South Korea: Local brewers complaining of tax disadvantages compared to foreign distributors

Sets of four to six imported beers sold at 10,000 won ($8.85) are one of the hottest deals at local convenience stores in South Korea, the Korea JoongAng Daily reported on January 25.

Their popularity is driving the rapid growth of imported beer in Korea.

However, Korean beer companies are complaining that they face a tax disadvantage compared to foreign distributors.

The controversy started when the Korea Customs Service started investigating whether Heineken misreported its production costs to escape taxes.

Korean beer companies claim that the reason for the boom of foreign beers is because of the unfair tax system. They advocate a per-unit tax where the tax is imposed not on the price of the drink but at the volume of the drink and percentage of alcohol in it.

Currently, a liquor tax, education tax and value-added tax are imposed on beer produced in Korea.

If the factory price of a beer is 1,000 won, the liquor tax is 720 won, education tax is 216 won and added-value tax is 194 won, leading to a total price of 2,130 won. For imported beer, the beer is taxed at a similar rate as Korean beer, plus possible tariffs, but it is based on the reported production price by the importer.

Local brewers are suspicious that importers are reporting lower production costs to lower the taxes on them. The reported production price of Heineken beer is around 500 won for a 500 millilitre can. The factory price is half the price of an average Korean beer, or 1,065 won.

“The import price is lowered as much as possible so they pay lower taxes and get 1,500 to 2,000 won worth of profit in the delivery process. That’s why they get more,” said a source from a Korean beer manufacturing company. However, not every imported beer’s reported production cost is as low as this. Among imported beers, expensive ones are taxed proportionately to their price.

A reform to Korea’s liquor tax system, introduced in 1969, has been discussed for years. The alternative outlined in 2018 was imposing a tax based on the volume imported and the alcohol percentage.

“Since the production of beer in Korea was disadvantageous, it was decided that, in the past, among Budweiser or Hoegaarden sold in Korea, the cans should be imported,” said a source from Oriental Brewery. “If the system changes to a per-unit tax, the [local] production of these kinds of products would restart.”

The craft beer industry largely supports this change. Craft beer is often made with more expensive ingredients in small amounts, so it is hard for brewers to lower the price.

“If the system changes, the craft beers can compete on a fairer playing field,” said Kim Jin-man, the head of an association of Korean craft brewers. “If so, the craft beers can market a set of four craft beers for 10,000 won.”

However, many claim that discussing a change to the liquor tax only for beer is unfair. They say that if taxes are based on the percentage of alcohol, taxes on other types of alcohol, like soju, will increase.

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