Korea to expand tax incentives to bolster AI, future tech growth

First Vice Minister of Economy and Finance Lee Hyoung-il speaks during a press briefing at Government Complex Sejong, Tuesday. Courtesy of Ministry of Economy and Finance

The government will expand tax incentives for research and development and investments in three strategic future growth driver industries — artificial intelligence (AI), next-generation mobility and transportation — the Ministry of Economy and Finance said Thursday.

This is part of the first tax revision announced by the Lee Jae Myung administration, which also includes adding five AI-based technologies to the list of Korea’s strategic asset technologies. It will classify data centers as industrial facilities to induce corporate investment in the AI sector.

The government also seeks to expand long-term investment in innovative technologies and secure sustainability by fostering the AI sector. The revision will increase tax revenue by 35.6 trillion won ($25.6 billion) over the next five years.

“Tax revenues have declined sharply over the past three years," First Vice Minister of Economy and Finance Lee Hyoung-il said during a press briefing at Government Complex Sejong on Tuesday.

"Next year's tax plan will focus on restoring tax revenue while striking a balance between fiscal sustainability and bolstering economic growth and people's livelihoods. The government recognizes the need to normalize the weakened tax revenue, and will operate the tax system to ensure that tax spending is implemented in a fair and effective way.”

The government will raise the maximum corporate tax rate to 25 percent from the current 24 percent. This returns the rate to the one in effect in 2022.

The rate was cut to 22 percent under the Lee Myung-bak administration in 2009, and was later increased to 25 percent under the Moon Jae-in administration in 2017. The former Yoon Seok Yeol administration cut it to 24 percent.

Financial investment income, together with other rental or business incomes, will lead to close to a 50 percent tax rate, a major deterrent in increasing holdings in high-dividend firm stocks.

The “major shareholder” rule for capital gains tax will be tightened. Those who hold more than 1 billion won worth of a single stock will be subject to up to a 50 percent tax rate. This is a stricter measure compared to the previous requirement of those holding 5 billion won in a single stock, eased during the Yoon Suk Yeol administration.

In addition, the securities transaction tax rate will be restored to 0.2 percent, up from 0.15 percent. The measure came in response to the abolishment of the envisioned financial investment income tax, the much-disputed drive that lost momentum after criticism that only major institutional investors would reap benefits at the expense of a vast majority of retail investors.

The president, then head of Democratic Party of Korea (DPK), together with party leadership long struggled to push ahead with the change after many retail investors characterized it as "Jae Myung tax.”

The now-scrapped tax sought to impose a rate of up to 27.5 percent on income from trading stocks, funds, bonds and financial derivatives exceeding 50 million won.

In addition, a larger tax deduction will be granted on credit card spending for households with multiple children.

The maximum per-child credit card spending deductible will be raised to up to 3 million won from the current maximum of 2.5 million won.

The government will also allow a separate taxation for companies that pay high dividends, in a move to induce greater corporate investments, while expanding incentives for companies that maintain long-term employment.

The tax burdens on self-employed and small business owners will also be reduced.

The ministry’s tax plan will be submitted to the National Assembly for passage following Cabinet approval.