Clear The Air News Tobacco Blog Rotating Header Image

South Korea

NTS probing foreign tobacco firms’ suspected tax dodging

SEOUL, Aug. 30 (Yonhap) — South Korean tax authorities are investigating foreign tobacco companies over suspicions that they evaded taxes on huge profits from a tobacco price hike last year, industry sources said Tuesday.

Citing the need to discourage smoking, South Korea marked up taxes levied on cigarettes by 2,000 won (US$1.79) in January last year, raising the price to 4,500 won per pack.

Cigarette makers are said to have raked in tens of millions of dollars in so-called inventory profit by keeping products shipped out before 2015 in stock and selling them after the tax hike for a huge gain.

According to the sources, the National Tax Service (NTS) has been conducting an extensive tax probe into Philip Morris Korea, which sells the Marlboro brand, and British American Tobacco (BAT) Korea, the vendor of Dunhill cigarettes.

NTS investigators are focusing on suspicions that some tobacco companies, aware of the expected price hike beforehand, pocketed “excessive” profits by stocking up on products and selling them after the tax increase, they said.

“A tobacco price hike can give cigarette companies large profits by enabling them to sell some products in inventory, which were shipped out before a price hike,” an industry source said. “The NIS seems to be investigating their suspected tax evasion or hoarding during the process.”

An NTS official refused to confirm the tax probe, citing an office policy that it can’t “comment on a tax audit into a specific taxpayer.”

Tobacco companies got a lot of flak for their inventory profit last year. Faced with a growing public outcry, South Korea’s sole tobacco maker KT&G Corp. announced in April last year that it would donate 330 billion won for social contribution activities. KT&G spent 80.8 billion won last year and plans to fork out 70 billion won this year.

Some watchers said KT&G may have been spared a tax audit because of its donation.

Philip Morris and BAT Korea complain that it is unfair and discriminatory against foreign tobacco companies for the NTS to exclude KT&G, which they argue reaped the largest inventory profit from the tax hike.

Philip Morris, British American Tobacco under tax audit

PMI, BAT criticized for failing to pay taxes despite huge amount of profits

The National Tax Service (NTS) has launched special audits of foreign tobacco makers here, according to industry sources on Tuesday. The move comes amid allegation that the companies did not pay taxes though they enjoyed tens of billions of won of “inventory profit” after the price hike in January last year.

However, the companies complain that the investigation is unfair because KT&G, the country’s homegrown cigarette maker, also enjoys massive profits but was not included in the special probe.

According to a source close to the matter, Philip Morris International (PMI) Korea, which manufactures Marlboro, and British American Tobacco (BAT) Korea, which makes Dunhill, are under the tax agency’s scope.

Tobacco makers pay taxes when they are shipping products. Since many of the tobacco products which were shipped before the price hike were held in inventory, those sold after the hike generated greater profit for the companies. The NTS is looking into whether the tobacco makers have paid the due amount of taxes and whether any illegalities were involved in generating the profit.

Three tobacco manufacturers, PMI Korea, BAT Korea and KT&G reportedly enjoyed the tax margin worth 150 billion won, 24 billion won and 330 billion won, respectively, from tens to hundreds of billions of won, respectively, after the price of a pack of cigarettes increased by 2,000 won.

Amid controversy, KT&G last year announced a plan for corporate social responsibility projects worth 330 billion, pledging it will return such profits to society. The company spent 80.8 billion won last year and will spend around 70 billion won by the end of this year.

Observers say that KT&G’s move influenced the NTS to launch occasional audits on the foreign companies. Both PMI Korea and BAT Korea finished regular audits in the first half of this year.

However, the foreign tobacco makers say that the government’s decision is unfair.

“Not only the NTS but also the Board of Audit and Inspection has been investigating foreign tobacco makers over the tax margin, but the fairness of such audits is questioned because they were just focusing on foreign tobacco makers,” said a PMI Korea official.

“Due to the nature of the tobacco industry, there is always stock in inventory. To return the tax margin to society, PMI Korea lowered the price of its products by 200 won and absorbed the loss,” she said, adding that PMI Korea has already announced a 21.5 billion won project for social contribution last year.

An NTS official said the tax agency does not affirm an individual company’s tax audit, but added that it launches an audit on numeric analysis.