Foreign Carmakers Blamed for Making Undue Profits Cashing in on Tax Benefit

SEOUL, June 17 (Korea Bizwire) – In an effort to stimulate Korea’s moribund domestic consumption, the government lowered its special consumption tax on vehicles from 5 percent to 3.5 percent, starting from August 2015.

This tax benefit — which will  expire at the end of June — however, has brought about “undue profit” to foreign car makers while there is growing proof that the domestic consumers have enjoyed little benefit from this change in the tax system.

Many consumers seem to have had not the faintest inkling of what it was all about: They are not aware that the consumption taxes on imported vehicles are paid when they go through customs, and the tax benefit applies to all vehicles that went through customs before June. So technically speaking, these vehicles should still be sold at a discounted price with the lower tax rate even after the government’s tax benefit terminates.

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However, certain manufacturers are planning to apply the 5 percent consumption tax to the vehicles they imported at a 3.5 percent rate, starting in July, pocketing the tax benefits that were intended to aid consumers, in the first place.

According to industry watchers, Toyota and BMW are among the foreign auto brands that will apply the same prices across all vehicle models starting in July, including the 5 percent special consumption tax. 

This is, argued some of the foreign car brands including Toyota, intended to  prevent confusion among South Korean auto buyers, who might raise fairness issues regarding varied price tags for the same car models. And other manufacturers also explained that applying the higher tax rate will yield few financial benefits because there is an insignificant number of these vehicles.

This practice, little wonder, caused rising criticisms that some foreign brands are illicitly obtaining government benefits, at the expense of the local consumers’ financial gains.

Furthermore, some companies have even increased their vehicle imports as the  tax benefit nears its end. If these companies choose not to apply the 3.5 percent tax rate on the future sales of these vehicles, the surplus benefits will accrue to the manufacturers and not Korean consumers. 

Foreign car companies faced similar allegations of impropriety earlier in January.

Initially, the lowered special consumption tax policy was supposed to last until December 2015. However, with a further decrease in domestic consumption, the government decided to resume the policy in February, while also applying it to vehicles sold in January. The majority of domestic manufactures have refunded the surplus tax money to customers who purchased vehicles and paid the higher 5 percent consumption tax rate. 

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However, certain foreign motor companies refused to refund the tax difference for their vehicles, claiming that they already provided extra discounts similar to the lower tax rate. But consumers were not convinced, and argued that such discounts were conventional promotions unrelated to the government tax policy.

Currently, prices for imported vehicles are set autonomously by the manufacturers, with no legal means for the government to interfere with pricing policies. 

“Technically, car companies should apply the lowered tax rate to vehicles imported before June, even when they’re selling them after the policy comes to an end,” said a motor industry official. “But with different pricing policies expected from various companies, we expect to see another controversy once the tax rate policy comes to an end.”

By Kevin Lee (kevinlee@koreabizwire.com)