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Proposal to tax heat sticks the same as cigarettes

A proposal to tax heat-not-burn tobacco products at the same rate as combustible cigarettes is before the National Assembly, the Korea Herald reported.

Legislation to revise three laws governing taxation of tobacco products reportedly has been introduced by Rep Kim Kwang-lim, a member of the Liberty Korea Party. All tobacco products are harmful and should be taxed at the same rate, according to the legislation. Heat-not-burn products are taxed at about half the KRW 3,323 (EUR 2.59) rate for combustible cigarettes, the Herald said.

PMI, BAT units fined KRW 300 billion for hoarding

The Korean affiliate of Philip Morris International (PMI) and a British American Tobacco (BAT) subsidiary were fined a combined KRW 300 billion (EUR 239 million) for hoarding, the Yonhap news agency said.

The companies were accused of building up inventories in advance of a 2015 hike in excise duties. Sale of the hoarded cigarettes after January, 2015, allowed the companies to avoid tax on the profits, according to Yonhap. PM Korea was fined KRW 218 billion and BAT Korea KRW 89 billion, Yonhap reported. The ruling has been appealed, the news agency said.

As cigarette prices rise, so does smuggling

After the government raised cigarette prices from 2,500 won ($2.27) a pack to 4,500 won in January 2015, the number of tobacco products illegally distributed in Korea rose significantly.

The government caught 3.64 billion won worth of cigarettes smuggled into the country last year, the Korea Customs Service (KCS) said. The figure soared to 6.66 billion won this year through June.

“In the past, most of the illegally distributed cigarettes came from those given to sailors or workers at ports, but there are more smuggling cases reported after the price increase,” said an official at the customs service.

The government distributes duty-free cigarettes to sailors and foreign workers at dockyards at cheap prices since the workers often travel abroad. Since the amount of tobacco given to them was sizable, the workers profited by selling them to stores that illegally sell cigarettes.

However, cheating has become more sophisticated and systematic, including smuggling using shipping containers, since the price of cigarettes has gone up. Smuggling Korean cigarettes from overseas has risen since the government’s price hike.

In fact, the price of a pack of cigarettes only accounts for 26 percent of the retail price, or just 1,182 won. Another 54.5 percent of 4,500 won are taxes and the remaining government charges are used to promote health across the country.

Park Myung-jae, a lawmaker from the ruling Saenuri Party, said tax losses from illegally distributed or smuggled tobacco products are projected to reach to between 70 billion won and 210 billion won this year. “Tobacco consumption in Korea is around 3.75 billion packs a year and experts estimate that up to 1.7 percent of the total tobacco consumed here in Korea is illegally distributed,” he said.

Assuming the rate of illegally distributed tobacco products to be 0.6 percent, yearly losses from tax evasion reaches 74.6 billion won in 2016, and the amount rises to 186.4 billion won if 1.5 percent of merchants evade taxes.

On a recent visit to a small grocery store that sells foreign snacks and nutritional supplements in Namdaemun Market in Jung District, central Seoul, a store owner in her 50s was asked for cigarettes. She went to the other side of her store where boxes were stacked. Inside of the covered box, there were some 50 cartons of cigarettes. Outside of the box, “Made in Japan” and “Busan” were written in English.

“Korean tobacco is 34,000 won and it is 37,000 won for foreign one,” she said. “If you can’t find the one you want then I will bring it from the back.”

A reporter purchased a carton of Korean cigarettes for 34,000 won and another carton of a foreign brand for 37,000 won, some 25 percent cheaper compared to the retail prices around the country.

One tobacco company in Korea looked at those products and said they all were legitimate cigarettes and not fake ones, but noted that they are distributed illegally. In Korea, cigarette merchants must have licenses to sell and cannot sell for less than 4,500 won a pack.

Illegally distributed tobacco products are being sold at various places, including Namdaemun Market, Gukje Market in Busan, Yankee Market and Chinatown in Incheon. It is hard to find them through a web search, but stores’ locations and business hours are introduced in smokers’ communities on the internet. An industry insider said that the number of communities is growing as more smokers are seeking to buy tobacco at lower prices since the price hike.

Customs officials said they caught eight people who smuggled 1.41 million packs of cigarettes worth about 6.4 billion won last Tuesday. The smugglers didn’t report the cigarettes that were in the containers they were moving.

“We were surprised that such a method was actually used since we doubted this would ever happen when the government announced its plan to raise the price,” an official at the KCS said.

An industry insider, who has been dealing with illegally distributed tobacco for about 20 years, said the cheating methods are becoming more sophisticated.

“In the past, the only problems we faced were fake cigarettes made in China and peddlers who hid duty-free cigarettes they bought overseas in their suitcases to bring them into the country,” he said. “After the price hike, we are finding more numbers of large-scale smuggling cases.”

According to him, the custom declaration process for containers shipped overseas is completed a few days before the actual departure date. After the declaration, smugglers remove cigarettes that were supposed to be exported legally during the time between the declaration and departure. Such smugglers ship empty containers and distribute the tobacco across the country.

“These products head to various places that sell cigarettes illegally such as nightclubs and billiards,” an industry insider said.

Furthermore, there are middlemen overseas that buy legally exported Korean tobacco during the distribution process and ship it back to Korea. According to the source, the majority of the Korean tobacco heads to Saudi Arabia first. Then it is distributed to places like the Middle East, Russia and Eastern Europe. During this process, brokers and middlemen who buy products and take charge of distributing Korean tobacco to certain countries ship it back to Korea.

KCS recently caught smugglers using a similar cheating method. According to the customs service, a 53-year-old man surnamed Cho and four others bought 776,000 packs of exported Korean cigarettes in the Philippines at low prices from November 2014 to March of this year. They shipped them in a container to Korea, claiming the containers were carrying wooden chairs.

“There were no reasons for this type of crime to occur when the price was 2,500 won,” an industry insider said. “Smugglers didn’t have any reasons to do so by taking risks to make a small profit, but they are more willing to do so now since the price went up to 4,500 won.”

According to the KCS, only about 2.5 percent to 3.5 percent of containers entering Korea are inspected at the ports. Officials use X-ray machines as well, but the cost of the machines is a few billion won, which makes it hard for the government to operate the machinery on a large scale.

“We do understand that only a few containers go through inspections, but we do have a risk management system that focuses on containers or shippers that are more likely to commit such crimes,” said an official at the KCS. The agency labels certain countries in Southeast Asia as crime-ridden spots and implements tougher measures to catch them.

“It is very rare for smugglers to get actual imprisonment even after they are caught and we believe this is the reason why smuggling cases continue to go up,” an industry insider said. The KCS, on the other hand, said that smugglers face prison terms of up to five years and fines or tax levies as well.

Meanwhile, Rep. Park Myung-jae of the Saenuri Party proposed a bill to track cigarettes to reduce illegal distribution. Park’s proposed bill includes plans to attach special barcodes and tracking devices for each pack of cigarettes.

“The bill needs to be passed as early as possible in order to reduce the tax evasion from the illegally distributed tobacco,” Park said.


Graphic warnings for tobacco products

The government will require packaging of cigarettes, chewing tobacco and e-cigarettes to feature graphic warnings as of 23 December, news agency Yonhap said.

An enforcement ordinance issued by the government today requires the new warnings to cover 30 per cent of the upper part of the front and back of packs.

The Ministry of Health and Welfare unveiled 10 graphic pictorial warnings in March.

Determined activists drive tobacco control

Dr Hong Gwan Seo’s conversion to tobacco control activist began as he puffed on a cigarette reading medical literature on the harms caused by smoking.

“As a doctor I thought I knew the dangers, but as I read I realized smoking was crazy; it was like committing suicide slowly. So I quit.”

That was 1988, the year that the Korean Association on Smoking or Health (KASH) was founded. Since then, there have been two high points for advocates in South Korea, says Dr Seo. In 1995, the Health Promotion Act created smoke-free spaces and banned tobacco advertising.

In 2014-15, the government adopted a range of tobacco control (TC) measures: cigarette prices rose 80 percent thanks to a tax hike and it was announced that packages would have to carry graphic health warnings by December 2016.

Japan and Korea stake out tough anti-counterfeiting positions in proposed trade deal

Trade representatives from 16 Asian countries are convening in Kyoto this week for an eighth round of negotiations over the Regional Comprehensive Economic Partnership (RCEP) agreement. In the run-up to the meeting a series of leaks revealed the IP positions of four key parties to the deal (Japan, Korea, India and ASEAN), which indicate that the East Asian nations are hoping to codify tough measures against counterfeiting.

Back in April, this blog covered the leaked provisions of the proposed Trans-Pacific Partnership (TPP), which some observers feared could affect plain packaging laws in Australia and elsewhere by giving tobacco companies more leeway to sue governments over alleged appropriation of their brand assets. The RCEP is an alternative trade deal being negotiated exclusively by Asian countries. But while it is relatively unknown compared to the TPP, if passed the RCEP could have a greater impact on regional trademark enforcement efforts. That is because, unlike the TPP, it involves China, India and the whole of ASEAN (though four ASEAN states are also negotiating TPP). Taken together, these markets probably account for the lion’s share of the enforcement activities undertaken by global brands focused on the region. Therefore, any change in policy could have a notable impact.

The question on everyone’s mind is how similar or dissimilar the RCEP will be to the TPP. Four proposed IP chapters leaked by Knowledge Economy International (KEI) give insight into the negotiating positions of Japan, Korea, India and ASEAN (which is negotiating as a bloc), while a leak of the proposed IP chapter of the latter agreement revealed what is shaping up to be a strongly rights-holder friendly system. Given the Obama administration’s repeated refrain of “If we don’t write the trade rules, China will”, there has been some speculation about whether RCEP could emerge as a homegrown alternative to the TPP – potentially without all of the IP protections sought by Western corporations. But the leaks make clear that Japan and Korea are pushing for a TPP-style regime.

While many of the most contentious flashpoints are in the patent space, surrounding issues like compulsory licensing for pharmaceuticals, anti-counterfeiting is one area where there are marked differences in the proposals that have now been made public.

One area in which both Japan and Korea are seeking to enshrine strong anti-counterfeiting measures is in the realm of customs enforcement. Both propose that customs authorities be empowered to act ex officio to suspend the release of trademark infringing goods for import, export or transhipment. India’s proposal makes no specific mention of customs enforcement, while ASEAN’s includes a general call for cooperation on border measures. The leaked TPP draft makes clear that there are splits within ASEAN on the issue: Vietnam opposes the inclusion of ex officio powers for customs officials, while Singapore, Brunei and Malaysia support granting such authority only over goods imported into a country, not goods which are exported or in transit.

Another strict measure sought by both Korea and Japan relates to criminal prosecution in cases of wilful trademark infringement or counterfeiting on a commercial scale. Both countries’ proposals also detail standards to ensure that wronged parties are granted adequate damages and other remedies in civil and criminal litigation. Again, neither the ASEAN nor the Indian chapters cover this issue in detail. The TPP draft includes similar language but there is ample disagreement over the details; Vietnam, for example, supports criminal sanctions for commercial-scale import of counterfeit goods, but not export.

Beyond counterfeiting, there is discord over whether the agreement should require signatories to extend protection to non-traditional trademarks. India’s submission proposes that parties may require a mark be visually perceptible to be reigistrable. Korea, which allows sound and scent marks, wants such marks to be accepted throughout the region. It may be joined in this by Japan, which has introduced its own system of non-traditional marks in the time since its proposal was authored. The TPP draft in circulation looks set to extend protection of sound marks, while parties including Vietnam, Brunei and Japan oppose adding similar language about scents.

Another issue this blog has covered which is likely to be a hot topic in Kyoto is India’s strict FDI rules. Countries including Japan and Australia are likely to ask for the addition of an e-commerce chapter to the agreement pressuring India to open up that part of its economy, allowing foreign brands to sell goods online directly to Indian consumers.

Of course the usual caveats apply here: these positions are all at least nine months old and could be far from what ends up in the final agreement (especially because we haven’t yet heard from China). But it’s clear that Japan and Korea have an incentive (due to the former’s role in the TPP and the latter’s FTA with the US) to lobby for robust trademark protection policies. Rather than rival alternatives, it looks likely that the two agreements could be mutually reinforcing. With the TPP near completion and the RCEP aiming to wrap up negotiations by the end of this year, we should soon have more than just speculation to go on. And then we’ll know who gets the first crack at “writing the rules” for intellectual property in Asia.