Controversy over Automobile Taxes: How Will They Be Reformed?

The government has initiated efforts to reform the current automobile tax on passenger vehicles, which is based on engine displacement, following concerns about its fairness. With potential changes to the criteria for automobile taxes, it is expected that the burden on imported cars will generally increase, while the burden on domestically manufactured cars will decrease. The Ministry of Public Administration and Security (MPAS) announced plans to establish an Automobile Tax Reform Task Force in collaboration with the Korea Local Tax Institute, which will gather input from experts and relevant government departments before finalizing the reform proposal by the first half of next year.

 

The reform of automobile taxes is expected to bring significant changes to the domestic automobile market and consumers, and discussions and negotiations on this matter are likely to continue.

 

The Need for Automobile Tax Reform

The reason behind MPAS's initiation of these reforms is the recommendation from the Presidential Office, which called for improvements in the criteria for imposing automobile taxes based on the results of public discussions. In response to this, Minister of Public Administration and Security, Lee Sang-min, stated, "Since many citizens empathize with the necessity of revising the automobile tax assessment criteria, we will gather expert opinions to establish a fair tax assessment standard."

 

Current Automobile Tax Criteria

Currently, the automobile tax for non-commercial passenger vehicles is assessed based on engine displacement, with a reduction of up to 50% of the tax amount every five years starting from the third year of ownership. For example, a 2015 Sonata with a 1998cc engine had a tax amount of KRW 299,700 in 2021 (1998 × 200 × 75%), with an additional 30% local education tax.

Issues with Engine Displacement as a Criterion

The current system of assessing automobile taxes based on engine displacement is facing challenges due to advancements in engine downsizing technology, which maintain vehicle performance. According to Choi Byung-gwan, Director of the Local Finance and Economy Office at MPAS, "The engine displacement criterion has not kept pace with technological advancements, and the environmental landscape has changed significantly with the widespread adoption of eco-friendly vehicles."

 

Expected Changes in Tax Burden

If the tax assessment standard shifts from engine displacement to vehicle price, it is expected that the tax burden on owners of domestically manufactured cars will decrease. The domestic automotive industry also argues for a change in the automobile tax criteria, citing the need to reduce the tax burden on the middle class and lower-income individuals and achieve tax fairness.

Improvement in Tax Criteria for Eco-friendly Cars

The reform proposal for automobile taxes is expected to include improvements in the tax criteria for eco-friendly cars, including electric vehicles. Currently, non-commercial electric cars fall under the category of "other passenger vehicles" and are taxed at a fixed amount of KRW 100,000 (including 30% local education tax), taking into account their environmental benefits and support for emerging industries. As a result, owners of Tesla Model X, priced over KRW 100 million, pay only KRW 100,000 in automobile taxes, while owners of Hyundai Avante 1.6 (1600cc) vehicles, priced at around KRW 20 million, pay an annual tax of KRW 220,000. This has led to situations where owners of much cheaper Avante vehicles pay more than double the tax of Tesla owners.

 

Challenges of Electric Vehicle Adoption and Reduced Tax Revenue

As the share of electric vehicles increases, there is concern that tax revenue may decrease. Therefore, the MPAS has indicated that they will take into account the policy of promoting eco-friendly vehicles and may consider delaying the implementation of tax reforms based on the trend in electric vehicle adoption.

Considerations for the New Tax Criteria

The new tax criteria are expected to consider various factors beyond vehicle price, including fuel efficiency, carbon dioxide emissions (for internal combustion engine vehicles), weight, and output (for electric vehicles). The MPAS has stated that they will primarily rely on price as the standard but are also considering additional factors.

 

Coordination with the South Korea-US Free Trade Agreement (FTA)

The reform of automobile taxes is linked to the South Korea-US Free Trade Agreement (FTA), necessitating discussions and agreements with the United States. In response to this, Director Jo Young-jin stated, "We need to work together with the Ministry of Trade, Industry, and Energy to resolve this issue," emphasizing the need to come up with a solution acceptable to the United States.

 

The reform of automobile taxes is expected to bring significant changes to the domestic automobile market and consumers, and discussions and negotiations on this matter are likely to continue.