Korea: Gov’t slammed for flip-flopping on alcohol taxes
By Lee Kyung-min
May 20, 2019
The government is facing criticism for flip-flopping on its stance on the liquor tax causing strong protests from local breweries.
The Ministry of Economy and Finance said recently that it is considering scrapping plans to set up a quantity-based tax code instead of a manufacturing price-based one.
The announcement effectively voids a two-year debate over fair competition between producers of imported beers and local breweries, long stressed by the latter being subject to up to 72 percent tax under what they call an “unfair, outdated” tax code.
The Korea Alcohol and Liquor Industry Association estimates a tax gap of as much as 20 percent exists between the two groups.
Calls for the revision, first floated in 2017, were put on hold by former Finance Minister Kim Dong-yeon in July 2018, when he cited the need to form a broader consensus among all liquor manufacturers on the fairness of the tax.
Only four months later, however, the ministry said in November that it would resume its push for the revision, saying a concrete plan was scheduled to be announced in March 2019.
But the announcement was further delayed to this month, only to be scrapped with no specific resumption timeline in sight.
The flip-flops came as the quantity-based tax code could prompt another backlash as it may benefit domestic beer manufacturers but it could end up levying higher taxes on soju and traditional liquors because they have higher alcohol percentages.
Local breweries say the repeated flip-flops have left them confused, mostly due to fast-deteriorating profit margins.
“It is true that the market is designed to unfairly favor the imported beers,” an Oriental Brewery (OB) official said.
Imported beers are sometimes sold at a lower price than in their country of origin, in what they see as a result of a “legal tax loophole,” a discretion to report the import price with the tax authorities here as they see fit.
“Their competitive edge comes largely from low price, due to low tax levied here. We will be able to set strategies only when there comes a clear tax code revision,” the OB official said.
Greater frustration is expressed by the Korea Craft Brewers’ Association, which accounts for 4 trillion won ($3.4 billion), or 1.2 percent of the beer market here.
They say large beer companies with massive manufacturing operations are incomparable to theirs.
“It is a simple issue about economies of scale,” an official from the association said.
Under the current system, they see no opportunities to expand their market presence despite offering high quality.
“We take great pride in consumer reviews that highly assess our products, but we are bound to lose in price competition. The government should help us stay motivated to make high-quality beer at a reasonable price, rather than making our business harder,” he said.
The official said imported beer is likely to account for over 20 percent of the market in 2019, a rapid expansion in less than a decade from the previous 4 percent.
“Their prices dropped even faster after the free trade agreement took effect in 2018,” the Korea Craft Brewers’ Association official said. “The government should help us stay afloat by formulating a tax code that guarantees fair competition.”
According to the National Tax Service, imported beer accounted for 16.7 percent of the market in 2017, 37 percent year-on-year growth from 4.7 percent in 2013.
An official of HiteJinro, one of the manufacturers of soju as well as beer, said the firm is monitoring the situation, without elaborating further.