[Editorial Note] "Is the Production Tax Credit Effective During a Production Downturn?"

The government has announced plans to introduce a production tax credit for the semiconductor and secondary battery industries, a measure dubbed the "Korean IRA (Inflation Reduction Act)." However, some in the industry immediately responded that "such a policy is less effective during periods of production cuts." With major companies currently adjusting output due to slowing demand for electric vehicles, oversupply, and aggressive price competition from Chinese products, there is a valid point that "a system that rewards higher production does not fit the current reality."

However, the government's move goes beyond simple tax cuts or industry support. It is important to note that this is a strategic response aimed at maintaining the domestic production base amid intensifying global supply chain realignment and competition for industrial leadership. The United States is implementing a production tax credit under the IRA, which provides immediate reimbursements to companies producing above a certain volume, while Europe is also working to attract domestic industries through cash subsidies or regulatory easing. Korea has chosen the production tax credit as a means to avoid being left out of this global trend.

Whereas the existing investment tax credit was a one-off incentive limited to facility investment, the production tax credit is closer to an operational benefit, providing tax deductions based on actual production results. The government's push for this system signals its intention to reward the outcome of actual product manufacturing within Korea. In the mid- to long-term, the aim is to encourage the retention of domestic manufacturing capacity and provide a compelling reason to "produce in Korea" even as global supply chains are being reshaped.

Of course, this system does not offer immediate benefits to all companies. In particular, in sectors such as secondary battery materials, which are dominated by small and medium-sized enterprises, there are concerns that securing liquidity is more urgent than corporate tax reductions. Since the production tax credit is a post-facto deduction, it is difficult to provide immediate assistance for raising investment funds or expanding facilities, which is a realistic concern within the industry.

Accordingly, some have proposed a "hybrid support model" in which tax credits are applied to large companies above a certain revenue threshold, while small and medium-sized enterprises receive government subsidies or loans for facility investment. However, such measures would require consultation with fiscal authorities, and if the nature of the support leans too heavily toward subsidies, there could be conflicts with World Trade Organization (WTO) rules.

Ultimately, the key is pragmatic coordination. The industry needs to recognize the government's position and limitations, including the inability to indiscriminately increase cash subsidies, and both sides must work together to develop supplementary measures.

Moreover, this measure is a "privilege" limited to the semiconductor and secondary battery sectors. Other industries?such as traditional manufacturing, displays, bio, and aerospace?do not even have this. From the perspective of the companies involved, being selected as a policy priority is something to be grateful for. Semiconductors and secondary batteries are core national strategic industries, and securing technological competitiveness and supply chain stability are crucial variables in international competition. Although the measure takes the form of a tax cut, it is ultimately a system designed to safeguard the nation’s industrial base as a whole, and should be viewed from a longer-term perspective.

The government must also go further and consider tailored supplementary measures that take into account the characteristics of each industry and company size. While tax reduction policies alone cannot be the answer, they are an important means of signaling policy direction. The industry, for its part, should use this system not merely as a "tax benefit," but as an opportunity to redefine its role within the nation’s industrial strategy.