Korean companies retain US tax benefits in OECD agreement
TL/DR –
South Korean manufacturers investing in the US will maintain federal tax incentives without additional levies under the new global minimum tax framework. The Organisation for Economic Cooperation and Development (OECD) announced the package, which includes a safe harbour for investment-linked tax incentives and prevents top-up taxes in other jurisdictions. The package is designed to support real economic activity and removes tax uncertainty for Korean manufacturers as they expand investment in the US.
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US Tax Incentives Retained for South Korean Manufacturers Amid Global Minimum Tax Overhaul
The Organisation for Economic Cooperation and Development (OECD) has revealed a new package to the 15 percent global minimum tax, which brings significant tax benefits to South Korean manufacturers operating in the US. Under this new framework, these businesses can retain federal tax incentives, with no need for additional tax payments.
Understanding the Package: Safe Harbour and Side-By-Side System
In this side-by-side package, a ‘safe harbour’ for investment-related tax incentives is a notable component. Firms can continue to enjoy substance-based benefits without incurring top-up taxes in other countries. This is applicable to certain expenditure and production-based credits linked to tangible investment and employment.
A second major feature, the ‘side-by-side’ system, lets domestic minimum tax regimes operate concurrently with global rules. Under this framework, multinational groups based in countries that use a certified domestic minimum regime won’t have to pay added top-up taxes in other countries.
For a regime to qualify, it must have a statutory corporate tax rate above 20 percent. It should also ensure an effective rate of at least 15 percent on domestic income, while applying a 15 percent tax to foreign-source income earned by group subsidiaries abroad.
Impact on South Korean Manufacturers
This package will significantly impact Korean manufacturers, particularly automakers and battery makers. They will continue to benefit from the Inflation Reduction Act credits for advanced manufacturing, thus reducing tax ambiguities as they broaden their investment in the US.
The South Korean government, which initially proposed the inclusion of refundable tax credits such as the Inflation Reduction Act in the safe harbour, has welcomed the package. “The latest agreement is expected to help reduce the global minimum tax burden on overseas-expanding companies in new industries such as secondary batteries and electric vehicles, thereby strengthening their global competitiveness,” noted the Ministry of Economy and Finance.
Global Minimum Tax and Its Implementation
The global minimum tax, agreed in 2021 by 145 countries under the OECD and the Group of 20 Inclusive Framework, targets multinationals with consolidated revenue of over €750 million ($880 million). It mandates that these businesses pay a minimum 15 percent tax, regardless of their operational location.
Despite the planned roll-out in 2024, the regime has seen fragmentation due to the resistance of several countries, including the US, citing reasons such as tax sovereignty and protection of domestic firms.
In line with this, Korea has planned to introduce a domestic minimum top-up tax from this year. From 2026, multinational companies operating in Korea, subject to low effective tax rates, will be taxed at a minimum rate of 15 percent on income, with the first filing and payment due from March 2028.
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