Philip Morris, BAT reap benefits from cigarette price hike

By Lee Hyo-sik

Philip Morris International (PMI) Korea and British American Tobacco (BAT) Korea have reaped huge benefits from a tobacco price hike in January 2015, according to an opposition lawmaker, Friday.

The price increase has failed to reduce cigarette consumption by as much as the government projected, meaning the higher prices have placed a heavier financial burden on low-income earners while fattening the pockets of multinational tobacco companies.

According to financial data released by Rep. Park Young-sun of the main opposition Minjoo Party of Korea, PMI Korea had sales of 810.8 billion won ($737.1 million) last year, up 15.3 percent from 2014. Its net profit jumped 33.9 percent to 191.7 billion won.

BAT Korea’s 2015 sales dropped 13.5 percent to 391 billion won, but its net profit reached 27 billion won, compared with a 9.6 billion won net loss in 2014.

“The government’s decision to hike cigarette prices, by 2,000 won to 4,500 won per pack in the name of lowering smoking rates, has enabled tobacco companies to rake in tens of billions of won more in profits,” Park said. “The price increase has only hurt low-income households.”

The number of cigarettes sold here reached 3.17 billion packs in 2015, down 29.6 percent from 2014. But cigarette sales are projected to bounce back to 3.8 billion packs this year, suggesting the effects of the price hike have waned.

The better-than-expected performance by the two multinational cigarette makers comes as they face mounting criticism for evading a combined 208.3 billion won in taxes on profits stemming from the cigarette price increase.

The Board of Audit and Inspection (BAI) concluded Thursday that PMI Korea evaded 169.1 billion won in taxes and BAT Korea 39.2 billion won after illegally realizing undue “inventory profits.”

The BAI also found that the companies violated Korea’s law that governs hoarding, asking the Ministry of the Interior and the National Tax Service (NTS) to file a complaint with the prosecution against the two.

It said the firms shipped cigarettes out of plants and stored them in warehouses from September through December 2014, then sold them after the tax hike took effect on Jan. 1, 2015, realizing larger margins.

Given that taxes are imposed on cigarettes when they are moved out of manufacturing facilities, the companies shipped larger quantities out to pay lower taxes before 2014 ended. The products were then sold the following year at 4,500 won a pack, generating larger margins than if they had been sold in 2014.

The government levied 1,550 won in taxes on each pack of cigarettes until 2014 and then increased it to 3,318 won.

After the government announced the price hike in September 2014, PMI Korea and BAT Korea increased their inventories sharply in a bid to reap inventory profits, according to the BAI.

Through this scheme, the agency said PMI Korea evaded 169.1 billion won in taxes and BAT Korea evaded 39.2 billion won.

The two firms were also found to have broken the law that governs hoarding. In December 2013, PMI Korea’s inventory amounted to about 4.45 million packs of cigarettes, but it rose 24-fold to 106.23 million packs a year later. BAT Korea had no inventory in December 2013 but a year later had about 24.63 million packs.

The BAI asked the NTS and the interior ministry to impose a 237.1 billion won fine, including back taxes, on PMI Korea and a 55 billion won fine on BAT Korea, and refer the two to the prosecution for breaking the anti-hoarding law.