Tax agency launches probe into medicine rebates

Major South Korean pharmaceutical companies may soon face a heavy penalty, with the Seoul Regional Tax Office investigating into charges of their tax evasion using illegal sales practices, according to industry sources.

Seoul’s tax probe came after the National Tax Service found out irregular activities by some drug manufacturers during their regular tax audit that began last year.

Jeil Pharmaceutical, Green Cross, Ahngook Pharm, Daewoong Pharmaceutical, Ildong Pharmaceutical and Dong-A ST are among the companies being investigated, the NTS said.

Meanwhile, most of the multinational drug manufacturers doing business here will not be affected by the tax probe as they have put a ban on any kind of rebates. Instead, these firms prefer providing doctors incentives through “legal” methods. Hosting seminars, at home or abroad, is one of the incentives to doctors offered by global drug makers.

According to sources, major domestic drug makers were asked to submit documents regarding the use of gift cards purchased by them between 2010 and 2014.

Gift cards are often used as a source of kickbacks, better known as “rebates” here, to doctors in return for prescribing their products.

Industry watchers, however, said it will not be easy to find hard evidence of such a long-standing malpractice in the industry, as pharmaceuticals get used to exploiting existing tax loopholes and devising new solutions for offering rebates.

“Regarding the rebate practice using gift cards, we purchase gift cards at restaurants or gas stations, and report them as seminar expenditure. We then encash the gift cards to offer 10 to 30 percent of the medicine prices to doctors,” said Charles Son, a former employee of a local drug company.

“Reporting such illegal spending under operating expenses will lower the firms’ tax amount,” Son added.

Son and multiple sources confirmed that both parties never leave paper contracts or a trace of digital transactions as a preventive measure against any investigation by prosecutors or the NTS.

“In reality, whether it’s legal or illegal, drug salesforce cannot survive without offering rebates to doctors,” Son explained.

Other rebate methods include offering doctors corporate cards for personal use and making illegal cash-back transaction using a credit card at restaurants.

By Suk Gee-hyun (monicasuk@heraldcorp.com)