A fairness dispute is building ahead of the rollout of a "regional preference coefficient" that will grant larger tax benefits for research and development and capital investment the farther a site is from Seoul. Even districts that share a border could face disadvantages in taxes and various forms of fiscal support depending on how the government draws the zones. Some local governments are stepping up their opposition, with at least one planning a rally at the National Assembly.
The government has begun mapping out detailed zone assignments for all 229 cities, counties and districts nationwide ahead of the coefficient's introduction next year, according to the ministries involved on the 25th. The system applies weights of 1.0 to 1.5 times across four zones to tax credits for R&D, integrated investment and domestic production. The Seoul metropolitan area gets 1.0 times; metropolitan cities outside the capital region and preferred areas within the capital region get 1.1 times; other non-capital regions and preferred areas inside non-capital metropolitan cities get 1.3 times; and preferred areas in other non-capital regions get 1.5 times.
The Ministry of the Interior and Safety released its regional preference index and the resulting four-zone classification on the 20th. The Ministry of Finance and Economy plans to adjust some areas based on that work and finalize the plan in February next year. Because preferred areas include regions with declining populations, the broad outline is already largely clear. Still, officials are weighing whether to place industrial cities adjacent to the capital region, such as Cheonan and Asan, and mid-sized regional industrial cities, such as Changwon and Pohang, in the 1.1-times bracket for non-capital metropolitan cities or in the 1.3-times bracket for other non-capital regions.
The gap in tax benefits created by the zoning becomes stark when applied to a large semiconductor company's investment. If Samsung Electronics (005930.KS) spends a combined 2 trillion won ($1.4 billion) next year in Yongin, Gyeonggi Province — 1 trillion won each on R&D and facility investment in semiconductors, designated a national strategic technology — its R&D tax credit would come to 300 billion won and its integrated investment credit to 200 billion won, for a total of 500 billion won. That reflects base credit rates of 30% for national strategic technology R&D by large companies and 20% for semiconductor facility investment, with Yongin assigned the lowest coefficient of 1.0 times.
In Andong, North Gyeongsang Province, by contrast, the maximum coefficient of 1.5 times would lift the credit rates to 45% for R&D and 30% for semiconductor facility investment. That would raise the R&D credit to 450 billion won and the integrated investment credit to 300 billion won, for a total of 750 billion won. For the same 2 trillion won in spending, Yongin would receive 250 billion won less in tax credits than Andong, leaving a correspondingly heavier tax burden.
The coefficient applies not only to national strategic technologies such as semiconductors, secondary batteries, displays and biotechnology, but also to R&D and facility investment credits for new growth and source technologies and for general sectors. A domestic production tax credit being created next year will be differentiated the same way. The R&D credit rate, however, is capped at 50% even after the coefficient is applied.
Tax benefits for workers and individual donors will also vary by region. A young adult employed at a small or mid-sized company currently receives up to 10 million won in income tax relief over five years, whether in Seoul or in Haenam, Jeonnam, home to the southernmost tip of the peninsula. From next year, Seoul will keep the current level while Haenam expands to as much as 20 million won over 10 years.
The tax credit for hometown love donations will diverge as well. On a donation of 500,000 won, residents in zones one through three, including the capital region, would receive a credit of 193,500 won, while those in zone four — preferred areas in other non-capital regions — would receive 237,500 won, a benefit 44,000 won larger.
The sticking point is that questions about the fairness of the zoning criteria are already surfacing. Inje in Gangwon State objects that it was placed in zone two alongside Chuncheon and Wonju in the interior ministry's regional preference index despite its high level of underdevelopment. If the finance ministry carries that classification directly into its tax zoning, Goseong in Gangwon State — also a border area — would receive the 1.5-times coefficient while Inje County would get only 1.1 times. By simple calculation, Inje would receive roughly 30% less in tax benefits than Goseong. Inje County's emergency response committee is reported to be planning a protest rally outside the National Assembly building in Seoul on the 27th.
Experts say careful adjustment is needed to minimize disputes over fairness among regions. "It is positive in that it steers growth away from a capital-centered model toward one led by the provinces, but the government will need to review policy effects and local conditions closely and draw the zones reasonably so that pushback from local governments is minimized," said Kim Sang-bong, a professor of economics at Hansung University.