'Prescribing Cold Medicine When Breathless'... Government-Supported Neglected Refining Industry "Tax Cuts Needed to Prevent Reverse Discrimination"

Improved Cash Flow Through Tax Deferral
Reverse Discrimination Tax... Competitive Disadvantage Against Importers

Sung Yun-mo, Minister of Trade, Industry and Energy, is speaking at a meeting with the petroleum industry held on the 22nd at the Korea Trade Insurance Corporation in Jongno-gu, Seoul. Photo by Moon Ho-nam munonam@

[Asia Economy Reporter Hwang Yoon-joo] The refining industry, excluded from the government's period industry stabilization fund support, has raised its voice asking for at least a reduction in taxes amid controversy over reverse discrimination.

According to the refining industry on the 23rd, at the Ministry of Trade, Industry and Energy's meeting with the refining industry held the previous day, they additionally requested ▲exemption from petroleum import charges on crude oil used to produce LPG ▲exclusion of heavy oil used as raw material in the refining process from taxable goods under the Individual Consumption Tax Act or application of conditional tax exemption.

Currently, petroleum import charges impose 16 KRW per liter on crude oil used to produce LPG, whereas imported LPG is exempt from these charges. This creates a situation where domestic refiners producing LPG are at a disadvantage compared to LPG finished product importers. They are also at a cost competitiveness disadvantage. Domestic LPG prices follow the prices first announced by importers. Domestic refiners have to bear a loss of 16 KRW per liter when competing with importers.

For heavy oil used as raw material in the refining process (Bunker C oil), they bear 17 KRW per liter and an education tax of 2.55 KRW, which is 15% of the individual consumption tax. The refining industry argues that these taxes do not align with the purpose of the individual consumption tax, which is levied on final consumption activities.

When heavy oil for refining is used in the manufacture of taxable goods under the individual consumption tax produced in the refining process, deduction or refund of the individual consumption tax already paid is possible. However, if it is used in the manufacture of goods on which the individual consumption tax is ultimately not imposed (such as naphtha, asphalt), deduction or refund becomes impossible, which is problematic.

The reason the refining industry has made additional tax-related requests is that the government's support measures so far have focused on improving cash flow. If it is difficult to temporarily reduce tax rates or for the government to directly provide funds as in the automobile, aviation, and shipbuilding support plans, at least they ask for a reduction in tax rates where reverse discrimination controversies exist.

The government's support measures for the refining industry so far include ▲deferment of petroleum import and sales charges and customs duties payment (each 90 days/2 months) ▲leasing of Korea National Oil Corporation's surplus storage facilities ▲early and additional purchase of strategic stockpiles ▲temporary reduction of rental fees for Korea National Oil Corporation's storage facilities ▲deferment of payment for Korea Petroleum Quality & Distribution Authority's quality inspection fees for 2-3 months ▲exemption from large-scale petroleum storage facility open inspections (under consultation) ▲deferment of transportation tax and road tax, etc.

The refining industry feels relieved by the government's support measures but worries that if the current situation continues, losses in the second quarter could increase. Due to the sharp drop in international oil prices and the COVID-19 pandemic, domestic demand and export amounts for transportation fuels such as gasoline, diesel, and aviation fuel decreased by 17.9% and 10.1%, respectively, compared to the previous year in the first quarter of this year. The Korea Petroleum Association estimates the operating loss of the four major refiners in the first quarter of this year to be about 3 trillion KRW.

A refining industry official said, "In the short term, we are trying to absorb the shock through issuing corporate bonds and commercial papers (CP), but if the rebound in international oil prices and social recovery from COVID-19 are delayed and the current situation prolongs, liquidity pressure will increase."

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