"Tax Collection Blind Spot" Local Taxes of 1 Trillion Won Lost Due to Long-Term Rental Cars

Amid a significant decline in national tax revenue in the first half of this year compared to the previous year, the long-term rental car market has been identified as a tax blind spot. An analysis suggests that if local taxes on long-term rental cars are collected at the same level as those on purchased or leased vehicles, more than 1 trillion won could be additionally raised annually.

According to the industry on the 4th, Lotte Rental's long-term rental car division recorded operating revenue of 377.5 billion won in the first quarter of this year, accounting for more than 85% of the total auto rental revenue (439.9 billion won). Last year, revenue from long-term rental cars increased by about 19% compared to 2020, indicating a steep growth trend. SK Rent-a-Car also showed that long-term rental cars account for 83.7% of its auto rental business, and this proportion continues to grow.

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Long-term rental cars are a car rental product unique to Korea and are classified as commercial vehicles under the Enforcement Decree of the Local Tax Act, thus receiving tax benefits. Commercial vehicles with an engine displacement of 2500cc or less are subject to a maximum automobile tax of 19 won/cc, and those exceeding 2500cc are taxed at 24 won/cc. In contrast, if a vehicle is owned or leased, automobile tax is imposed at a maximum of 140 won/cc for engines 1600cc or less, and 200 won/cc for those exceeding 1600cc. This means the tax burden is about 7 to 8 times higher than when using a long-term rental car.

Including other tax benefits, the cost savings are even greater. Rental vehicles are exempt from local education tax, whereas purchased or leased vehicles incur an additional 30% charge on automobile tax. Regarding acquisition and registration tax, under Article 12 of the Local Tax Act, long-term rental cars pay 4% of the sales price in tax, while leased vehicles pay 7%. For example, a high-priced imported car like the Mercedes-Benz E-Class (E350 4Matic), valued at approximately 91.7 million won, can save about 5.42 million won in taxes over a 4-year rental compared to leasing. The Sonata 2.0 gasoline model, priced at 28.08 million won, is estimated to save about 3.01 million won.

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The problem is that unlike other commercial vehicles such as buses, taxis, and trucks, long-term rental cars are often used for personal purposes. An automotive industry official stated, "It is necessary to reconsider whether it is appropriate to grant tax benefits to long-term rental cars used as private vehicles with an engine displacement of 2000cc, in the same context as commercial vehicles like buses and taxis."

There is also an analysis that excluding long-term rental cars from commercial vehicles could raise more than 1 trillion won annually in local taxes. Hyundai Capital analyzed data from the Korea Rent-a-Car Business Association and the Korea Automobile Manufacturers Association and found that if 214,000 newly registered long-term rental cars last year had been used as leased vehicles, an additional 1.0848 trillion won in local taxes could have been collected. The tax revenue loss is expected to increase as the long-term rental car market grows.

Previously, national tax benefits such as education tax and individual consumption tax for long-term rental cars were abolished in 2014. At that time, the Ministry of the Interior and Safety attempted to revise the Enforcement Decree of the Local Tax Act to consider rental cars rented for more than one month as 'private vehicles, not commercial,' increasing automobile tax by up to 1360%, but the move was scrapped due to opposition from the rental car industry.

An official from the automotive industry explained, "As long-term rental cars are increasingly used as non-commercial vehicles, reforming policies to exclude long-term rental cars from commercial vehicles would greatly help in securing additional local tax revenue."

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