Push to Introduce Domestic EV Production Tax Credits... Production-Linked Credits, Battery Investment Support Needed

Domestic EV market share falls to 48.7%... China-made vehicles account for 43.5%
Domestic EV market share drops below half for the first time
Ruling and opposition lawmakers propose "production tax credits" amid Chinese EV push
Japan's policy combines production and investment support

As discussions on introducing production tax credits for electric vehicles gather momentum, calls are growing to look to Japan's approach to supporting production and investment. The approach combines tax credits tied to vehicle production and sales volumes with support for capital investment in the battery supply chain to strengthen the domestic production base.

According to the Korea Automobile & Mobility Association (KAMA), of the 258,284 electric passenger cars newly registered in South Korea from January to September this year, 132,438 were imported, accounting for 51.3%. The market share of domestically produced electric passenger cars fell to 48.7%, dropping below half for the first time, while China-made vehicles accounted for 43.5% of the overall market. The Ministry of Trade, Industry and Energy's September automotive industry report also showed that sales of domestically produced electric vehicles fell 14.5% year on year, while sales of imported electric vehicles rose 41.0%, driven by strong sales from Tesla and BYD.

A view of the body shop at Kia AutoLand Hwaseong EVO Plant East. Kia

Government excluded automakers... Industry calls for production support

As the push by China-made electric vehicles intensifies, discussions on introducing production tax credits to directly support domestic manufacturing are also gaining momentum. On the 16th, 19 lawmakers from both the ruling and opposition parties, including Yoon Hoo-deok of the Democratic Party of Korea and Yoon Han-hong of the People Power Party, introduced a revision to the Restriction of Special Taxation Act that would include electric vehicles in the domestic production tax credit program. The key provision would allow companies that produce and sell eligible products in South Korea to receive income or corporate tax credits tied to sales volumes.

In its tax reform plan last August, the government designated six sectors for support, including solar and wind power, secondary batteries, semiconductors, key materials, and artificial intelligence (AI) robot components, while excluding fully assembled electric vehicles. The government reasoned that the domestic production base for electric vehicles was relatively solid and that existing measures, such as purchase subsidies, were already in place; providing tax benefits for batteries and cathode materials, which are key components, could also strengthen the competitiveness of finished vehicles. The government has maintained that production tax credits should be designed around key items and that fiscal costs and the effectiveness of support need to be considered.

Automakers, however, have argued that purchase subsidies alone are not enough to counter the price competitiveness of China-made electric vehicles and have called for finished vehicles to be included in the credit program. As Chinese companies boost their price competitiveness through lower production costs and economies of scale, the industry says tax support directly tied to domestic production is necessary. Automakers are concerned that a weakened domestic production base could hurt not only vehicle assembly plants but also suppliers and employment.

There have been signs of a shift in the government's recent approach. Next month, Lee Hyeong-il, Deputy Prime Minister and Minister of Finance and Economy, plans to visit Hyundai Motor's research center to hear from industry representatives.

A production tax credit is a system that reduces a company's tax burden based on the volume of products it produces and sells domestically, encouraging production in the country. Unlike support for capital investment or research and development, it links benefits to actual production performance, potentially encouraging domestic factories to operate and expand output. Increased production can also have knock-on effects on parts procurement, supplier output, and local employment.

However, a tax credit does not automatically lead to lower vehicle prices. Its effects may vary depending on the credit amount, eligibility requirements, a company's tax capacity, and how it uses the benefit, such as to cut prices or make additional investments. Nor is it possible to conclude that such credits could quickly eliminate the cost gap with Chinese manufacturers or close the technology competitiveness gap.

Various electric vehicles, including Kia's PV5 and EV3, are on display at EV Trend Korea 2026, held at COEX in Gangnam-gu, Seoul, on August 25. August 25, 2026. Photo by Kang Jinhyung.

Japan combines tax credits for automakers with battery supply chain support

Some say Japan's approach should be considered in designing the system. Japan introduced the "Strategic Domestic Production Promotion Tax System" as part of its fiscal 2024 tax reform. The system provides tax credits tied to production and sales volumes in strategic sectors, including electric vehicles, recognizing that high costs at the production stage make it difficult for private companies to decide whether to invest.

Japan provides tax credits of 400,000 yen per electric or fuel cell vehicle and 200,000 yen per compact electric vehicle or plug-in hybrid. Companies can receive the credits for up to 10 years after obtaining government certification for their business plans, with the credit amount gradually reduced in the latter part of the eligibility period. The annual credit limit is generally 40% of a company's corporate tax liability, and amounts exceeding the limit can be carried forward for up to four years, subject to certain conditions.

The battery supply chain is supported through separate measures. The Japanese government has provided investment subsidies to strengthen the domestic production base for batteries and related materials, components, and manufacturing equipment. In other words, Japan combines tax credits tied to automakers' production and sales performance with support for capital investment in the battery supply chain. The aim is not only to support vehicle production but also to secure the supply capacity for key components and materials.

In South Korea, too, there are calls to design support for automakers' production alongside support to help parts companies transition to future mobility. According to the Korea Automotive Technology Institute's "2025 Survey on the Automotive Parts Industry," just 6.1% of domestic parts companies had pursued a business transition or diversification related to future mobility. If the benefits of production tax credits are concentrated among automakers, their impact in supporting the transition of the parts supply chain and employment may be limited.

Park Jeong-gyu, a visiting professor at KAIST, said production tax credits could be an alternative way to support domestic production. "The current approach is not enough, so I think production tax credits may be necessary as a way to try something different and support domestic production," he said. He also raised the need to consider Japan's example. "Japan supports automakers with battery-related production, while providing support to parts companies at a higher rate," Park added.

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