Korean tax authorities have begun an intensive special tax investigation into two foreign tobacco manufacturers for evading taxes on cigarettes produced before last year‘s tax hike, but sold after the raise, industry watchers said.

For the past few months, the National Tax Service has been looking into the excess profits that Philip Morris International and British American Tobacco gained by selling cigarettes produced before 2015 but sold after the government imposed an excise tax hike that raised the prices of each pack by roughly 2,000 won ($1.80), they said.

“The investigation seems to have been sparked by an audit of the finance and interior ministries by the Board of Audit and Inspection,” said an executive at a tobacco company who asked to remain anonymous.

Each tobacco manufacturer is expected to have reaped tens of billions of won in excess profits. The cigarettes sold for excess profit were those that were kept in reserve to prepare for supply shortages, which is not illegal. 

The investigation will look into allegations that the tobacco companies intentionally tried to corner the market by holding back supply until after the price increase, which will also implicate retailers selling cigarettes as well.

A spokesman for BAT told The Korea Herald, “We are cooperating fully with the investigation,” but also added 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 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 themselves declined to confirm these numbers.

Korean tobacco manufacturer KT&G, which stood to gain the most profits with a 60 percent local market share, announced in April last year that it would use its own excess profits for the Korean community. Although KT&G did not release the exact amount of the excess profits, 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 also 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 line in Korea, was also left out of the investigation. The Mevius products sold here are produced by KT&G through a licensing contract between the two companies.

The National Tax Service did not comment on ongoing tax investigations.

By Won Ho-jung (hjwon@heraldcorp.com)