RESTRICTED
WORLD TRADE G/SCM/Q2/KOR/12
18September 1997
ORGANIZATION(97-3726)
Original: English Committee onSubsidies
andCountervailing Measures
SUBSIDIES
Replies toQuestions Posed bytheEUROPEAN COMMUNITY1andJAPAN2
Regarding theUpdating Notification ofKOREA3
Thefollowing communication, dated 4September 1997, hasbeenreceived fromthePermanent
Mission ofKorea.
_______________
Please findouranswers tothequestions posed bytheECandJapan regarding theupdate
notification ofKorea astheyhavealready beenprovided attheregular meeting on1-2May1997 of
theCommittee onSubsidies andCountervailing Measures.
CONTENTS
PageNo.
Replies toquestions posed bytheEC....................................2
Replies toquestions posed byJapan .....................................4
1G/SCM/Q2/KOR/10+Corr.1,2G/SCM/Q2/KOR/11.
3G/SCM/N/3/KOR+Rev.1-G/SCM/N/16/KOR.G/SCM/Q2/KOR/12
Page2
REPLIES TOQUESTIONS POSED BYTHE EC
Q.A. Subsidies contingent upon theuseofdomestic overimported goods
TheCommunity isaware thatKorea stillgrants anumber oftaxincentives tocompanies,
andthatinmany cases alarger deduction isoffered iffirms purchase domestically-produced goods
rather thanimported goods (Tax Credits forInvestment inFacilities). Such discrimination in
favour ofdomestic over imported goods means thatthese subsidies areprohibited under
Article 3.1(b) oftheSubsidies Agreement.
Korea hasnotified several suchschemes, buttheCommunity isaware thatKorea grants:
Taxincentives forinvestment inR&D facilities
Ifadomestic company invests capital inR&D facilities, itisallowed todeduct 5%ofthe
amount invested from corporate income taxifimported goods areused, or10%ifthegoods are
produced inKorea.
Inaddition, companies areallowed tocount acertain percentage ofthevalue oftheassets
purchased aslosses when calculating their taxable income. Iftheassets areproduced inKorea,
theamount which canbededucted is20%higher thanifthegoods inquestion areimported.
Korea isrequested tonotify theabove scheme andtogivedetails ofallother subsidies
contingent upon theuseofdomestic overimported goods which were notincluded initsoriginal
notification ofsubsidies, using thestandard notification format. Since suchsubsidies areprohibited
byArticle 3.1(b) oftheSubsidies Agreement andhave notbeen under Article 28.1, Korea is
requested toexplain whytheyarestillinforce andwhat steps have been taken tophase them
out.
Korea isalsorequested tonotify allsubsidies provided toindividual firms withaview
topromoting theuseofdomestic overimported goods. Ifsuch subsidies areprovided onthe
basis ofapplications from firms which specify thatthepurpose ofobtaining thesubsidy istofavour
theuseofdomestic goods inKorean industry, theywould seem tofallunder Article 3.1(b), even
iftheprogrammes involved donotexplicitly specify suchacondition foreligibility .
Reply
Taxcredit forinvestment inR&D facilities isapartofthetaxcredit forinvestment infacilities
fortechnology andmanpower stipulated byArticle 10oftheTaxExemption andReduction Control
Law.
Taxcredit forinvestment infacilities fortechnology andmanpower states thefollowing:
Inthecasewhere aresident oradomestic corporation invests capital infacilities which develop
technology orenhance manpower, anamount equivalent to3%oftheinvestment (5%inthe
caseofinvestment inR&D facilities and10%inthecaseofinvestment using domestically
produced materials) isdeducted from theincome orcorporation taxforthebusiness year.
Koreahasalreadynotifiedthetaxcreditforinvestmentinfacilitiesfortechnologyandmanpower
asapart(d)(1) ofV-D"Tax Credit forInvestments inFacilities" initsnewandfullnotification.G/SCM/Q2/KOR/12
Page3
Intheupdated notification for1997, Korea willinclude theexplanation onthedifferential
treatment ofinvestment inR&D facilities.
Korea hasnotified allthesubsidies which areprohibited under Article 3.1(b) oftheSCM
Agreement inthenewandfullnotification ofApril 1996. Allother subsidies except forthose already
notified arenotcontingent upon theuseofdomestic overimported goods.
Aswehavealready made ourposition clear inthesecond special meeting ofOctober 1996
forareview ofthesubsidies notification, wewillrevise alltaxincentives including thetaxcredit for
investment infacilities fortechnology andmanpower sothatoursubsidy programme willbecompatible
withtheSCM Agreement bytheendof1998.
Q.B. Sector specific subsidies
TheCommunity isaware thatcertain taxincentives granted inKorea provide forlarger
deductions tofirms incertain sectors. Such subsidies confer abenefit tocertain sectors andare
therefore specific inaccordance withArticle 2oftheSubsidies Agreement andKorea isrequested
tonotify them under Article 25using thestandard format, inparticular providing adefinition
oftheindustry sectors described below. Examples ofthese incentives are:
Q.1. Reserves fortechnological development
Ifadomestic firmhassetaside reserves forexpenses incurred intechnological
development, 3%ofthese reserves maybecounted aslosses when calculating taxable
income. Thisamount risesto4%inthecaseoftechnology-intensive industries and5%
forcertain qualified capital goods industries.
Reply
Incases where aresident oradomestic corporation hassetaside technological
development reserves forthepurpose ofpaying fortheexpenses incurred inthedevelopment
andinnovation oftechnology, those reserves shallbecounted aslosses when calculating the
income forthebusiness yearuptoanamount equivalent to3%ofthegross receipts thereof
(5%inthecaseofatechnology-intensive industry andcertain qualified capital goods industries).
Thescope oftheterms "atechnology-intensive industry andcertain qualified capital
goods industries" asdefined bytheDecree oftheTaxExemption andReduction Control Law
includes almost allofthemanufacturing industries. Therefore, thisscheme isnotspecific and
itdoesnotfallwithin thenotification requirement.
"atechnology-intensive industry andcertain qualified capital goods industries" defined by
theDecree oftheTaxExemption andReduction Control Law:
machinery, electronics, electricity, textile, chemistry, petrochemistry, biology, metals,
transportation, information, communication, medical precision andoptical instruments,
engineering andsoon.
Q.2. Taxcredit fordevelopment oftechnology andmanpower
Unused taxcredits under thisscheme canbecarried forward forfiveyears; in
thecaseofcertain qualified capital goods industries thisperiod isincreased toseven years.G/SCM/Q2/KOR/12
Page4
Reply
According totheDecember 1996revision oftheTaxExemption andReduction Control
Law, alltheunused taxcredits under thisscheme canbe,regardless ofthesector, carried
forward forseven years.
Moreover, since "certain qualified capital goods industries" included almost allofthe
manufacturing industry before therevision ofthelaw,thisscheme wasnotnotified tothe
Committee because itwasnotspecific.
Q.C. Content ofupdate notification
Korea 'supdate notification contains noinformation atall.Korea 'soriginal notification
contained information onsubsidy amounts uptotheyear1994. Why hasthenotification not
been updated toinclude datarelating to1995?
TheCommunity requests Korea toupdate itsnotification inaccordance withthestandard
format andtheprovisions ofArticle 25oftheSubsidies Agreement.
Reply
Inthe1996 update ofthenotification, Korea informed theCommittee thatnochanges have
beenmade inthenewandfullnotification. Duetoalackoftime, wecould onlydelay andsubmit
atentative update ofournewandfullnotification.
The1997updated notification willbesubmitted inaccordance withtheprovisions oftheSCM
Agreement andthestandard format.
REPLIES TOQUESTIONS POSED BYJAPAN
Q.1. "Reserves forExport Losses", "Facility Investment Loans bytheSMEs Foundation
Formation Fund", and"Assistance Programme toPromote theSpread ofDomestically
Produced Mini-Computers"
IfJapan understands correctly, Korea explained thatthese subsidies were prohibited
subsidies andwould bephased outby1998 atthelastreview meeting. WillKorea phase out
these programmes bytheendof1997 asscheduled?
Reply
Korea hasalready made itsposition clearconcerning thephase-out period ofprohibited subsidies
atthesecond special meeting ofOctober 1996 forareview ofthesubsidies notification, andhas
submitted awritten response onthisindocument G/SCM/Q2/KOR/9.
ForJapan'sbenefit, Korea would liketoreiterate itsresponse: "Facility investment Loan by
theSMEsFoundationFormationFund"wasabolishedattheendof1996,andthe"AssistanceProgramme
toPromote theSpread ofDomestically Produced Mini-Computers" and"Reserves forExport Losses"
willbeabolished attheendof1997 and1998, respectively.G/SCM/Q2/KOR/12
Page5
Q.2. Subsidy toHanbo Steel
Could Korea explain thedetails ofthesubsidy including theproper title, theamount,
theduration, andtheform ofthesubsidy? Could Korea explain whether thesubsidy hasbeen
notified? That notbeing thecase, isKorea going tonotify thesubsidy?
Reply
TheKorean Government hasnotprovided toHanbo SteelCompany anysubsidies which would
besubject tothenotification requirement stipulated inArticle 25.2oftheAgreement onSubsidies and
Countervailing Measures.