under the existing tax code, the tax deduction is only allowed when the R&D accounts for more than 2 percent of the company’s total revenue, and it needs to be more than 10 percent of the overall R&D investment.

Because of tough business conditions in 2017, only 0.66 percent of companies applying for deductions, or 224, applied for the tax deduction for new growth technology R&D investment, out of a total of 33,614 companies that applied for R&D deductions.

Additionally, government tax benefits for R&D investment have been shrinking.

In 2013, the government provided a maximum 6-percent deduction on R&D investments for conglomerates. Last year it was reduced to maximum 2 percent.

“Other competing countries like Britain [maximum 11 percent], Japan [maximum 14 percent] and France [30 percent up to 100 million euros ($113 million) a year] have been expanding their tax benefits on R&D investment,” said Kim Hyun-soo, head of the corporate policy team at KCCI. “We are proposing that the government raises the R&D tax deduction to 36 percent and 40 percent on the increased amount.”

Some of the benefits are scheduled to end. The tax deduction given for investing in production improvement facilities is to end at the end of this year, while the deductions for R&D and energy-reduction facility investment are scheduled to end in 2021.

The KCCI is currently working on convincing the government to extend the deadline on the tax benefits granted for investing in production improvement and safety until the end of 2021.

BY OH WON-SEOK [lee.hojeong@joongang.co.kr]