Domestic car prices drop by 300,000 won... Excise tax formula changed for fairness with imported cars

[Asia Economy Sejong=Reporter Dongwoo Lee] The government is improving the method of calculating the tax base to reduce the individual consumption tax (ICT) on domestically produced cars. Accordingly, the ICT on domestic cars is expected to decrease by about 300,000 KRW starting from July.

On the 18th, the Ministry of Economy and Finance announced the "2022 Tax Reform Follow-up Enforcement Decree Amendment" containing these details. According to the amendment, the government will recognize the estimated method instead of the sales price method as the tax base when domestically manufactured goods are sold directly by the manufacturer to consumers.

Implementing the amendment will exclude costs incurred during distribution and sales stages after manufacturing, resulting in a lower tax base itself. If the ICT tax base method is revised, the tax on domestic cars is estimated to decrease by an average of 200,000 to 300,000 KRW starting in July.

Unlike imported cars, which use import prices as the tax base, domestic cars have been taxed based on the manufacturing cost plus operating margin, causing issues of tax fairness. For domestic cars, the tax base is determined by the ex-factory price including distribution and sales margins, whereas for imported cars, only costs incurred until the goods arrive in Korea are included, excluding domestic sales and administrative expenses from the tax base. This structure results in higher taxes on domestic cars even for the same product.

In response to such reverse discrimination controversies, the government commissioned a research project last May to enhance tax fairness between domestic and imported cars and prepared institutional improvement plans in last year’s tax reform proposal.

The estimated method involves the Commissioner of the National Tax Service comprehensively considering average costs and profits at the sales stage by industry, with the Standard Sales Ratio Review Committee reviewing and deciding the ratio every three years and publicly announcing it. With this enforcement decree amendment establishing the legal basis for applying the Standard Sales Ratio, the committee plans to announce the ratio by product category.

[Image source=Yonhap News]