Chanel, Louis Vuitton 'can face tax probe'

People queue in front of the Louis Vuitton store at Lotte Department Store in Myeong-dong, Seoul, on May 13. / Korea Times photo by Lee Han-ho

By Kim Jae-heun

The National Tax Service's (NTS) special audit of Starbucks Korea could be a warning sign for other multinational corporations here suspected of tax evasion.

The tax probe of the U.S. multinational coffeehouse brand seemed to be an irregular one that the tax agency could have launched against any firm operating in the country suspected of evading tax.

The NTS has been probing offshore tax evasion since the beginning of this year, mainly targeting multinational tech companies and imposing 1.33 trillion won in penalties for tax evasion. Companies generating over 150 billion won in sales are subject to a special audit.

In this case, luxury brands like Chanel and Louis Vuitton could also be targets.

As “limited companies,” they are not obliged to open their account books to the public, so their recent annual sales are unknown. However, considering that Louis Vuitton Korea recorded 497.4 billion won in revenue when it last revealed its management information in 2011, and that sales have been growing since, the French luxury brand can be subject to an irregular NTS probe at any time. This is the same for Chanel which posts the second-highest sales among luxury brands here after Louis Vuitton.

One source for their possible tax evasion here is that they barely pay anything to open a boutique in department stores, but they can enter it as a cost in their books.

This is the case with Starbucks Korea, which reported false numbers for the expenses it paid importing coffee beans from the United States and for store interior decoration here.

The NTS said the two luxury brands could be subject to the special investigation, but a clear evidence is needed.

“As long as a company is operating a business in the country and we have evidence of their suspected tax evasion, we can launch an investigation,” an NTS official said.

This is because the tax agency cannot reinvestigate the same case once it fails to prove a company's tax evasion.

“Most often, global companies like Chanel and Louis Vuitton make no mistake in perfecting their accounts so they can defend themselves well when the NTS investigates,” said a source well aware of the local luxury industry.

Chanel and Louis Vuitton's recent markups could also be subject to tax investigation. By law, the luxury firms' account books have to show the exact amount they spent on materials to produce the items. However, the numbers have been fixed by the brands' headquarters overseas and the NTS lacks the reach to investigate this.

“Local department stores will not reveal what they have paid for interior decorations of luxury brands boutiques because this can disadvantage retailers,” the source said.

“A tangible document is needed for the tax agency to launch a special investigation into the accounts of Chanel and Louis Vuitton here.”