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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.

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