"Tax Exemption for Domestically Produced Electric Vehicles"... National Assembly to Begin Full Discussions After Chuseok Holiday

After the Chuseok holiday, the National Assembly will begin full discussions on whether to include electric vehicles as targets for the domestic production tax credit. The government argues for excluding them from the target due to "duplicate support," but opposition from both ruling and Joo Yo (Rep.) lawmakers and the automotive industry is significant, drawing attention to what conclusion will ultimately be reached.

According to the National Assembly and the automotive industry on the 25th, the political sphere plans to review whether to include electric vehicles in the domestic production tax credit as part of discussions on the government's submitted "2026 Tax Reform Plan" after the Chuseok holiday. This system reduces income and corporate taxes based on production volume for items with weak domestic production bases and is also known as the "Korean version of the IRA (Inflation Reduction Act)."

The Ministry of Economy and Finance announced last month that it would introduce this system by amending the Special Tax Treatment Restriction Act (hereinafter referred to as the Special Tax Act) when announcing the tax reform plan. However, it only listed support areas including △solar power generation △wind power generation △secondary batteries △semiconductors △core materials △AI (artificial intelligence) robot parts, excluding electric vehicles that the industry had expected to be included.

The government maintains that since subsidies for electric vehicle sales are already being provided, duplicate support should be avoided. On the other hand, the automotive industry argues that tax benefits for domestically produced electric vehicles are absolutely necessary considering the aggressive penetration of Chinese-made electric vehicles into the domestic market. It is also explained that countries such as the United States and the EU (European Union) are actively protecting their own automotive industries by imposing high tariffs on Chinese-made electric vehicles.

The National Assembly, sharing these voices, has successively introduced bills to include electric vehicles as targets for the domestic production tax credit. Representative Lee Eon-ju of the Democratic Party of Korea included a plan to reduce taxes by 4 million won per electric vehicle in the Special Tax Act amendment bill he sponsored at the beginning of this month. Specifically, it allows for a tax credit based on production performance of 4 million won per vehicle for domestic residents who directly produce and sell or export electric vehicles after undergoing final manufacturing processes domestically.

Lee (Rep.) emphasized that "the electric vehicle industry is linked to a wide range of upstream and downstream industries including batteries, electrical components, semiconductors, software, and materials, as well as being a key manufacturing sector that creates large-scale regional employment and investment." He further urged, "It is necessary to establish a production-stage support system to prevent the overseas transfer of domestic electric vehicle production bases, stably maintain domestic supply chains and employment, and improve the competitive conditions for domestic production companies in response to major countries expanding their support for domestic production."

Prior to this, Representative Yoon Han-hong of the People Power Party also reflected a plan to include electric vehicles as targets for the domestic production tax credit in the Special Tax Act amendment bill he sponsored at the end of last month. Yoon (Rep.) explained the background of introducing the bill by stating, "The goal is to introduce a domestic production tax credit system for promising industries that are strategically important to economic security so that domestic companies can compete on equal footing with overseas competitors, thereby promoting domestic production by companies and enhancing national competitiveness through the creation of quality jobs and securing supply chains."

An official from the automotive industry said, "China has significantly lowered electric vehicle prices due to local oversupply and government support, making it virtually difficult for brands from other countries including Korea to compete on price," and added, "We must protect the domestic automotive industry through a domestic production tax credit."