The South Korean government is broadening its tax support for businesses from focusing solely on 'investment' to include 'production.' Industries such as semiconductors and batteries will benefit from the 'domestic production tax credit' (Korean version of the IRA), which offers tax reductions based on domestic production levels. However, sectors like AI data centers, electric vehicles, and vaccines have been excluded, raising concerns about gaps in support.
According to industry sources, the government finalized a revision to the Tax Exemption and Reduction Control Act during a cabinet meeting. The new policy targets six sectors: solar energy, wind energy, batteries, semiconductors, key materials, and AI robot components. Starting in 2027, eligible items will have their corporate taxes reduced based on the quantity produced and sold domestically, multiplied by a standard deduction amount for each category.
While the previous integrated investment tax credit provided reductions based on the amount invested in factories and equipment, the new system requires actual production and sales to qualify for benefits. Companies cannot apply both credits to the same production facility, necessitating a careful evaluation of initial investment costs, future production volumes, and operational periods to choose the most advantageous program. A regional coefficient of up to 1.5 times will also apply to production outside the capital region.
Industries with large-scale production bases in South Korea, such as semiconductors and batteries, are expected to benefit significantly. In contrast, electric vehicle manufacturers and AI data centers have been left out. The automotive industry has been advocating for tax incentives for electric vehicle production to counter the influx of Chinese electric vehicles and U.S. pressure for local production. The biotechnology sector has also requested that vaccine production be classified as a matter of economic security and be eligible for the production tax credit.
The exclusion of AI data centers highlights the limitations of the new policy. Currently, data centers are not classified as a standalone industry in the Korean Standard Industrial Classification, falling under 'hosting and related services,' which complicates the basis for support.
Compared to the U.S. IRA, there are differences in the support mechanisms. The U.S. advanced manufacturing production tax credit allows for cashing out tax credits if certain conditions are met, while South Korea does not offer direct refunds or third-party transfers. Companies that incur losses due to significant upfront investments may find it challenging to realize immediate tax benefits even as production increases.
The government's expansion of tax support to include production is seen as a step forward in the competition to attract domestic manufacturing bases. However, the actual impact will depend on which industries and products are recognized as 'domestic production.' Ongoing discussions in the National Assembly and subsequent implementation processes are likely to see continued demands for the inclusion of excluded sectors such as AI data centers, electric vehicles, and vaccines.
Oh Moon-sung, a professor of tax studies at Hanyang University, stated, "Support should focus on specific items that confirm the vulnerability of domestic production bases, supply chain risks, and the potential to induce additional production, while also considering the scale of existing industry-specific tax support when determining eligibility and deduction amounts."
* This article has been translated by AI.
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