SOUTH KOREA. The Korean government’s recent decision to allow local market “˜tax refund’ stores to offer instant refunds to tourists from 1 January is causing serious concern among duty free retailers.
The government made the announcement in late November, in a move to compete with Japan where the authorities last year introduced sweeping consumption tax exemptions for foreign visitors to stimulate tourism. The Japanese measures extended exemptions on categories including cosmetics, confectionery, food, liquor, tobacco and medicines to more than 2,400 downtown stores. Simultaneously, eligibility for refunds of the consumption tax came down from a JPY10,000 (US$91.50) spend to JPY5,000 (US$45.75).
In a similar move announced on 29 November, Korea’s Finance Ministry announced the revision of existing exemption guidelines for some 8,000 qualifying stores that serve foreign tourists. Items costing less than KW200,000 (US$175) will attract an immediate tax refund (value added and consumption taxes), rather than the visitor having to queue up at the airport for the refund.
Each foreign national can buy upwards of KW1 million worth of products under the new arrangement.
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Management at The Shilla Duty Free (whose flagship store in Seoul is pictured) see the new tax refund measures as a further blow to Korea’s under-fire duty free sector |
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So what does that mean for Korean duty free retailers? A spokesman for The Shilla Duty Free told The Moodie Report: “This is definitely bad news for current duty free operators in Korea as duty will not be imposed on [certain] imported items due to FTAs [Free Trade Agreements]. It means that ultimately the goods’ price in the [domestic] stores and duty free stores will not be different.”
He explained: “There are three kinds of taxes on goods in Korea: VAT (value added tax), consumption tax on certain products (which are usually luxury items) and duty on imported items. From next year, 8,000 shops can sell goods without imposing VAT and consumption tax. If the goods are local, the price theoretically would not be different from duty free. Only duty on imported items remains but the price gap will be no longer be critical even in these cases. So we are very concerned about the future of the Korean duty free industry.”
A Lotte Duty Free spokesperson confirmed the situation but emphasised the importance of the fact that the new measures only apply to purchases under KW200,000.
One of Korea’s most experienced duty free retailers explained that licences for the tax refund shops are granted by the National Tax Service (NTS), whereas Korea Customs Services grants duty free licences. “The number of these shops is increasing rapidly and they are [gradually] taking over the duty free market – but it will take time,” he said. “For the time being – say for at least five years – I think the duty free market will continue to thrive unless you get further incidents such as MERS.”
Besides the tax refund shops, Korean department stores also offer the tax refund scheme. Some of these (notably the acclaimed Shinsegae flagship department store in Seoul) already enjoy significant tourism-related business.
“The price gap between traditional duty free stores and local market shops is being eroded and that situation may accelerate in the future. We need to monitor the situation closely to see how it impacts duty free,” noted one senior source.
A leading supplier offered the view that duty free retailers such as Lotte Duty Free and WalkerHill Duty Free, which both lost a key downtown licence in the recent Korea Customs Service bid, could consider operating those stores under this scheme in order to protect their respective capital investments. They could then hope to win back their duty free licence at a later date.
In theory, he said, Lotte World could freely sell items under KW200,000 in-store, offering instant refunds, and for items above that price offer them on a pick-up basis at the airport – “no different that pre-order online”. In short the former duty free shop would become part tax refund store, part duty free showcase.
“I would not underestimate this move even in the shorter term,” he said in a reference to the advantages of being able to get an instant refund rather than queuing up at the airport with receipts to claim a refund. “The new system’s efficiency could be a game changer.”
