KT&G under investigation for unfair profits from excise hike

The Korean fair trade watchdog has begun an investigation into tobacco manufacturer KT&G on allegations that the company gained up to 330 billion won ($282 million) in unfair profits following a hike on cigarette taxes in late 2014.

The FTC’s investigation follows a report from the Board of Audit and Inspection that was released Jan. 12 regarding the management of additional profits that may have been gained by tobacco manufacturers after the tax hike that went into effect in 2015.

According to the audit board, KT&G gained nearly 330 billion won in additional profits by selling about 200 million packs of cigarettes to retailers at a higher price, although they had been manufactured in late 2014 before the price was officially changed.

The audit board claims KT&G sold these 200 million packs to retailers at the raised price of 3,719 won instead of the original price of 2,028 won, with the company paying only pre-change taxes to the government.

Although other foreign tobacco companies operating here, such as Philip Morris International, British American Tobacco and Japan Tobacco, were also accused of reaping similar profits, KT&G was singled out by the audit board because of its position in the market.

In 2014, when the tax hike was first decided, KT&G’s market share was at 61.68 percent, legally making the company a “market-dominating enterprise” with influence over cigarette prices. The allegation is that KT&G used this dominant position to coerce retailers to buy cigarettes at a higher price before the raised prices were justified, violating the Monopoly Regulation and Fair Trade Act. 

According to Article 6 of the law, “abusive acts by a market-dominating enterpriser” can be penalized up to “3/100 of the turnover,” or profits gained by the company while committing these abuses.

A spokeswoman for KT&G declined to officially comment on the allegations, saying only that the company “would cooperate fully with investigations.”

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