Pernod Ricard in tax turmoil

Pernod Ricard’s South Korean arm has allegedly been fined 10 billion Korean won (£5m) by the country’s National Tax Service, according to reports from Seoul and Paris.

They say Pernod Ricard South Korea was found guilty of inflating advertising and other costs to lower its profits and thus its tax liability. Neither Pernod Ricard nor the Korean tax authorities have commented.

The French group’s local company’s operating profit slumped by almost three quarters in the year to June in figures filed to South Korea’s Financial Supervisory Service and it posted an 8.9bn won net loss on sales down almost 5% down on the previous year.

South Korea has been troublesome for Pernod Ricard for several years and it has commented about it being a difficult market. Despite aggressive marketing, revenues have declined from 351bn won in 2010 to below 300bn last year. Earlier this year Pernod Ricard South Korea was forced by union action to abandon plans to lay off staff in a cost cutting exercise.

According to Korean reports, the tax authorities had been investigating Pernod Ricard for the past six months and alleged that it had overstated its advertising and promotional costs for five financial years.

In total Pernod Ricard South Korea, which is headed by Jean-Manuel Spriet, who was in charge of Pernod Ricard UK until 2013, claimed that during the five years it spent 31% of its revenues or 506bn won. Local sources say that Diageo, which is the market leader for whisky in South Korea, spent about half that sum.

Nor, say observers in Seoul, is the fine the end of the matter. The tax authorities are believed to be considering prosecuting individual managers, including possibly Spriet.

Pernod Ricard is not the first global drinks company to meet legal difficulties over accounting for activities in South Korea. In 2011 Diageo paid $16m to settle a case brought by America’s Securities and Exchange Commission concerning its activities in South East Asia. Part of the action, which Diageo formally neither agreed or denied, involved South Korean officials.

The SEC said that Diageo paid 100m won (about $86,000) to a customs official in South Korea as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Diageo was also said to have improperly paid travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, the charges said, Diageo routinely made hundreds of gift payments to South Korean military officials in order to obtain and retain spirits business.

The SEC’s order found that Diageo and its subsidiaries failed properly to account for these illicit payment and that they concealed the payments to government officials as legitimate expenses for third-party vendors or private customers, or listed them in false or vague terms or, in some instances, failed to record them at all.

The case was brought after Diageo was forced to trade in South Korea through an agent after its local company had its licence withdrawn temporarily. It was restored about a year later.