Domestically Produced Cars Discriminated Against in Terms of Individual Consumption Tax

The individual consumption tax on domestically produced automobiles should be imposed in the final consumption stage instead of the current intermediate distribution stage to resolve the problem of a higher tax rate being imposed on domestically produced cars against imported ones, the Korea Economic Research Institute (KERI) asserted in a report released on Nov. 26.

For domestically produced cars, the individual consumption tax is imposed when cars are shipped out of a manufacturing plant. The timing for imported cars is when importers report the importation of vehicles to authorities concerned.

As a result, the tax on domestically produced cars is calculated based on shipment prices that include sales and administrative expenses and operating margins, while the tax on imported cars is based on prices that exclude sales and administrative expenses and operating margins. The report asserts that domestically produced cars carry 38 percent higher individual consumption tax than imported cars as the profit margin of imported cars is around 30 percent.

Noting that the current practice undermines tax neutrality, the report stressed that the timing of imposing the individual consumption tax on domestically produced automobiles should be shifted from the current distribution stage to the final stage.

"Intermediate-stage taxation also violates international taxation standards, and no major automobile producing countries operate a tax system disadvantageous to cars produced in their own countries," said Lim Dong-won who wrote the report

Making a change in the timing of individual consumption tax imposition on automobiles corrects a structural distortion of relative prices between domestically produced and imported cars, which does not go against international trade rules, Lee added. In other words, applying the same taxation time to both domestically produced and imported cars is in compliance with the national treatment principle of the General Agreement on Tariffs and Trade (GATT), which prohibits discrimination between imported and domestically produced goods with respect to internal taxation or other government regulation.