‘Excess profits’ key to tax dispute

| August 31, 2016

More details have emerged about an apparent investigation by the South Korean tax authorities into the possible underpayment of taxes at the time of a huge tax increase on January 1, 2015.

According to a story by Won Ho-jung for the Korea Herald, quoting ‘industry watchers’, Korean tax authorities have begun an intensive special tax investigation into two foreign tobacco manufacturers, British American Tobacco and Philip Morris International, for allegedly evading taxes on cigarettes produced before last year’s tax hike and sold after the increase.

After the tax increase, the first in about 10 years, the prices of cigarettes rose in Korea by about 2,000 won to about 4,500 won.

There has been no official confirmation of the investigation by the National Tax Service, which does not comment on ongoing tax investigations, but an executive at a tobacco company who asked to remain anonymous was quoted as saying that the investigation seemed to have been sparked by an audit of the finance and interior ministries by the Board of Audit and Inspection.

Each tobacco-products supplier is thought to have reaped tens of billions of won in ‘excess profits’, but the cigarettes sold for excess profit were those that were kept in reserve to prepare for possible supply shortages, which is not illegal.

A spokesman for BAT told the Herald that his company was co-operating fully with the investigation, but he said that the investigation should cast a wider net. “If the issue is really the excess profits, then it should include all tobacco manufacturers and not just BAT and PMI,” he said.

According to numbers released by the office of Saenuri lawmaker Kim Kwang-lim in October last year, excess profits from reserve cigarette supplies reached 240.8 billion won for KT&G, 145.9 billion won for PMI, 40.3 billion won for BAT, and 17 billion won for JTI after corporate taxes. The companies declined to confirm these numbers.

KT&G, which has a 60 percent local market share, announced in April last year that it would use its excess profits for the Korean community. Although KT&G did not say how much excess profits it had made, the budget for its community projects was set at 330 billion won, to be used over a period of several years.

Philip Morris International has agreed to spend about 20 billion won for community service projects over five years, according to a spokeswoman.  “We cannot comment about the content of an ongoing investigation, but we do feel that there are some problems of fairness in the fact that only foreign manufacturers are being investigated,” she said.

Japan Tobacco International, which sells its Mevius brand in Korea, was left out of the investigation. Mevius sold in Korea are produced by KT&G through a licensing contract between the two companies.

Category: Breaking News

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