[Tax Story] Supercar Tax Controversy

Tax investigations are sometimes deployed to enforce discipline when social unrest prevails. The primary targets are real estate speculators and those leading extravagant lifestyles. A common trait among them is driving luxury imported supercars such as Lamborghini or Ferrari to flaunt their wealth.

According to a recent announcement by the tax authorities, several supercars worth billions of won were purchased under a company’s name and provided for use by a full-time housewife spouse and university-aged children. While owning luxury imported cars cannot be condemned in a capitalist country, there are considerable issues from the perspective of fair taxation. There is a high likelihood that tax evasion is concealed behind such actions.

Tax laws and administration have been very strict regarding luxury imported cars. In the 1990s, mere ownership was enough to be selected for a tax investigation. The Korean government faced protests from the United States and the European Union (EU) for imposing tax investigations and other disadvantages on buyers of imported cars. At that time, tax investigations effectively served as a non-tariff barrier (a policy to restrict imports from abroad by means other than tariffs to protect domestic products).

As imported cars flooded the Korean market, ownership alone could no longer be a criterion for tax investigations. Instead, control began under the clause of 'expenses unrelated to business.' However, this applied only to vehicles owned by companies. People quickly perceived this loophole in the tax law. They stopped owning supercars and started leasing them. Consequently, the rental car market experienced a boom.

In 2016, to prevent tax evasion by these individuals, the tax authorities amended the tax law (Article 27-2 of the Corporate Tax Act) to include leased vehicles in the scope of application and to regulate their use for non-business purposes (such as commuting or shopping). Drivers were required to keep a logbook, and insurance had to be limited to employees of the corporation. This restricted those driving supercars.

Currently, nouveau riche individuals establish corporations, purchase supercars, and list family members as employees to drive them. It is a case where ten people cannot stop one thief. Just because an act is not prohibited by law does not mean it is morally right.

Can such acts be prevented by tax law alone? It is impossible. Tax law exists to collect taxes, not to punish illegal acts. Rather, since directors under commercial law have a duty as faithful managers, it is considered more effective to punish acts such as falsifying corporate vehicle logbooks or fraudulent hiring by corporations owning supercars under commercial law violations.

The standard for viewing supercars is fair taxation. A legitimate businessman would suppress unnecessary car purchases to reduce company expenses. This reduces costs and results in paying more taxes. Conversely, operating a supercar incurs high costs, leading to paying less tax. The key is how to adjust this difference. There is also the issue of tax burden equity between business owners who use supercars and wage earners who cannot.

France annually announces the average maintenance cost recognized by tax law based on the engine displacement and mileage of cars owned by workers (as of 2019, up to 4,253 euros, approximately 5 million won, for a 20 km commute). Taxes are imposed if the declared amount exceeds this standard. This criterion could be a useful reference for supercars in Korea.

In any case, if selected for a tax investigation, the corporation or business owner will undergo a comprehensive tax audit and will likely be assessed taxes several tens of times greater than the price of the supercar. This recalls the words of Russian literary giant Alexander Solzhenitsyn: 'If you chase cheap things, you will always pay a considerable price.'

Changnam Ahn, Professor, Department of Economic Taxation, Gangnam University

This content was produced with the assistance of AI translation services.