About 100 Billion Won
The Supreme Court of Korea has ruled that Philip Morris Korea evaded close to 100 billion won in taxes by simulating wholesale sales of its stored cigarettes in anticipation of a cigarette tax increase in 2015.
On July 27, the Second Division of the Supreme Court stated that it had overturned the original verdict in the special consumption tax lawsuit filed by Philip Morris Korea against the National Tax Service, which had called for a tax refund to the company. The case has now been sent back to the Suwon High Court.
Originally, cigarettes were not subject to special consumption tax. However, with the revision of the special consumption tax law in 2014, each pack of cigarettes was taxed an additional 594 won, and the cigarette consumption tax increased from 641 won to 1007 won. Consequently, the price of cigarettes rose from 2,500 won to 4,500 won in January 2015.
Anticipating this increase, Philip Morris Korea erected temporary warehouses from September to December 2014 and manipulated their computer system to accumulate about 191 million packs of cigarettes, making it appear as though these were sold to wholesalers by the end of 2014, prior to the price increase.
The National Tax Service argued that Philip Morris Korea had sold its stored cigarettes to wholesalers at an inflated price after January 2015, but had manipulated the sale to appear earlier in order to evade the additional special consumption tax that followed the price increase. The company was then taxed 99.7 billion won (US$77.8 million).
Philip Morris Korea objected to the National Tax Service’s decision and subsequently filed a lawsuit when their objection was rejected by the Tax Tribunal. Both the first and second trials accepted the company’s claim that the cigarettes in question were actually shipped to wholesalers in 2014, before the special consumption tax was applied.
However, the Supreme Court viewed Philip Morris Korea’s temporary warehouses as a stopgap measure intended to accumulate as much inventory as possible before the price increase, in order to profit from the price differential later on. The court ruled, “Even if the computer system shows that the cigarettes were sold in advance before the tax increase, the special consumption tax should be levied based on Jan. 1, 2015, when the cigarettes actually moved from the temporary warehouses to the wholesalers.”