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Gov’t looks to tax breaks to try to spur the economy

July 26,2019
The Moon Jae-in administration is making changes to tax laws to stimulate a stalled economy.

The amendments, announced Thursday by the Ministry of Economy and Finance, are supposed to encourage investment by large corporations and promote research and development (R&D) as Korea’s economy faces growing headwinds from various directions.

According to the Finance Ministry, tax deduction rates for investment in facilities improvements by companies with assets larger than 10 trillion won ($8.5 billion) will increase from the current 1 percent to 2 percent for all of next year. Companies with assets less than 500 billion won will be eligible for a deduction rate of 10 percent from the current 7 percent, while those with assets in between 500 billion won and 10 trillion won will be eligible for a deduction rate of 5 percent compared to 3 percent.

The government reduced the deduction rates in 2017 to collect more taxes.

The changes will probably have the most impact on large corporations as they account for 80 percent of the country’s facilities investment.

This is a noticeable shift from the administration’s earlier antagonism toward big business, proof of Korea’s increasingly difficult economic situation.

The Bank of Korea has already revised its forecast for the country’s gross domestic product (GDP) growth for this year to 2.2 percent from 2.5 percent, after slashing the benchmark interest rate last week.

The government said it expects the temporary increases to the deductions to stimulate corporate investment. Facilities investment fell 11.5 percent in May compared to the same month the previous year.

The new deductions for facilities investments will cover more industries including pharmaceutical manufacturing and high-tech logistics systems.

The government expanded a list of safety facilities to prevent industrial accidents eligible for tax deductions by including those for oil pipelines and liquefied petroleum facilities.

In addition, inheritance taxes are being changed. Under current laws, the inheritance tax rate reaches up to 50 percent. For major shareholders of companies, there is an additional rate of up to 30 percent based on the company’s size. The amendments reduce that rate to up to 20 percent.

In the wake of Tokyo’s export restrictions, the government also included tax incentives to promote R&D in new industries.

More industries will receive up to 40 percent in tax credits for R&D starting from next year.

The government announcement also focused on promoting consumption starting with some alcoholic products, beer and makgeolli rice wine.

A new system taking effect next year will levy taxes based on the alcohol content and volume of drinks rather than their production price or import price.

The government also said it will temporarily exempt 70 percent of individual consumption taxes for those who exchange 15-year-old and older motor vehicles for new ones until the end of this year.

BY CHAE YUN-HWAN, SOHN HAE-YONG [chae.yunhwan@joongang.co.kr]