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Government delays alcohol tax change, again

May 09,2019
Local beer makers have been left frustrated as the government has once again decided to postpone a change to the current alcohol taxation system that breweries have been requesting for years.

On Tuesday, Finance Ministry tax director Kim Byung-gyu said a reform on changing the local alcohol tax system from price-based to volume-based will be delayed. The government had promised in February to finalize details for the new system by early May.

After canceling the announcement of a reform last July, this is the third time in six months that the government has said it will further delay the plans.

“We’ve held multiple meetings with the industry to collect their opinions - the beer industry generally agrees on supporting taxing by volume, but with other types of alcohol there were disagreements,” Kim explained to reporters.

He added that for soju, rice wine, liquor and other types of alcohol other than beer, a different tax system would create “uncertainties” as it would bring rapid changes to “the distribution and sales structure.”

Kim also made it clear that the government still plans to shift to a volume-based system, but did not say when it would happen.

Changing alcohol tax standards has been a common request from local beer manufacturers that have been struggling against imported competition in recent years.

Under the current system, taxes on local beer are based on the sum of manufacturing, margins and sales costs, whereas those for imported beer are based on declared import prices which do not include marketing and sales costs.

A volume-based system would mean the alcohol content is what is taxed. This system is already common in most OECD countries.

Beer companies argue that price-based taxing creates unfair competition where imported beers pay less and can be sold in bundles like the popular “4-cans for 10,000 won [$8.50]” deal at discount chains and convenience stores. These promotions quickly pulled up imported beers’ share of the local market. According to state-owned Korea Ratings, local beer shipping declined while imported beer grew seven-fold between 2010 and 2017.

Sources in the local alcohol industry said that the latest delay happened after discussions in the government recently started to consider applying the change to all alcohol types, not just beer.

“Among the beer industry - local brands, importers and craft beer makers - the debate has been going on for a long time and there’s a general consensus in support of volume-based tax,” said an anonymous industry source.

“But this isn’t the case for other alcohol sectors that don’t have to fight with imported competition. Each sector will have their own say on the matter and there are very complicated calculations for this.”

The delay’s impact is even bigger on smaller craft breweries that deal with higher production costs per unit.

“Our stance is that the modification should be implemented at once, at least for beer,” said a spokesperson for the Korea Craft Brewers Association which represents 40 craft beer makers.

“Other alcohol types don’t face the imported competition as we do and it’s not urgent for them.”

BY SONG KYOUNG-SON [song.kyoungson@joongang.co.kr]