Tax Credits Should Also Be Expanded for General R&D

In its “World Economic Outlook (WEO), July 2023” report, the International Monetary Fund (IMF) revised upward its forecast for global economic growth this year by 0.2 percentage points from its April forecast, to 3.0%. Growth forecasts for major economies were also revised upward from April, including by 0.7 percentage points for the United Kingdom, 0.2 percentage points for the United States, 0.1 percentage points for Japan, and 0.1 percentage points for the euro area.

In contrast, Korea’s growth forecast for this year was revised downward by 0.1 percentage points from the April forecast, to 1.4%. This suggests that while the global economy is gradually emerging from recession and entering a recovery phase, the Korean economy has yet to begin a full-fledged rebound and continues to follow a low-growth trajectory.

Meanwhile, on July 27, the Ministry of Economy and Finance convened the Tax System Development Review Committee and finalized and announced the “2023 Tax Revision Bill.” It is encouraging that the revision somewhat expanded R&D tax credits by adding core technologies related to biopharmaceuticals to the list of national strategic technologies under the Restriction of Special Taxation Act, while also adding supply chain-related essential technologies, such as core technologies for improving energy efficiency and the refining and processing of critical minerals, to the category of new growth and source technologies.

However, given the Korean economy’s low-growth path, it is still regrettable that the revision did not expand general R&D tax credits for technologies that do not fall under national strategic technologies or new growth and source technologies.

According to Article 10 of the Restriction of Special Taxation Act (Tax Credits for Research and Human Resources Development Expenses), the R&D tax credit system allows firms to deduct a certain portion of their R&D investment from corporate income tax, with credit rates differing by technology field and firm size. At present, the general R&D tax credit rate is applied differentially as follows: 0–2% for large enterprises (with the credit rate calculated as ‘current-year R&D expenses/revenue × 1/2,’ capped at 2%), 8% for medium-sized enterprises, and 25% for small and medium-sized enterprises.

By contrast, the R&D tax credit rate for certain national strategic technologies (54 technologies across 6 fields) is 30–40% for large and medium-sized enterprises and 40–50% for small and medium-sized enterprises. For new growth and source technologies (262 technologies across 13 fields), the R&D tax credit rate is 20–30% for large and medium-sized enterprises (25–40% for KOSDAQ-listed medium-sized enterprises) and 30–40% for small and medium-sized enterprises. In other words, tax credit rates for R&D in national strategic technologies and new growth and source technologies are substantially higher than those for general R&D.

For general R&D, Korea’s tax credit rate for large enterprises, at 0–2%, is far lower than that of major countries such as France (30%), the United Kingdom (13%), and the United States and Japan (up to 10%). Over the years, tax law revisions have increasingly narrowed R&D tax support for large enterprises, with the general R&D tax credit rate for large firms continuously reduced from 3–6% in 2013, to 3–4% in 2014, 2–3% in 2015, 1–3% in 2017, and 0–2% since 2018.

It is undesirable to apply general R&D tax credit rates with such excessive differentiation based simply on firm size. R&D investment entails high risk regardless of firm size. In addition, an excessive gap in credit rates by firm size can discourage corporate R&D investment. According to the Korea Institute of S&T Evaluation and Planning, large enterprises accounted for 60.8% of private R&D investment as of 2021.

Moreover, according to the Korea Institute of Public Finance’s in-depth evaluation report on tax expenditures (2018), an empirical analysis using tax filing data from more than 5,000 corporate taxpayers for the 2007–2017 tax years found that a 1 percentage point increase in the tax credit rate for general research and human resources development expenses led to a 5–10% increase in such spending.

Accordingly, continued reductions in R&D tax credits may leave Korea lagging behind major countries in R&D tax support, undermining global competitiveness and weakening the R&D investment and growth potential of Korean firms. For this reason, future tax law revisions should further expand R&D tax credits, especially by raising the general R&D tax credit rate for large enterprises and easing the excessive disparities based on firm size, so that firms can take the lead in private R&D investment and thereby enhance Korea’s growth potential.

Sanghyun Hwang, Professor, Division of Economics and Finance, Sangmyung University

---

Original title: 일반 R&D 분야도 세액 공제 확대해야

Author: Sang-hyeon Hwang

Date: 2023-08-02

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25929