The government is considering the introduction of production tax credits and the expansion of their application to strengthen the domestic production base for national strategic industries, including electric vehicles. However, there is growing controversy over the effectiveness of these policies. The structure of the production tax credit requires companies to have tax liabilities to benefit, making it difficult for loss-making firms, which urgently need financial support, to take advantage of these incentives.
◆Production Tax Credits Require Tax Payments...Limits on Immediate Support
According to relevant government departments, discussions are underway to expand the application of domestic production tax credits and support for loss-making companies. Following a meeting on economic issues on October 25, Deputy Prime Minister and Minister of Finance Lee Hyung-il met with Hyundai Motor Group on November 2 to discuss the introduction of production tax credits for electric vehicles.
Previously, the government decided to establish domestic production tax credits for six key sectors, including solar power, wind power, secondary batteries, semiconductors, core materials, and artificial intelligence (AI) robot components, as part of the 2026 tax reform plan. From next year until 2036, tax reductions will be provided based on the quantity produced and sold domestically. The amount of the credit will vary by production region, with up to 1.5 times the benefit for areas outside the capital region.
The issue is that the effectiveness of the support varies depending on a company's profitability. The production tax credit deducts a certain amount from corporate taxes that companies must pay. Even if a company produces a large quantity and generates a tax credit, if it is operating at a loss, it will find it difficult to receive any real benefits in that fiscal year.
To address this issue, the government is preparing a plan that allows unused credits to be carried forward for up to 10 years. This means that even if a company records a loss initially, it can utilize the accumulated credits when it eventually turns a profit.
However, the carryforward credits only reduce future tax burdens and do not alleviate current cash flow issues. Companies that face significant initial investment burdens and take considerable time to secure profitability after starting production may experience delayed support effects.
As an alternative to address these limitations, direct subsidies are being discussed. President Lee Jae-myung proposed at a national report meeting on the Korean Green Transition (K-GX) strategy last month that subsidies be provided to loss-making companies upfront, with the amount deducted from future production tax credit benefits. This approach aims to share some of the initial risks with the government rather than waiting for companies to turn a profit.
In other countries, systems have already been implemented to complement the limitations of tax credits. A notable example is the advanced manufacturing production tax credit under the U.S. Inflation Reduction Act (IRA). The U.S. supports local production of certain items, such as batteries and solar and wind-related components, while introducing direct payments and transfer systems that allow companies to cash in tax credits. If companies meet specific criteria, they can receive cash refunds or transfer credits to third parties to secure funding.
◆Rising Electric Vehicle Imports Highlight Need for Domestic Production Support...Calls for Direct Subsidies
There is an increasing need for expanded support at the production stage domestically, particularly for electric vehicles. While electric vehicle purchase subsidies aim to reduce consumer costs and promote adoption, production support focuses on maintaining domestic factories and supply chains while lowering production costs.
Recently, as the electric vehicle market has expanded in South Korea, concerns have arisen that the increasing share of imported vehicles may not directly lead to increased domestic production. Reducing companies' cost burdens through production tax credits could help maintain domestic production facilities and secure work for parts suppliers. However, there are voices suggesting that tax credits alone may not provide sufficient incentives for loss-making companies, and that direct subsidies should be considered in conjunction.
Financial burdens and the selection of support recipients also pose challenges. Direct subsidies can provide funding regardless of a company's profitability, but there is a risk that public funds may be allocated to projects with uncertain outcomes. Therefore, it is essential to establish specific support criteria based on production volume, domestic investment, and job retention, along with mechanisms to assess performance. Ultimately, expanding production tax credits is not enough; designing a system that allows companies to receive benefits when they genuinely need support is crucial.
Park Hoon, a professor of taxation at the University of Seoul, stated, "For loss-making companies, providing subsidies would be the most effective approach," adding, "If financial support can help a company survive, the impact of subsidies will be the greatest."
* This article has been translated by AI.
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