[NEWS ANALYSIS] Could tax change affect 4-can foreign beer deal?
Earlier this month, news broke that the government may raise taxes on imported beer, shocking lovers of the sudsy sales promotion.
In the past two weeks, local breweries and alcohol importers actively spoke up on the issue ahead of the Finance Ministry’s tax policy reforms for 2019, which are set to be decided today. An early hint came from Finance Minister Kim Dong-yeon, who implied that the government would eventually stand beside consumers this time.
“If [import beer] taxes are hiked, consumers who enjoy a can of beer at home may find this difficult to accept,” he said in an interview with Yonhap on July 18.
Kim’s statement indicated that the government will not apply the tax policy change. However, many stakeholders still say that the current system is unfair to local brewers, putting them at a disadvantage against imported competition.
Quantity or cost?
This is not the first time controversy has arisen over Korea’s beer tax system, which manufacturers have continuously deemed as unfair to local brands.
Local and imported beers are both taxed at a rate of 72 percent, but they have a different tax base. Taxes on local beer are based on the sum of manufacturing, margins and sales costs. Imported beer, on the other hand, is taxed based on the import price, or the product price plus transition fees declared by the importer, and customs tax. In other words, marketing and sales costs are not taxed on imported beer.
Some importers reportedly declared smaller import prices in exchange for lower taxes, which allowed them to sell beers for prices that are sometimes cheaper than their country of origin. These lighter tax burdens allowed the four-can for 10,000 won promotion to flourish across Korea.
The Finance Ministry is considering changing the tax structure to tax all beers based on their quantity as part of next year’s tax reform package.
“Beer accounts for more than 50 percent of the country’s alcohol market, and the current tax system based on price sets the ground for unfair competition between local beer and imported beer,” said Hong Beom-gyo, a senior researcher at the Korea Institute of Public Finance (KIPF), a think tank under the Ministry of Strategy and Finance, at a roundtable discussion earlier this month.
Korea is one of five Organization of Economic Cooperation and Development countries out of 30 that taxes alcohol based on costs rather than quantity. The system was quantity-based until 1968.
Behind local brewers’ constant calls for tax reform is the rapid rise of imported beers in Korea, boosted by their prices, which can often end up being cheaper than domestic lagers.
“The purpose was not to request lower taxes on local beer, but to ask for equality in tax standards on imported beer,” said a source at a major domestic brewery.
According to a report from the KIPF this month, the market share of imported beer in the Korean market increased three times to an estimated 16.7 percent last year from 4.9 percent in 2013. Local breweries’ market share slipped from 95.1 percent to an estimated 83.3 percent during the same period. A majority of this portion belongs to Korea’s three largest breweries - Oriental Brewery, Hite Jinro and Lotte Chilsung Beverage. In 2016, imported beers broke through the 90-percent threshold.
While local beers still dominate in restaurants and bars, people drinking at home have moved over to cheap imported beers.
“In consumer-friendly retail channels like convenience stores and discount chains, according to what I know, half of all beers sales come from imports already,” said the source. “For [sales of] local beers to grow, more people have to eat out or mingle with friends at bars, but that’s not the lifestyle trend at the moment. With more solo drinkers and shorter working hours, retailers [as opposed to restaurants] are really where sales are likely to grow in the future.”
Statistics from convenience store GS25 showed that sales of imported beer reached 55 percent last year, exceeding sales local beer for the first time ever.
Starting this year, imported beer from the United States and the European Union will face zero customs taxes, according to their trade agreements with Korea.
Of course, tax cuts don’t always lead to lower consumer prices. But a report from Jang Ji-hye, an analyst at Heungkuk Securities, showed that beer imports from the United States during the year’s first quarter increased by 108.8 percent.
Local microbreweries generally support quantity-based tax, claiming the current system discourages investment in quality ingredients, facilities and workers.
“The current system taxes the producer price, which includes the costs of human labor, ingredients and machinery,” said a spokesman for the Korea Craft Brewers Association. “Good ingredients and a high-quality work force require investment, and more costs lead to more taxes. The system motivates manufacturers to make cheap and, therefore, low-quality beer.”
The spokesman said that a change to the tax system would allow microbreweries to make more investments, and currently, investments are more financially difficult for smaller companies.
All alcoholic drinks are subject to this tax system, so distillers of other types of booze also see it as unfair.
“It’s sad to see Korean alcohol considered cheap and low-quality,” said Lee Ji-min, a liquor columnist who runs Daedongyeojudo, a website that introduces Korea's traditional alcoholic beverages. “Even if manufacturers make high-quality products with good ingredients, fancy packaging and active marketing strategies, it all comes back to taxes and higher prices. So consumers don’t buy them and manufacturers are motivated to make cheap products with low-quality ingredients.”
Industry experts say that the switch to a quantity-based tax system wouldn’t be as bad as some consumers think. Whether the tax change would eradicate the four-can promotion depends on the beer brand.
The difference lies in the declared import price. Expensive beers are taxed more heavily in a system that imposes taxes based on costs. If the tax is applied based on quantity, then beers will face a uniform tax regardless of their price. The beer industry believes that the government’s threshold for a quantity-based tax is between 840 won and 860 won per liter.
“The average tax imposed on imported beer is around 790 won per liter,” said another industry source. “Pricier foreign beer brands that currently carry taxes above the 840 to 860 won limit would see lower taxes. Importers paid lower taxes on cheaper beers, so retailers may have difficulty continuing to offer heavy discounts.
“It’s hard to say whether heavy discounts will disappear from retailers. On the contrary, lower taxes on premium brands may pull down consumer prices.”
Some beer importers say that a change to quantity-based tax may expand consumer choice for high-quality craft beer from overseas.
“For importers that specialize in high-quality craft beer, a change to a quantity-based tax instead of one based on cost will definitely lower the bar to bringing in good products,” said the operator of tap house that mainly offers foreign craft beer. “My personal assessment is that premium beer above 15,000 won per unit will all fall below 10,000 won if the government decides to conduct the change to quantity-based at the expected level among industry insiders [at the 800 won range].”
A possible hangover
Some argue, however, that any shift to quantity-based taxation should be carefully reviewed, as it may cause unexpected side effects.
The ongoing debate at the moment is confined to beer. But if the government applies a quantity-based system to beer, the issue will eventually be raised by other alcohol industries in Korea regarding soju and wine.
Soju is a major reason the government is carefully reviewing the change to a quantity-based tax. It’s been only roughly three decades since beer became a popular beverage among local consumers. Soju was historically considered a cheap beverage for a longer period, and the outcry will be large if any change to taxes ends up raising prices.
Hong from the KIPF also said during this month’s open round table that the research center did not suggest a full-fledged implementation across all alcohol beverages, as it might increase prices on Korea’s most popular hard liquor.
“If we shift beer tax to quantity base, there surely will be claims that we should do the same for soju … This is a fundamental issue that touches all of Korea’s special consumption tax,” said Sung Myung-jae, an economics professor at Hongik University.
Sung said that local breweries and beer industry sources do not consider the aim of alcohol taxes, which is reducing harmful consumption.
“The special tax imposed on products like alcohol and cigarettes include social costs for problems like drunk driving and secondhand smoke,” he said. “If a tax is imposed on costs, social costs have to be considered … To realize the social role of taxes, quantity-based standards should be applied with this social cost to reduce consumption. In Korea, there’s no way this is going to happen because it will entail soju price hikes and a huge public backlash.”
BY SONG KYOUNG-SON [email@example.com]