Philip Morris Accused of Tax Evasion After Cigarette Price Increase

According to a report by South Korean media outlet Business Korea on July 28th, the Supreme Court of South Korea has ruled that Philip Morris Korea (PMI Korea) evaded nearly 100 billion Korean won in taxes by simulating wholesale sales of cigarettes stored prior to the increase in cigarette taxes in 2015.

The Supreme Court's second division announced the overturning of the initial ruling on a special consumption tax dispute case brought by PMI Korea against the National Tax Service, in which the company requested a refund of taxes. This case has now been re-submitted to the Suwon High Court.

Initially, cigarettes were not subject to special consumption tax. However, with the revision of the Special Consumption Tax Law in 2014, an additional tax of 594 Korean won was imposed on each pack of cigarettes, and the cigarette consumption tax increased from 641 Korean won to 1007 Korean won. As a result, the price of cigarettes increased from 2500 Korean won to 4500 Korean won in January 2015.

Philip Morris Korea company is expected to experience growth until now. In the period from September to December 2014, the company established temporary warehouses and manipulated its computer systems to accumulate approximately 191 million cigarette packs. This was done to create the illusion that the products were sold to wholesalers before the end of 2014, thus avoiding any subsequent price increases.

The National Tax Service (NTS) has found that Philip Morris Korea Company sold its stock of cigarettes to wholesalers at inflated prices after January 2015, manipulated sales records to make it seem like the sales occurred earlier in order to evade subsequent increases in special consumption taxes. As a result, the company has been taxed 99.7 billion Korean won (equivalent to approximately 77.8 million US dollars).

Philip Morris Korea Company has lodged a protest against the decision made by the National Tax Service, and subsequently filed a lawsuit after their objection was dismissed by the Tax Court.

The company's argument was accepted in both first and second trials, as they believed the disputed cigarettes were actually shipped to wholesalers in 2014, before the specific excise tax was imposed.

However, the Supreme Court considers the temporary warehouse of Philip Morris Korea as a temporary measure aimed at accumulating more inventory before the price increases, in order to profit from the price differentials in the future.

Court rules:

Even though the computer system shows cigarettes being sold prior to the tax increase, the excise tax should still be based on January 1, 2015, when the cigarettes were actually transported from temporary warehouses to wholesalers.

Reference: 

[1] Philip Morris Accused of Tax Evasion Following Cigarette Price Increase