The Chosun gets results:
Import Cars Get Cheaper as Domestic Car Prices Soar - Chosun Ilbo, July 9, 2007
Tax Office to Investigate Mercedes-Benz Korea - Chosun Ilbo, July 10, 2007
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16 Comments
http://www.heraldbiz.com/SITE/.....010082.asp
Mercedes Benz Korea had rescinded the contract or refused to extend the contract with Eugene & Company, a former Mercedes Benz dealer, and the former dealer subsequently reported the tax probe and other issues of Mercedes Benz Korea to the National Tax Service and the Fair Trade Commission and filed a complaint to the prosecution against it.
Sounds like business as usual, then.
The complaints have been going on for a while:
http://news.naver.com/news/rea.....enu_id=103
Oh look! It’s the afore mentioned Eugene!
So, am I to take it then that it was OK to treat the Korean market “like an undeveloped African country” while Eugene & Company was part of the system?
The high price of those European cars in South Korea is due to the importer/dealer margin rather than tariff and other taxes. What’s revealed in this case is that Mercedes Benz Korea pays higher price for their cars to Mercedes Benz of Germany than the importers / dealers in some other countries do. There is a suspicion, which Eugene & Company brought up, that this practice might be to avoid tax. Eugene & Company used to be the part of the system that entertains the ridiculous price.
I hate tax, too, BTW.
I get the first article. It’s basically:
Importers : importing cheaper models at a cheaper price
Domestic : gouging the local market even further
However, I’m completely lost on the 2nd article. Why in the heck would a company intentionally reduce its profits ? Assuming taxes are on profits and not revenue (gross income), doesn’t it make the most sense to maximize profits (net income), thereby maximizing after-tax income ?
As someone put it to me well : don’t let the tax tail wag the dog.
For example, if the tax rate is T, ATI is after-tax income, and BTI is before-tax income (net income, basically), then we have
Profits:
ATI = BTI - BTI*T = BTI(1 - T)
ATI = BTI(1 - T)
Surely, for any rate of T less than 100%, the best way to increase ATI is to increase BTI, yes ?
So, again, why would a company intentionally reduce its before-tax profits ?
Either:
1. MB Korea is using bone-headed logic to hurt itself, profit-wise.
2. There’s some form of corruption at MB Korea and/or the tax office
3. The equation : “ATI = BTI(1 - T)” is incorrect. In other words, the Korean tax system is not based upon net income, but something else instead, like gross income.
4. The article is poorly written, since it doesn’t attempt to answer the obvious question that many (most) readers are left with.
It’s likely a combination of the four, but I have no idea other than that.
Does anyone have any more information ?
Mercedes-Benz is not a client, although I do work with other automobile importers. There are a whole host of reasons why the cars are more expensive in Korea, and include special test standards just for Korea, the nation-wide after-sales service network and parts inventory required by law, customs duty, Value-Added Tax, special excise tax, road bond, blah blah blah. And don’t forget the high salaries demanded by Korean employees of the automobile importers, and the insane rents for the showrooms where cars are sold. All of these show up in the final sales price.
However, the question is why a foreign-owned importer of goods manufactured offshore would want to artificially depress its profit in Korea. This is an area of law known as transfer pricing, and a hot area of inquiry for the tax office — they like it because it’s very subjective, which means tax officials can seek bribes, or generate investigations at will in order to harass someone.
Business profits of corporations are taxed twice before they end up in the pockets of the shareholders. First, the corporation must pay corporate income tax on its net income — tax rates are 15.4% on the first W100 million in net profit, 26.4% (I think) on the balance above that. After the company has paid its income tax, its after-tax profit may be distributed to shareholders through declaration of a dividend.
And here is where the taxman bites twice. Dividend income is personal income of the shareholder, and therefore subject to corporate income tax if the shareholder is a corporation, or personal income tax is the shareholder is a natural person.
Most foreign-invested companies are owned by another corporation, which corporation is located somewhere outside Korea. Under the Basic Tax Act (and the various tax treaties Korea is so busy destroying under the Roh gang), income of non-residents is subject to withholding tax at rates up to 25%. So first pay 26.4%, then pay 25% on what’s left after the corporate tax has been paid — the shareholder gets fifty-five cents on each dollar of profit earned in Korea. (Withholding taxes may be less than 25% on dividends, according to tax treaty like the tax treaty with Belgium that is causing so much heartache in the Lone Star case.)
Now, suppose we surreptitiously raise the ex works price of the imported good to the point where, after paying the import price, staff salaries and rent, abra-cadabra, there is no profit in Korea. The effective tax rate here is then zero — if the tax rate in the place from which the car is exported is lower than the tax rate here in Korea, the foreign exporter has just saved a bunch of money.
I’m not saying this is what Mercedes-Benz has done. Like I said before, I work with other auto importers and so I have a more nuanced appreciation for what costs go into the final sticker price, and even why the price of the Korea-bound model would be higher at the docks. But if one is a foreign-conspiracy crazed official, the foregoing is what they are convinced is going on.
MiGuk> You have a point, and I do not have information per se, but rather things to add to the mix.
1. Despite what you may think from my post, I do not think these are related per se. What I found funny was the fact they appeared one day after the other.
2. I wonder what may be going on is, if the NTS is trying to crucify MB for whatever reason, if they are doing it by selective enforcement.
3. As the former article indicates, there a a whole host of taxes that car buyers must pay. So your calculation may not be a simple as NI times a tax rate. MB could have been screwing around with a number of taxes (e.g. registration, displacement, import) And further it should be noted that the actions could have been to lower the overall price of the auto, or to cheat somebody (customer, government, suppliers, etc.).
MigukNamja:
The fact that MB charges its Korean distributor more than its Japanese and US distributors obviously doesn’t mean that MB makes less profit, but that the profit of the local distributor is (theoretically) lower because its cost is higher. The NTA has got its panties in a twist because they figure there is a transfer pricing ploy in play that thereby lowers the Korean-based profits and, hence, the Korean tax take, while MB is still enjoying the same or even larger profit that it is collecting somewhere else - either in Germany or, more likely, in some intermediate tax-advantaged location with a marginal rate of tax much lower than either Germany or Korea - in which case it’s multiplying the value of its after tax profit even more. And we know from the travails of Lonestar, Newbridge, and others - now including GE Real Estate - how the local mercantilists feel about that particular form of theft of their national wealth.
Whenever I’ve sold equipment here I’ve usually offered it for 10-25% higher than my company’s global average price. Why? Because this is a high-maintenance country with high-maintenance customers, expecting levels of service beyond anyone else save perhaps Japan and Singapore.
For Mercedes to charge a premium here is entirely in line with sound business practice.
Wedge:
Good point, though perhaps it’s worthwhile to note that there are at least two dimensions to this phenomenon.
The first concerns the end-users of the products, particularly in the case of high(er) end/luxury goods.
The second but actually the primary concern for most foreigners doing business here is the govt/local partner matrix.
Government (mis)regulation (and interference, even in the absence of anything remotely resembling legitimate authorizing legislation and/or administrative rules) and the brain damage of making (let alone maintaining and enforcing) deals with local “partners” create risks transaction costs that are a multiple of the norm in the international (not to mention, e.g., US or European domestic) business environments — in effect a Korean Risk Muliplier (TM) that is the analogue of the Korea Discount in the securities markets.
An excellent example is that presented by the current case, where MB’s troubles appear to stem from the “I die, you die” mentality of its former distributor Eugene, who has provoked this government investigation after being terminated by MB - (no doubt, for much more than justifiable cause) - with what are likely nothing more than unsubstantiated (and, ultimately, unsupportable) allegations.
Sometimes I wonder how much longer it will be before the rest of the world begins to so seriously question the wisdom of having pushed for the opening of Korea that it decides to let it lapse back into being a sort of holding pond for the toxic discharges of China. NB it not a question of “if”, but only “when”.
Sperwer: When I was referring to high-maintenance customers I actually meant the defense establishment. Certainly it cuts across all levels of society, though.
The defense procurement authority here is generally recognized as the most difficult to deal with in the world (something Coreans can be proud of). Convincing the guys at the home office to do business here requires adding margin.
Wedge:
Roger that, the Korea Defense establishment is just the same as the usual suspects — on steroids.
Fear not (Korea Times):
South Korea needs an organization that will fairly protect domestic industries from unfair trade practices by foreign players in the era of free trade and the Korea Trade Commission (KTC) aims to do just that, striving to be one with the highest level of credibility, its new chairman says.
Dr. Bark Tae-ho, 55, dean of the Graduate School of International Studies at Seoul National University, who was designated as the new KTC chairman late last month, laid great emphasis on “fairness’’ and “expertise’’ as the most required virtues of the country’s trade remedy agency.
“We need to continue our efforts to improve our expertise, objectivity and fairness in trade to remain as an impartial judge in the case of unfair trade actions such as dumping or subsidies,’’ Bark said in an interview with The Korea Times Wednesday.
In most real market economies the primary role of the fair trade regulatory body is to ensure that the domestic market is free, first, from domination by local cartels, monopolists, predatory pricers, etc., not to protect them from foreign competition.
#14,
“Beware of the evil foreign capitalist”. LOL
What a joke. Just google “Korea dumping”.
The Korea Trade Commission is the Korean analogue of the United States International Trade Commission, not the Fair Trade Commission. Its mission is very different from enforcement of fair trade law in the domestic market. The Korea Trade Commission, as in the case of the International Trade Commission, is charged with applying appropriate remedies in cases where domestic industry suffers “import injury”. There’s nothing wrong with that.
However, I don’t buy that the Korea Trade Commission will be an organization with the highest level of credibility, or that it can be impartial.