By Kim Jae-won
Can Diageo Korea, the local unit of the U.K.-based liquor giant, bear the wrath of the customs office or will the maker of Johnnie Walker walk away from the Korean market?
Last Friday, a few hints were seen in Courtroom 102 at the Seoul Administrative Court where a second hearing was held in a legal dispute over alleged evasion of taxes and tariffs that could eventually cost Diageo 500 billion won.
Three attorneys from Kim & Chang, the nation’s biggest and most renowned law firm, defended the Korean unit of the U.K.-based liquor heavyweight Diageo, while two lawyers from the Korea Government Legal Service represented Seoul Main Customs Office (SMCO).
The first hearing was held in March after the suit was filed in October last year; and by all accounts neither side is willing to accept anything less than outright victory, meaning the case will likely go to the highest court and may take years to settle.
“It is a strong case,” a Diageo official said, arguing that the customs’ action is a rebuttal to foreign investors that is unfitting in open economies such as Korea.
Diageo has every reason to stick to its guns. It has paid 194 billion won in penalties and depending on the court’s decision may have to pay 217 billion won more.
“The customs’ demand is as good as telling us to shut down our business and leave,” the official said.
The case dates back to 2009 when the customs office accused Diageo Korea of lowering import prices of its flagship Windsor whisky to evade taxes and tariffs. The SMCO levied 194 billion won of back taxes in 2009, saying the company imported the whisky from its parent company in London at prices lower than usual during the 2004 to 2008 period.
The customs office imposed an additional 216.7 billion won of back taxes in September 2011, applying the same charge for March 2008 to October 2010. Korea imposes a 72 percent liquor tax, a 30 percent education tax and an 8 percent tariff on whisky. Diageo Korea posted 104.1 billion won in net profits with sales hitting 397.3 billion won last year.
The customs office also has little room to maneuver because it will have to pay back what Diageo was charged plus interest of around 3 to 4 percent per year, besides a loss of face if the court rules against it.
It believes the firm evaded more than 400 billion won ($350 million) in liquor taxes by underreporting import prices of its Scotch whisky.
“Diageo reported import prices of Windsor which were lower than its rival brand Imperial,” said Korea Customs Service Commissioner Joo Yung-sup in a meeting with reporters earlier this year.
Imperial is a major brand of Pernod Ricard Korea, a local unit of the Paris-based global liquor company.
Joo said that Windsor and Imperial sell here at similar prices, so it makes no sense that the former’s import price was lower than the latter’s.
Diageo said the company is the industry’s biggest player, so it is natural that it could import Windsor at lower prices than its competitors thanks to the firm’s big production system and negotiation power.
“It’s like a game between E-Mart and a small grocery store in the same neighborhood,” said Yoo Dong-hoon, director of Diageo.
“We have the same business practice at all over the world. It is about transfer pricing, an international norm between a parent company and its offshore subsidiary.”
However, the customs office says Diageo’s imports prices are substantially lower than its competitors. It said the authorities imposed fines and back taxes by comparing the import prices with Imperial as well as Kingdom and Lancelot of Hite-Jinro.
The legal dispute is drawing more attention as it has become a diplomatic matter. The British Embassy and the European Union Chamber of Commerce in Korea asked the customs office to consider not imposing the taxes but the government rejected their request.
The Diageo director said that the legal dispute has had a bad effect on the group’s global strategy of making Korea a hub for the Asian market.
“Foreign companies put emphasis on transparent administration, and I think the Korean government has failed to meet that standard. I’m sorry that Korea lost the chance to attract more foreign investment with the tax dispute.”
The amount levied on Diageo is the largest fine in any tax evasion case here. The fine and back taxes hit a record high because of the tax rate for imported whisky. The long period in question pushed the total up even higher.