"Domestic Car Acquisition Tax 38% Higher Than Imported Cars... Need to Resolve Reverse Discrimination"

Report on Issues Regarding the Timing of Individual Consumption Taxation on Automobiles

[Asia Economy Reporter Dongwoo Lee] It has been argued that the 'individual consumption tax on automobiles (ICT)' is being taxed differently for domestic and imported cars, undermining tax neutrality.

On the 26th, the Korea Economic Research Institute stated in its report titled 'Review of the Problems in the Timing of Automobile Individual Consumption Taxation' that assuming an import car margin rate of around 30%, buyers of domestic cars at the same price bear about 38% more ICT than buyers of imported cars.

A buyer of an imported car priced at 60 million KRW pays 780,000 KRW less in ICT compared to purchasing a domestic car at the same price. Including the education tax (30%) added to the ICT, the total amount paid is 1.02 million KRW less than that for a domestic car.

The report pointed out that this phenomenon occurs because the current automobile ICT is imposed not at the final consumption stage but at the intermediate distribution stage. For domestic cars, the timing of ICT taxation is set at 'when leaving the manufacturing plant,' so the taxable amount is finally determined based on the ex-factory price, which includes selling and administrative expenses and operating margin.

On the other hand, for imported cars, the timing of taxation is set at the 'import declaration,' excluding selling and administrative expenses and operating margin incurred domestically after importation, thus receiving relatively favorable tax treatment. Ultimately, the difference in the timing of ICT taxation between domestic and imported cars causes issues with tax neutrality, fairness in tax burden, and a decrease in tax revenue.

The report argued that to enhance the global competitiveness of the domestic automobile industry, the timing of automobile ICT taxation should be shifted to 'point-of-sale taxation' to eliminate reverse discrimination against domestic cars.

It cited the principle of national treatment under Article 3 of the General Agreement on Tariffs and Trade (GATT), which prohibits discriminatory treatment between imported and domestic goods. The report diagnosed that the proposed ICT reform applying the same taxation timing to both domestic and imported cars does not legally violate GATT's national treatment obligation.

Im Dongwon, a senior researcher at the Korea Economic Research Institute, said, "The reform proposal shifts the timing of taxation to the final consumption stage in line with the characteristics of consumption tax, enhancing the international consistency of the tax system," and added, "It is not about overtaxing imported cars but does not violate the principle of national treatment."

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