Core focus:
1.Tax controversy shifts focus to solid nicotine e-cigarettes: South Korea's regulatory discussions on synthetic nicotine have sparked debate over the tax system for "solid-type" e-cigarettes, with concerns that they may become a means to avoid taxation.
2.Industry refutes tax avoidance accusations: Industry insiders point out that these products were already included in the regulations of the Tobacco Monopoly Law as early as 2017 and are not considered loophole products. Currently, they are only sold in small quantities by small and medium-sized enterprises, and tax issues are not a new phenomenon.
3.Historical and international comparisons: South Korea uses a tobacco tax system similar to Japan, which taxes based on weight. Japan has had a similar policy without controversy for 12 years, prompting industry insiders to question why it is only now being seen as a problem.
4.The regulatory gap in synthetic nicotine is receiving more attention: Compared to traditional solid nicotine e-cigarettes, the industry believes that the current focus should be on the unregulated status of synthetic nicotine, which is not subject to the Tobacco Business Law, untaxed, and widely circulating in the market.
5.Policy delays trigger regulatory vacuum: Despite plans to advance legislation, the relevant committees in the South Korean National Assembly failed to push through the bill in February 2024, causing uncertainty over the prospects of synthetic nicotine regulation.
According to News1 on May 13th, the recent controversy over the regulation of synthetic nicotine products in South Korea has extended to the tax system design for solid nicotine e-cigarettes, prompting further discussion at the policy level regarding tax fairness and regulatory loopholes.
Industry professionals point out that currently, the "solid type" nicotine e-cigarette referred to in the market is classified as a "tobacco solid e-cigarette" according to the Tobacco Industry Law. Its structure is based on tobacco solid materials, and it produces vapor for users to inhale after being heated by electronic devices.
This type of product first entered the market in 2017 by JTI Korea, a subsidiary of Japan Tobacco International, and in 2019 by BAT Rossmann, a subsidiary of British American Tobacco Korea. Although there were tax differences compared to similar HNB products at the time, it did not spark any major controversy. As sales have been weak, mainstream tobacco companies have gradually exited the market, leaving supply mainly in the hands of small and medium-sized enterprises. Current sales volume is even less than 10% of what large companies sold when they first introduced the product.
Solid nicotine products are taxed based on weight, a system that was modeled after Japan's relevant regulations. Even in Japan, these products face a tax burden about 70% lower than heated cigarettes, yet they have been sold for 12 consecutive years without raising any serious concerns about tax avoidance. The industry in South Korea has expressed skepticism towards the current situation where sales by small and medium-sized enterprises are causing tax disputes, describing it as a manifestation of "double standards.
At the same time, the industry widely believes that the more pressing issue than solid nicotine products is the regulatory gap in synthetic nicotine. Because synthetic nicotine is not directly derived from tobacco leaves, it currently falls outside the definition scope of the Tobacco Industry Law. As a result, it avoids the burden of tobacco consumption tax and is not subject to regulations in aspects such as online sales, self-service vending, and youth access.
Although the Economic Working Group of the Congressional Enterprise Finance Committee pushed for the inclusion of synthetic nicotine in regulatory legislation in February 2024, the bill ultimately failed to pass due to the need for further research. With the advancement of election political agendas, related legislation may face difficulties in making substantial progress in the short term.
Industry insiders point out that currently, small and medium-sized enterprises legally operating solid nicotine e-cigarettes are being depicted as "new types of circumvention products," which is unfair to law-abiding entities. They further suggest that if the authorities truly intend to guide the optimization of the industry structure through tax policies, they should consider adopting the current tax system based on weight for solid tobacco products as a policy tool to regulate new tobacco products, rather than targeting them as problematic and suppressing them.
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