Diageo-Customs Dispute May Last for Years
By Kim Hyun-cheol
Staff Reporter
Diageo's battle against Korean customs-imposed punitive duties of $150 million may last for years, with both sides showing no signs of compromise.
Last Friday, a first hearing was held at the National Tax Tribunal in Seoul but ended with both sides merely stating their cases.
``We will use whatever means we are legally entitled to,'' a Seoul official of the U.K-based multinational, which distributes Windsor, Johnnie Walker, said Monday. He observed that the customs office tried to go back on the pricing arrangement made in 2004. ``The length of time required is not at the top of our list of concerns.''
During an interview with The Korea Times, another company official observed that similar cases had lasted for years.
Diageo has an unenviable record of trouble with Korean authorities, including its latest one with the Korea Customs Service (KCS).
Earlier this month, the KCS imposed an unprecedented duty of 206.4 billion won on Diageo for alleged price underreporting on its imported products. The amount of levied duty is nearly half of the company's 2008 sales of 450 million won.
Industry sources also expect that Diageo won't seek an immediate settlement, considering the amount at stake.
Diageo was desperate to regain its status in the Korean market since March, when it resumed importing after a 6-month suspension.
The company forfeited its license in August 2007, after a probe into tax irregularities.
Diageo Korea is struggling for a bigger share with archrival Pernod-Ricard Korea, which markets Ballantine's and Royal Salute whisky brands.
Last year, Diageo accounted for 30.8 percent of the Korean whisky market, compared with Pernod-Ricard's 33.2 percent, as sales of its local brand, Windsor, failed to overwhelm those of Pernod-Ricard counterpart Imperial. Diageo Korea claims the figure is not correct because it excludes sales by its proxy, Sooseok.
The license cancellation came six months after a protracted inquiry by the government into alleged trading with ``unqualified'' retailers and unpaid arrears. Sooseok, another local distributor, carried out the Diageo business as a proxy until March last year.
The National Tax Service ordered Diageo Korea to pay a 350 million-won fine as well as an additional 60 million-won in value-added tax.
A rebound in Diageo's business since it returned to full operations, however, triggered other controversies. Some industry officials accused it of ``forced-in'' sales, in which products are pushed onto retailers, a practice to raise sales over a short period of time.
Similar allegations surfaced during a tax investigation in 2007, when its market share rose from 31.7 percent in January to 36.9 percent in April.
Industry watchers say Diageo Korea's influence is dwindling.
``Reputation counts in business,'' said a spokesman of a local distiller, who declined to be identified. ``Being labeled as a repeat offender is the last thing it wants to happen.''
The company has sufficient reason to care, as rapid growth of the Korean spirits market is making the country more of a battlefield for global players.
In 2007, the market for ``super premium'' whiskies, those over 17 years old, grew 15.2 percent here, and that of 21-plus year-old ``ultra premium'' products jumped 13.3 percent from the previous year.
Korea came in third in luxury spirit sales worldwide.