South Korean Tax Cut Plan To Boost Growth And Investment

by Mary Swire, Tax-News.com, Hong Kong

19 January 2007

In a bid to stimulate corporate investment and assist low-income families, South Korea's Finance Ministry has unveiled a revision to the tax laws which includes tax credits for corporate research spending and families.

In its revised enforcement ordinances, the ministry revealed a set of new tax rules, which include lower taxation on junk bond investment and an exemption of value-added taxes on investment advisory businesses.

The government has been pushing to invigorate corporate capital spending and boost household income to sustain domestic spending and boost the economy. According to the ministry's forecast, the economy's growth is expected to slow to 4.5% this year from a 5% advance last year.

Most of the tax revision will take effect as soon as the package is approved in a vice ministerial meeting and a Cabinet meeting. Some parts of the revision, including a tax deduction on companies' social donations, will take effect by the end of February.

Under the revision, the government will boost tax credits for large businesses which commission their research and development to universities or smaller businesses.

When such research spending surpasses their previous four-year average, 50% of the excess spending will be deducted from their corporate tax liability. Previously, only 40% of the excess spending had been deducted.

In addition, the government will provide tax credits for households whose annual income falls below 17 million won (US$1,804).

According to the plan, the government will provide tax credits according to their level of income. For example, the government will deduct 10% of families' total income from their tax liability if their annual income falls below 8 million won.

The government will also lower its taxation on dividend income from junk bond investment to invigorate investment on the riskier bonds and induce foreign investment. Under this revision, the ministry will lower the taxation to 5% for bond funds that invest 10% of their money in such junk bonds and more than 60% of money on Korean bonds.

In a bid to stimulate investment advisory businesses, the government will also exempt value-added taxes on such business operators, while providing the same tax exemption on the state-run Korea Investment Corp.'s asset management business.

"The set of new revisions has been drafted to support the government's move to improve the corporate environment and service industry as well as support the government's blueprint on 2007 economic management announced in early January," the ministry said.

"The revised tax code will support the government's macroeconomic management for this year," it added.

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