Financial and Leasing Sectors Pursuing Regulatory Relaxation, Risks of Market Monopoly and Fair Competition Damage

Lease and Rental Cars Are Separate Industries with Different Structures, Obligations and Tax Systems, Requiring Careful Review

From the consumer perspective, automobile rental services are broadly categorized into 'rental' and 'lease' concepts. While many people drive their own vehicles directly during vacations, many also travel by train or other means and then rent vehicles in that region to drive. It can be said that in places like Jeju Island, most movements are made through short-term rentals.

Another type is long-term rental where businesses rent and use vehicles over extended periods. These are the vehicles we always see on streets with license plate numbers starting with 하, 허, 호, etc. Recently, some high-value long-term rental vehicles are operated with green license plates. This applies to vehicles priced 80 million won or higher. For those who dislike vehicles with 하, 허, 호 numbers, there is the lease option, which operates in the same format as a personal vehicle. With long-term rentals, the relevant company directly manages insurance and other matters, whereas with leases, the individual directly handles both insurance and management. Long-term rentals and leases each have their own characteristics.

In this way, rental and lease have different features, and consumers make choices by comparing advantages and disadvantages across multiple dimensions including domestic versus imported vehicles, license plate differences, rental costs, and management entities. Due to these differing characteristics, consumers compare and select between them, and after approximately three years, ultimately choose diverse options such as purchasing directly or starting anew. The structure enables consumers to finally select among various methods.

Currently, these rental and lease structures are checking each other while promoting to consumers and making market expansion efforts. Given the significant advantages and disadvantages in comparison, they serve as checks against each other while maintaining balance, and market share situations are similar.

Recently, in this situation, financial organizations overseeing the leasing business are attracting attention by pursuing institutional changes to expand market share. The problem is that rather than using rational and objective methods targeting consumers such as publicity, they are seeking to expand market share through institutional changes. Given the characteristics of major conglomerates overseeing financial operations with abundant material and human resources, moves toward public opinion campaigns and institutional improvements through legislative bodies are appearing. Relatively small and medium-sized rental companies are facing quite difficult situations.

The most important aspect is that the currently balanced mutual competition is being conducted secretly through institutional changes, which is very dangerous and creates an unlevel playing field, potentially shifting problems to consumers later. Particularly, the financial sector related to leasing is attributing meaning to broadening and activating consumer choice, but in reality this is a very dangerous idea as it breaks balance while establishing a monopolistic structure. Moreover, while emphasizing the meaning of regulatory relaxation, this becomes an even more dangerous idea from a relative perspective.

Regulatory relaxation can be a means of industrial growth. However, it must not become a reason to relax the principles of fair competition. Recently, the capital financing industry is demanding two institutional improvements. One is regulatory relaxation of rental car handling limits (primary business ratio), and the other is a revision to the local tax system that excludes long-term rental cars from commercial vehicles under the Local Tax Act and applies non-commercial vehicle tax rates instead.

On the surface, these arguments appear to be for regulatory relaxation and fairness. However, as both issues affect the foundations of fair competition and the tax system, more careful review is necessary.

The first issue is to determine whether relaxing the primary business ratio strengthens fair competition.

The capital financing industry claims that primary business ratio regulations hinder growth and that relaxation is necessary to expand consumer choice. However, the current market situation differs somewhat from these claims.

According to the Korea Rental Car Industry Association Federation, among approximately 1,000 rental car operators nationwide, only 17 are affiliated with financial institutions, yet they already account for approximately 44% of the long-term rental car market. Registered vehicles increased by approximately 33% for financial-affiliated operators between end of 2021 and end of May this year, while dedicated rental car companies increased by only 7.5% during the same period.

The problem is not just market share. The starting line for competition itself is different.

Small and medium rental car operators often must secure vehicle purchase funds from financial companies that are their competitors. In contrast, financial-affiliated operators can utilize relatively lower procurement interest rates and group-level funding capabilities. Additionally, bundled sales using affiliated companies such as card issuers, banks, insurance companies, and capital financiers are possible.

If the primary business ratio is further relaxed in this situation, rather than activating competition, there is a high likelihood that market concentration will intensify around financial groups.

Moreover, small and medium rental car operators have provided long-term transportation means to low-credit consumers, ordinary citizens, and self-employed individuals who have difficulty using vehicles based solely on financial company credit reviews, filling market gaps. While financial companies conduct business centered on relatively creditworthy customers, small and medium businesses have performed a role supplementing transportation rights for groups excluded from the financial sector. If the market is reorganized around a small number of financial-affiliated operators, such social functions could also be weakened.

The second issue is whether lease and rental car are indeed the same industry.

The argument to exclude long-term rental cars from commercial vehicles and apply the same tax rates as non-commercial vehicles also requires careful review.

The starting point is the question of whether leasing and rental cars are the same industry.

Leasing, which only large companies belonging to financial sectors can provide, is merely a financial service providing acquisition financing for consumers to purchase expensive non-commercial vehicles under the Specialized Credit Finance Business Act, but rental car operations, in which numerous small and medium enterprises participate, are transportation service businesses under the Passenger Vehicle Transport Business Act. Rental car operators not only bear various legal obligations including use of commercial license plates, vehicle age restrictions, garage space requirements, periodic inspections, traffic safety management, and insurance coverage, but also provide various consumer convenience services such as vehicle management, general maintenance, visit-based maintenance, accident repairs/deductibles, and emergency dispatch.

That is, lease operators have no special obligations other than providing acquisition financing, and the simple structure places all obligations on the consumer as the owner of a non-commercial vehicle. In contrast, rental car operators, as owners of commercial vehicles, bear public law obligations and provide various services, and after the contract period ends, regardless of whether medium-to-long term or short-term, they receive returned vehicles and provide customized services to other consumers using those 'commercial' vehicles, enabling a structure capable of continuous value creation. Therefore, the role that the rental car business occupies in terms of satisfying diverse demands and the welfare of multiple consumer classes is certainly not insignificant.

The tax system is also different.

Long-term rental cars, as automobile rental businesses, are subject to value-added tax on the full rental amount, while automobile leasing is classified as financial and insurance services and is exempt from value-added tax. This demonstrates that the two businesses are treated as different industries under tax law. From the consumer perspective, when using long-term rental cars, value-added tax on the use of 'commercial' vehicles is borne, and upon vehicle acquisition, acquisition and registration taxes based on 'non-commercial' vehicle standards are borne. In contrast, when using automobile leasing, acquisition and registration taxes based on non-commercial vehicle standards are borne from the beginning. Therefore, there are no unreasonable aspects such as tax equity claimed by some.

Nevertheless, the approach of assuming lease and long-term rental cars as identical industries and trying to align only some tax provisions leaves differences between industries unchanged while modifying only specific systems.

Moreover, amending only the Local Tax Act while leaving related industry laws unchanged to reclassify long-term rental cars as non-commercial requires sufficient review in terms of legal system consistency and tax equity.

Above all, increased tax burdens are likely to lead to higher rental rates. The main users of long-term rental cars are ordinary citizens and middle-class consumers, as well as self-employed individuals who use vehicles for their livelihoods. Consideration must also be given to whether the burden of institutional reform ultimately shifts to the general public.

What is more important than regulatory relaxation is fair competition.

The government must consider both strengthening competitiveness in the financial industry and advancing the mobility industry. However, regulatory relaxation must not result in expanding market dominance of a specific business sector or disrupting competitive balance between industries.

The government must make careful judgments considering not only the necessity of regulatory relaxation but also market structure and legal system consistency, fair competition principles, and consumer benefits comprehensively. In particular, it must carefully examine how institutional reforms will affect not just strengthening competitiveness of a specific business sector, but also citizens' transportation rights and the overall industrial ecosystem.

Fair markets are not created by giving more opportunities to one business sector. Creating an environment where different operators can compete fairly under their respective roles and responsibilities—this should be the starting point for policy aimed at sustainable mobility industry and public benefit.

Such attempts through institutional change have traditionally been methods primarily used by large conglomerates with strong influence around them. The reason is that they have always mentioned the nominal purpose of institutional improvement for consumer benefit and choice. However, ultimately, processes of market distortion and monopolistic situations followed by the submersion of individuals and small enterprises have been repeated. The government must also avoid making mistakes of disturbing market order by simply emphasizing fiscal revenue aspects using regulatory relaxation as a means.

In Korea, recently, due to global uncertainty and confusion from various domestic issues, 'institutional frameworks for the weak' such as 'small and medium business-appropriate sectors' are shaking. Everything is collapsing and the place for small and medium enterprises continues to shrink. This problem is also ultimately characterized by strong aspects of regulatory relaxation for large enterprises' monopolistic positions. Wisdom is required to prevent the situation where one closes the barn door after the horse has escaped, by checking in advance and ensuring problems do not grow larger.