South Korea introduces tax refund scheme for overseas visitors

SOUTH KOREA. The Korean government has introduced a new scheme that allows around 8,000 stores to offer tax refunds to tourists. The new system, which we initially reported on in December, has prompted mixed reactions from duty free retailers this week. Some said the new system would further erode duty free’s price advantage, but others said it would have a limited impact, at least in the short term.

The government made the move to compete with Japan where the authorities last year introduced sweeping consumption tax exemptions for foreign visitors to stimulate tourism.

On 29 November, Korea’s Finance Ministry announced the revision of existing exemption guidelines for 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 KRW1 million worth of products under the new arrangement, saving 10% of the value of goods.

One duty free retailer told The Moodie Report of his concerns that the price difference between duty free and certain tax free items would be minimised, reducing the attractiveness of duty free stores.

But a Lotte Duty Free spokesperson noted: “Firstly, duty free shops can avoid customs duty, which is the difference with these other tax free shops. Second, the new measure only applies to purchases less than KRW200,000. Lastly, tax free shops are not exempt from liquor & cigarette taxes.”

Another Korean duty free executive told us: “Downtown duty free still has tariff savings and a strong merchandjse offer from luxury to Korean cosmetics. Most of the tax refund stores are small and heavily rely upon conducted tourists to whom they sell less well known products. It will take a while for them to catch up with the merchandise and business size compatible with experienced duty free retailers. Even most Korean cosmetic brands don’t seem willing to supply their products to those smaller players. Also, Chinese customers’ demands still far exceed the supply in Korea.

“But as the local tax free system evolves into a consumption tax free system for foreign tourists, eventually big department stores and city outlets will be the biggest threats to the downtown duty free business. They will have strong merchandise competitiveness. But it will also take a while for them to catch up with the competitiveness of duty free’s [buying] power and price savings.

“Even with an advanced consumption tax free scheme and department store networks in place across the nation, Japan started recently [to introduce] Korean-style downtown duty free business. That means downtown duty free retail still has strong advantages over the local retailers.”

Duty free retailers could be affected by the new scheme to refund consumption tax to tourists
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