With the government set to announce its tax reform plan in late July, adopting a “direct refund scheme (direct pay)” to refund semiconductor and battery investment tax credits in cash has emerged as the biggest point of contention. The United States returns tax credits in cash, and Japan provides subsidies covering half of factory construction costs. By contrast, South Korea’s direct subsidies for advanced industries are “0 won.”

Business groups have raised concerns that the gap in tax support methods translates into a gap in investment speed. They say South Korea remains stuck with ex post tax credits while the United States, Japan and Europe hand out cash directly, potentially leaving it behind in the race to invest in national strategic technologies such as semiconductors and secondary batteries.

According to industry on July 8, the tax reform plan is expected to center on a real-residency-based overhaul of real estate taxation, while also addressing tasks aimed at stabilising livelihoods and easing polarisation. One item being discussed is tax benefits for future growth engines. As the possibility rises that the plan will reflect a blueprint to expand tax credits for investment in national strategic technologies such as an AI semiconductor megaproject, whether to adopt a direct refund scheme has emerged as a key focus for advanced industries.

A direct refund scheme would return unclaimed tax credits in cash regardless of whether a company posts operating profit. Under the current system, national strategic technology tax credits are deducted only when companies pay corporate tax. That means companies in the early stage of a project, which post losses due to large upfront investment, do not receive the benefit. Under the current Restriction of Special Taxation Act, companies designated as national strategic technologies receive tax credits on commercialisation facility investment: 15 percent for large and mid-sized firms, and 25 percent for small and medium-sized firms. A key limitation cited has been that the credit applies only to companies that pay corporate tax.

The problem lies in the structure of industrial investment itself. Semiconductor and battery factories that require trillions of won typically go through at least 2 to 3 years of losses from groundbreaking to mass production. With no taxes to pay during that period, tax credits remain out of reach. The bigger the investment, the harder it is to receive immediate benefits. Unclaimed credits can be carried forward for 10 years, but companies have said the large gap between the investment timing and the benefit timing disrupts timely investment.

The point is also borne out in data. In a joint survey by the Korea Chamber of Commerce and Industry with the Korea Battery Industry Association, the Korea Display Industry Association and the Korea Bio Association of 100 advanced-industry companies eligible for national strategic technology tax credits, 50 percent said they had carried forward credits to the next year because corporate taxes payable were less than the credit amount. Among large companies, the carry-forward experience reached 90.9 percent. That far exceeded mid-sized companies at 33.3 percent and small and medium-sized companies at 54 percent.

◆Useless in loss-making periods... structural limits of tax credit support

Companies’ demands are also clear. In the same survey, 80 percent said introducing a direct refund scheme would help corporate financing conditions or the execution and expansion of investment. Those saying it would not help much accounted for 20 percent. The carry-forward problem was not a one-off. Based on expected investment and operating profit this year, 51 percent said they could again carry forward tax credits. Large companies led with an 81.8 percent carry-forward outlook, ahead of small and medium-sized companies at 60 percent and mid-sized companies at 30.8 percent.

Business groups are calling for benchmarking a U.S. IRA-style direct refund so that not only large companies but also materials, parts and equipment companies with heavy early investment burdens can feel immediate investment rewards. Kang Seok-gu (강석구), head of the KCCI’s research division, said, “The industry’s view is that the current corporate tax deduction method has the irony that the more massive the investment, the more limited the benefits.” He added, “I hope the National Assembly and the government will step forward so that introducing direct pay creates a virtuous cycle in which companies immediately enjoy the effects of tax credits and reinvest in a timely manner.”

Major countries overseas have already shifted toward cash-based support. The United States, through the Inflation Reduction Act, has allowed the full amount of tax credits to be paid in cash or transferred to other companies. Japan, to revive semiconductors, is supporting up to 30 to 50 percent of factory construction costs in direct cash subsidies for TSMC’s Kumamoto plant and domestic company Rapidus, among others.

Europe is similar. France, through a green industry investment tax credit implemented in March 2024, offsets corporate tax for investment in advanced industries such as secondary batteries and refunds remaining tax credits in cash. Canada introduced a scheme that returns up to 30 percent of clean technology capital investment in cash.

By contrast, South Korea relies on only one method for national strategic technologies such as semiconductors, secondary batteries and artificial intelligence: corporate tax credits. There is virtually no direct subsidy payout. As the competition for leadership in advanced industries turns into a contest between countries, that is why criticism has emerged that only South Korean companies are fighting on a “tilted playing field.”

If a direct refund scheme is introduced, it could ease cash constraints not only for large companies but also for small and mid-sized materials, parts and equipment firms with heavy upfront costs, observers say. Fiscal authorities, however, are carefully reviewing the possibility of large-scale tax revenue declines, and friction is expected over whether to adopt it and at what scale. An industry official said, “As industrial investment is becoming a race of speed, we hope this tax reform plan includes effective support measures such as a direct refund scheme.”