It has emerged that the domestic battery industry, which received trillions of won in tax deductions in the United States last year, might need to pay nearly 200 billion won in additional taxes by 2026 due to the implementation of a global minimum tax. Battery companies are currently investing in the U.S., and it is expected that the size of additional taxes will rise as local production increases in the future. To address this issue, there have been arguments advocating for the recognition of investment tax deductions as taxes already paid.
On April 23, the Korea Battery Industry Association, the Korea Petrochemical Industry Association, and the Korea New Renewable Energy Association jointly hosted a seminar titled “Response to the U.S. Inflation Reduction Act (IRA) and Global Minimum Tax.” At the seminar, accounting expert Jung Hyun from the law firm Yulchon stated, “Last year, LG Energy Solution received 676.8 billion won, and SK on received 610 billion won, totaling around 1.3 trillion won in tax deductions under the IRA. Unless there are other sources of income or deficits, domestic companies may have to pay approximately 180 billion won in additional taxes, equivalent to 15 percent of this amount, under the global minimum tax.”
He added, “If Samsung SDI’s volume is added in 2025, the amount will increase further. Applying a conservative assumption that the tax effects will persist equally until 2032, approximately 1.8 trillion won in additional taxes would need to be paid over the course of 10 years.”
The global minimum tax is a system that imposes a minimum corporate tax of 15 percent on multinational companies with annual global revenues exceeding 1 trillion won. If the effective tax rate in the country is 10 percent, the remaining 5 percent must be paid to the home country. The South Korean government has implemented this system starting from this year.
This initiative, driven by the Group of Twenty (G20) and the Organisation for Economic Co-operation and Development (OECD), aims to prevent multinational companies from avoiding taxes by establishing their headquarters in regions with tax rates lower than the global minimum tax rate of 15 percent. However, when tax deductions are received from overseas investments, it lowers the effective tax rate, leading to a situation where additional taxes must be paid domestically.
Accounting expert Jung argued that it is necessary to persuade the U.S. to recognize the IRA tax deductions paid in cash as taxes already paid to address the issue of the diminishing effects of IRA tax deductions due to the global minimum tax.
He stated, “The refund amount from the advanced manufacturing production credit (AMPC) related to the IRA is included in the global minimum tax income, resulting in additional taxes. However, if it falls under ‘deduction of current corporate tax expenses,’ the effective tax rate does not fall below 15 percent.”
He further explained, “Under U.S. tax law, cash payments for tax deductions, known as ‘Direct pay,’ are considered already paid. Although they are categorized under corporate taxes, they are not recorded as current corporate tax expenses, potentially qualifying for ‘deduction from current corporate tax expenses.’”
Expressing concerns about the feasibility of persuading the U.S., Jung stated, “As the global minimum tax was introduced through the OECD Common Approach, addressing additional tax levies can only be accomplished through changes in OECD administrative guidelines, which may allow for exemptions. The U.S. has been wielding significant influence over the Pillar Two agreement and its amendments. There is a precedent where the U.S. actively advocated for its national stance regarding renewable energy tax deductions under the IRA, leading to revisions in OECD administrative guidelines.”
He further emphasized, “The IRA represents the largest-ever investment in environmentally friendly energy in U.S. history and is a cornerstone of the Biden administration’s environmental agenda,” adding, “Given the upcoming U.S. presidential election, increased investment in the U.S. resulting from IRA benefits could lead to job creation, and it is necessary to convey to the U.S. side the perception that the negative impact of the global minimum tax directly affects investment growth.”
In addition, the domestic battery industry has expressed concerns that subsidies will be significantly reduced due to the detailed provisions of the U.S. IRA related to “Foreign Entities of Concern (FEOC).” It has decided to request a temporary grace period or exemption for graphite anode materials and special exceptions for the application of the global minimum tax to the government and the National Assembly.
Out of the 36 models benefiting from IRA subsidies, 30 models currently use K-batteries. However, there are concerns that there may not be any models eligible for subsidies if the use of Chinese graphite anode materials is banned starting from Jan. 1.
The U.S. provides tax deductions for industries such as electric vehicles under the IRA. Among these, the FEOC regulation restricts tax deductions when the ownership or control by the government of countries such as China exceeds 25 percent. Battery components face sanctions starting this year, while core minerals for batteries will face sanctions starting next year.
Such concerns were reiterated during the “Response to the U.S. Inflation Reduction Act (IRA) and Global Minimum Tax” seminar held on the same day. Park Jae-beom, a senior researcher at the POSCO Research Institute, emphasized during his speech, “To address this issue, the FEOC guidelines should be utilized as an opportunity to lower dependency on specific countries in the battery supply chain, and it is urgent to establish and support domestic supply chains for anode materials including graphite. Until domestic supply chains are established, a certain grace period for some key minerals is necessary.”
The Korea Battery Industry Association also holds the stance that a grace period for regulatory implementation is necessary considering that the vast majority of battery mineral production is currently sourced from China.
Park Tae-sung, vice chairman of the Korea Battery Industry Association, stated, “To enhance the effectiveness of the U.S. IRA and to continue strengthening the strategic partnership between South Korea and the U.S. in the green energy industry, including batteries and solar power, it is urgent to allow a temporary grace period for FEOC regarding graphite anode materials and to exempt the application of the global minimum tax.” He added, “We plan to submit a joint proposal to the government and the National Assembly in the first half of this year.”