[Tax System Needs Reform] The Korean IRA Emerges to Promote Domestic Production... "Careful Selection of Eligible Items and Refund Policy Needed"

Visitors attending '2026 Semicon Korea' held at COEX in Gangnam-gu, Seoul, are watching a demonstration of an automatic semiconductor wafer handling module. 2026.02.11 Photo by Dongju Yoon

The "domestic production tax credit" (production promotion tax system), announced by the government as part of its economic growth strategy for the second half of the year, is being referred to as the "Korean IRA," taking its cues from the U.S. Inflation Reduction Act (IRA). Until now, tax support for South Korean companies has been strictly "input-based," with eligibility depending on how much was invested in facilities (integrated investment tax credits), research and development (R&D) spending, and employment numbers. However, the core focus of the revised tax law is shifting to "output."

The government’s draft system framework is to deduct "domestic production and sales volume × appropriate unit price per production unit" from corporate and income taxes. For example, if a company manufactures battery core materials, specialty gases for semiconductors, solar components, or critical minerals domestically, tax credits will be provided in proportion to the volume produced. Expected support levels are estimated at 3–5% for general economic security items, 5–10% for strategic core items, and around 10% or additional subsidies for items especially difficult to produce domestically. Considering fairness with existing investment tax credit rates (1–10% for general items and 3–12% for new growth and original technologies), there are forecasts that the most likely structure will add a strategic item premium on top of a basic 5% production tax credit.

Production Cost, Output Volume, or Hybrid... National Assembly Puts Forward Three Models

The bills currently proposed in the National Assembly generally fall into three categories. Plan A (cost-based proportional credit) would grant a flat deduction worth 10–20% of domestic production costs. While the system is simple, it could create a paradox where companies with lower production efficiency and higher costs receive more tax benefits.

Plan B (output-based proportional credit) employs the U.S. IRA model by multiplying a set unit price by production—for example, per 1kWh of battery or per ton of critical mineral. This directly rewards actual output, but creates the challenge of requiring the government to determine the appropriate unit price for each item.

Plan C (hybrid model) fundamentally multiplies production volume by unit price, but applies varying deduction rates based on whether a company is a small or medium enterprise or is located outside the capital region (local preferential tax packages).

The Biggest Issue: Monetizing Tax Credits—How to Support Companies in Deficit

The hottest issue is how to support companies that are running deficits and therefore have no tax liability. Advanced industries that require large initial investments are unlikely to turn a profit immediately. Accordingly, both industry stakeholders and many lawmakers are strongly demanding that, even if a company owes no corporate tax in the short term, any tax credit be refunded in cash (refundable tax credit) or allowed to be transferred to a third party (tax credit transferability). Whether South Korea will move beyond traditional tax cuts to introduce a bold measure such as "monetizing tax credits" is the key point of attention.

Despite the rationale for its introduction, experts and fiscal authorities are cautious. The Korea Institute of Public Finance (KIPF), in the July 2026 issue of its "Fiscal Forum," called for a careful pace and sophisticated design in implementing a production promotion tax system. In particular, it cautioned about the "balloon effect" of selective tax support, in which targets continue to expand. The number of new growth and original technologies eligible in South Korea increased more than threefold from 91 in 2010 to 284 in 2026. The list of national strategic technologies also grew from 36 in 2021 to 85 this year. Likewise, the number of new growth and original technology commercialization facilities rose from 80 in 2017 to 193 this year, and facilities for commercializing national strategic technologies increased from 31 in 2021 to 69.

The construction site of Phase 1 fab at SK hynix Semiconductor Cluster, Cheoin-gu, Yongin-si, Gyeonggi Province.

"Support Should Be Expanded Cautiously"—Focus Is on Selection and Specialization

Trade issues are another variable. Tax systems that directly incentivize domestic production could be viewed as discriminatory against imports or as subsidies, potentially leading to trade disputes or countervailing duties from trading partners. Given South Korea's high dependence on exports and overseas trade, the system must be designed to minimize trade risks. Whether to permit refundable or transferable tax credits is also directly related to fiscal burdens. Allowing refunds or transfers would help the cash flow of companies that currently owe no taxes but may lead to a decline in tax revenue. This concern is heightened when corporate performance deteriorates during economic downturns, as increased tax credit refunds would further strain public finances. Kim Bitmaro, a research fellow at the Korea Institute of Public Finance, noted, "The United States permitted cash refunds of tax credits through the IRA, but Japan did not allow refunds and imposed strict conditions for increased investment and wages. South Korea, if it implements the system, must minimize the risk of trade disputes and carefully consider fiscal stability before allowing refunds."

A participant is looking at POSCO's steel composite material-applied battery pack at 'InterBattery 2026' held at COEX. 2026.3.11 Photo by Kang Jinhyung

The National Assembly review report also highlighted several issues: overlap with existing tax incentives, excessive tax revenue loss, potential undermining of minimum tax payment rules, and ambiguous targeting. The report stated, "High tax credits are already applied to national strategic technology R&D and facility investments, so extending credits to the production stage could result in double benefits. If deductions of more than 10% are applied to large industries such as semiconductors, batteries, and automobiles, the resulting fiscal burden could be uncontrollable." The report continued, "There is strong demand to exempt companies from the minimum tax requirement, which mandates that everyone who earns income pay at least some tax. Allowing this exemption for large corporations would inevitably trigger debates over tax fairness. There is also an urgent need to reach consensus on who will define and by what standards the 'strategically important items' are determined."

This content was produced with the assistance of AI translation services.