Philip Morris Wins Tax Lawsuit… Court Rules "Raw Material Royalty Tariff Illegal"

[Asia Economy Reporter Seongpil Cho] Korean Philip Morris, a foreign tobacco company, won a lawsuit challenging the customs office's decision to impose taxes by adding trademark royalty fees to the import price of tobacco raw materials.

According to the legal community on the 1st, the Seoul Administrative Court Administrative Division 5 (Chief Judge Yangjun Park) ruled in favor of Korean Philip Morris in the lawsuit filed against the Seoul Customs Office head to cancel the imposition of customs duties and other taxes. The court stated, "The imposition of customs duties, value-added tax, and additional tax totaling about 9.8 billion KRW imposed by Seoul Customs on Korean Philip Morris is all canceled."

Previously, Korean Philip Morris had established a tobacco manufacturing process since 2012, importing various tobacco raw materials from its headquarters and producing cigarettes domestically. Seoul Customs conducted a corporate audit for about two years starting in 2015 and, in March 2017, imposed customs duties of about 3.4 billion KRW, value-added tax of about 3.7 billion KRW, and additional tax of about 2.6 billion KRW on Korean Philip Morris.

The tax authorities viewed that Korean Philip Morris had underpaid customs duties by excluding royalties paid to overseas corporations for tobacco leaves from the import price. They considered the royalties paid by Korean Philip Morris to its headquarters as compensation for using trade secrets. The Customs Act stipulates that if an importer pays money as compensation for using trade secrets, customs duties must be imposed. Korean Philip Morris filed this lawsuit in objection to this decision.

Korean Philip Morris argued in court that "the royalties are only compensation for the use of trademarks and intellectual property rights of finished tobacco products and are unrelated to tobacco leaves or raw materials attached to the products." They also contended that "the raw materials themselves do not contain trade secrets warranting royalty payments."

The court judged, "It is reasonable to see that the royalties were provided as compensation not only for trade secrets including tobacco leaves but also for rights related to trademarks attached to finished tobacco products." Furthermore, the court stated, "Only a portion of the royalties can be evaluated as compensation for the use of trade secrets, and it was wrong for the authorities to tax the entire amount." It ruled, "The royalties related to trademark rights should be excluded, and the remaining portion related to rights for tobacco leaves and others should be separated to calculate the tax."