Tribunal upholds tax office’s taxation of Philip Morris Korea

A protracted tax conflict is likely to run on between tax authorities here and Philip Morris Korea, the local unit of the global tobacco company, as the Tax Tribunal has dismissed an appeal filed by the company and the latter is set to file an administrative lawsuit.

Some 210 billion won ($186 million) in tax -- national and local taxes combined -- is to be at stake, depending on the results of the upcoming litigations on whether the top tobacco maker dodged taxes by manipulating its inventory records.

The Tax Tribunal recently upheld the National Tax Service’s earlier imposition of 99.7 billion won in a special consumption tax on Philip Morris Korea in December last year, the Tax Tribunal said Monday.

The tobacco company, according to the tax office, had transferred its inventory to a temporary warehouse during the September-December period in 2014. Though the actual sales for these prereleased products took place later in 2015, the inventory records were marked as end-2014, shortly before the cigarette tax hike took effect, allowing the company to profit from the tax gap, tax authorities said.

Starting from January 2015, South Korea increased the price of cigarettes to 4,500 won per pack from the previous 2,500 won per pack, imposing a 594 won special consumption tax on each pack and hiking the local consumption tax from 641 won to 1,007 won.

The tax office charged Philip Morris Korea with 99.7 billion won in special consumption tax for the 106 million packs of cigarettes the company allegedly hid. Added to an earlier taxation of 111 billion won in cigarette consumption tax, which is a form of local tax, the company may face over 200 billion won in additional tax.

The tobacco company filed a petition at the Tax Tribunal in March, arguing its disputed move was not a sham transaction but a legitimate inventory release procedure. Facing the recent dismissal, however, the company is now considering an administrative litigation to dispute the taxation legitimacy, according to company officials.

The separate case on the 111 billion won in local tax is currently pending at the court.

By Bae Hyun-jung (tellme@heraldcorp.com)