Korea chips act all but useless, critics argue

Industry

Published: 26 Dec. 2022, 18:50 Updated: 26 Dec. 2022, 19:39

Korea chips act all but useless, critics argue

President Yoon Suk-yeol examines a wafer at the National Nanofeb Center situated within KAIST in Daejeon on April 29. [YONHAP]

Once hailed as Korea's answer to the U.S. Chips Act, a bill aimed at increasing tax incentives for semiconductor manufacturing facilities was finally passed last week, but it disappointed lawmakers from the two largest parties, the industry and academia due to less-than-expected benefits.

Rep. Yang Hyang-ja, the main author of the bill and head of a special committee on chip industry competitiveness promotion, harshly criticized the finalized version of the bill, saying that "it's better to veto" the bill rather than to pass it at its current status.

Non-politician members of the committee and four associations representing the local semiconductor industry issued a statement Monday requesting that the National Assembly reconsider the passed bill, a revision to the Restriction of Special Taxation Act.

Passed on Dec. 23, it would entitle big corporations a tax credit of up to 8 percent from the previous 6 percent for investments in semiconductor manufacturing.

For small enterprises, the percentage remains 16 percent, and for mid-sized enterprises it remains 8 percent.

The bill initially aimed to support growth in high-tech areas such as semiconductors, biopharmaceuticals and electric vehicle battery by increasing tax benefits.

“Within academia and the industry, some has even said it’s better to veto the bill rather than to pass it,” Yang Hyang-ja, a former Samsung Electronics executive-turned lawmaker who is the main author of the bill, told the JoongAng Ilbo.

Yang, a former member of the main opposition Democratic Party and now independent, is serving as head of the special committee formed by the People Power Party.

“Increase in investment and tax credit should be a matter which should be approached from a global perspective as a country entering a global chip war,” she continued. "It would be hard to formulate a strong semiconductor industry due to low tax credits.”

The National Assembly passes the revised bill on Restriction of Special Taxation Act on Dec. 23. [YONHAP]

“When we first proposed the bill, we initially pushed for a 20 percent tax credit,” Professor Kim Yong-seok of School of Electronic and Electrical Engineering at Sungkyunkwan University said. “The presidential office should have deliberated more about the tax rate before allowing the National Assembly to pass the bill.”

Yoon has promised to support the bills as semiconductors "determine the fate of the Korean economy.”

The U.S. and other nations are actively promoting investment into semiconductor research, development manufacturing and workforce development in the country.

The U.S. enacted the U.S. Chips Act, which was passed in July, which upped the tax credit rate to 25 percent when a company decides to build a semiconductor factory within the country regardless of its scale.

China reduces corporate income tax by 50 to 100 percent for semiconductor companies, and will provide financial support worth of 1 trillion yuan ($143.38 billion) to the industry by 2025. Taiwan is also pushing ahead with a drive to increase the tax credit rate from 15 to 25 percent for research and development for in-house semiconductor companies.

“The tax credit rate for domestic industry is low, and it’s barely getting enough financial investment,” said Park Jea-gun, the president of the Korean Society of Semiconductor & Display Technology. “If we lose the momentum now, in two to three years, we’ll lose the market even if we are equipped with the technology. Once we lose the momentum, we can’t turn it back.”

K-chips act bills are losing momentum as well, such as those for the training of professionals and simplifying the process for issuing licenses. Initial revisions of the act included expanding the number of students accepted for the semiconductor-related majors.

During the negotiation process, that part of the bill was omitted as it sparked regional conflict that the policy would be more advantageous for the universities in greater Seoul areas. The bill was settled to adjust the number of students accepted to the related majors within the designated student numbers.

Academia has strongly opposed the matter, arguing that the lawmakers were failing to see the bigger picture — allowing the future potential of semiconductor business to be limited by immediate regional conflicts.

“Restructuring of the school system is difficult regardless whether the university is within Seoul or not,” a professor who wished to remain anonymous said. “At this rate, it would be difficult for universities in regional areas to create semiconductor-related majors, thus making it more difficult to make up for the current manpower shortage within the industry.”

A bill about reducing red tape in the construction of chip factories is still pending.

“The government is planning to finance 1 trillion won on the domestic industry such as training professionals and in R&D, so we are just as supportive as the U.S. and Taiwan,” said lawmaker Yoon Young-seok of People Power Party (PPP).

“We get that the tax credit rate is not sufficient enough,” PPP lawmaker Yun Ju-keyng said. “We will try to come up with alternative support plans as the U.S. and Taiwan did.”

It’s becoming more clear that the domestic chip industry is suffering a downturn due to weak demand. Revenue of Samsung Electronics was 71.86 trillion won while and operating profit was 6.64 trillion won at the fourth quarter earnings, a reduction by 6.14 percent and 52.1 percent compared to the same period last year, according to the market consensus compiled by FN Guide.

“The global chip production will continue to be in surplus next year as countries such as the U.S. and China hold the semiconductor business in check,” said analyst Nam Dae-jong of eBest Investment & Securities.

"The government and the National Assembly seem to be only concerned about a possible drop in tax revenue,” said Yoo Hwan-ik, the head of the Federation of Korean Industries' (FKI) corporate policy division. “We need to look at it from a long-term point of view if Korea wants to secure the initiative and momentum for the future chip industry.”

BY KO SUK-HYUN, PARK EUN-JEE [lee.jaelim@joongang.co.kr]