Korea - South: Tax-exempt Tobaccos Find Its Way Back in Local Market

Source from:  Korea Times (kr)  07/29/2014

A large amount of Korean cigarettes exempted from taxes for exports are being diverted into the domestic market, according to the Korea Customs Service (KCS) Monday.

The KCS said the value of the duty-free cigarettes has reached some 100 billion won ($97.5 million) this year.

This means the value of untaxed Korean cigarettes is more than those smuggled into the country from China, Japan, Thailand, the Philippines, the United States and Indonesia.

The diversion occurs when an exporter doesn't load all declared cigarettes onto a cargo ship. A KCS official who disclosed his last name, Cho, for this article, said there aren't enough people to inspect every single cargo ship after an initial inspection.

These cigarettes are believed to be sold to bars and karaoke rooms.

The KCS has asked the prosecution to investigate two big dealers. Prosecutors in Incheon are currently conducting an investigation into how these cigarettes are distributed. They were not available for comment for this article.

The value of such cigarettes was 3.1 billion won in 2012 but jumped to 40 billion won in 2013.

"I call for tougher inspection on duty-free cigarettes from when they are stocked in storage until they are loaded onto a cargo ship," said Rep. Jasmine Lee of the ruling Saenuri Party in a statement.

"Cigarettes are tax-heavy commodities. We were aware of possible loopholes which people could take advantage of." said Cho, adding the KCS, the Ministry of Strategy and Finance and the Ministry of Security and Public Administration have launched a new inspection system to detect both diversions and smuggling.

Cigarettes are a lucrative business for the government, which is suffering a chronic fiscal deficit. It is contemplating a price increase to help minimize the deficit.

Cigarette manufacturing in Korea is divided into two categories according to where they are consumed.

Packs of 20 made for export are 1,564 won cheaper than those sold domestically. That difference is comprised of seven different taxes; and each pack is labeled duty-free. They are not sold at retail outlets and are only available at duty-free shops.

Cigarettes made for domestic consumption are sold directly to approximately 40,000 individual shops with licenses, which owners must obtain through county or district offices.

According to investigators, cigarettes smuggled from Indonesia and the Philippines are often sold in Ansan where there is a concentration of foreign workers. Enditem