[Seungseop Song's Financial Light] 'Ne Can Maekju' and Inflation-Linked Bonds

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Deputy Prime Minister Choo Kyung-ho: "Price Indexation Needs Reconsideration"

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A beer display shelf at a large supermarket in Seoul city. / Photo by Mun Ho-nam munonam@

"The introduction of an ad valorem tax on (beer and Takju) is good, but the price linkage system needs to be reconsidered. There is a concern that linking it to prices is not appropriate," said Choo Kyung-ho, Deputy Prime Minister and Minister of Economy and Finance, on the 9th regarding taxes related to alcohol. Why did the head of the fiscal authorities mention reforming the liquor tax system?

Liquor tax is broadly divided into ad valorem tax and specific tax. As the names suggest, ad valorem tax is levied based on price, while specific tax is levied based on volume. If liquor is subject to ad valorem tax, the tax is calculated by multiplying the tax rate by the price of the alcoholic beverage, so even for the same type of liquor, lowering the price results in less tax. Conversely, with specific tax, the tax is calculated by multiplying the tax rate by the volume of the liquor, so even if product prices differ, the tax is the same if the type and volume are the same.

The liquor tax system was first established in Korea in 1949. At that time, specific tax was applied to all alcoholic beverages. Then, starting in 1965, it began to shift to ad valorem tax. This was to reduce the public's alcohol consumption and increase tax revenue. The principle of 'liquor = ad valorem tax' established then was maintained for about 50 years.

However, a problem arose. Domestic beer companies began to suffer due to the ad valorem tax. Domestic brewed beer is taxed based on the price at the point of shipment. Therefore, the tax was applied to a price that included production costs, sales and administrative expenses for distribution, sales, and profits. Naturally, the tax burden on beer companies was high.

On the other hand, imported beer is taxed based on the price declared at the time of import. Since distribution costs after import are excluded, imported beers paid relatively lower taxes. With a lower tax burden, imported beer companies could set much cheaper prices. Thanks to this, imported beer companies could engage in aggressive marketing like '4 cans for 10,000 won,' but domestic companies could not.

In response, the government switched the ad valorem tax on beer and Takju to specific tax starting January 1, 2020. According to the National Tax Service, the tax on canned beer was 1,121 won per liter under the ad valorem tax, but after switching to specific tax, it dropped to 830 won, a reduction of 291 won. The diversification of domestic craft beers and the ability of domestic beer companies to run '4 cans for 10,000 won' promotions were thanks to this switch to specific tax.

Source: National Tax Service

However, soju still applies ad valorem tax like whiskey or wine. Since soju is a distilled liquor, it must have the same tax system as other distilled liquors like whiskey and wine. This was the conclusion of a lawsuit Korea faced at the World Trade Organization (WTO) filed by the European Union (EU) and the United States in 1997.

Therefore, the switch to specific tax for beer and Takju has also caused issues. The main issue is tax fairness. In fact, specific tax is not a typical tax system. Applying specific tax results in a tax reduction effect whenever prices rise. Prices and income increase every year, but since tax is levied based on volume, not price, the tax remains unchanged. Currently, soju, wine, and whiskey, which are subject to ad valorem tax, bear the full burden of tax increases as prices rise.

Thus, the government introduced the 'price linkage system.' While the government could raise taxes each time prices rise, the process would be complicated. Instead, by incorporating a price linkage system into the tax system, taxes automatically increase when prices rise. This also somewhat alleviates the issue of tax fairness.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is holding a press briefing at the Government Complex Sejong on the 9th.

So why did Deputy Prime Minister Choo Kyung-ho call for the abolition of the price linkage system? The recent price increase policies of the liquor industry are the cause. Deputy Prime Minister Choo explained, "For example, if the tax increased by 15 won due to the price linkage system, did the beer price only increase from 1,000 won to 1,015 won?" He added, "There is an effect of riding on consumer price increases, so there is a fundamental need for reconsideration." The claim is that liquor companies have used the price linkage system as an excuse to raise product prices more than necessary as taxes increase annually.

Deputy Prime Minister Choo said that as an alternative to the price linkage system, "I plan to consult with experts," and added, "I think it would be sufficient for the National Assembly to set the tax amount once at a certain point in time."