Gyeonggi Province has secured 25.9 billion won in tax revenue after winning a lawsuit filed by Korea Philip Morris Ltd., a foreign tobacco company, seeking to cancel the imposition of tobacco consumption tax.
The provincial government considers this ruling a representative case in which local governments and the Korea Local Tax Institute achieved a final victory through legal cooperation.
Korea Philip Morris, a foreign tobacco company with manufacturing facilities in Yangsan, South Gyeongsang Province, produces and sells cigarettes. In January 2015, ahead of a tobacco consumption tax increase (from 641 won to 1,007 won per pack), the company moved approximately one million packs of cigarettes from its factory to an external temporary warehouse or processed them as shipped out only in the accounting system, and then paid taxes applying the pre-increase tax rate.
In 2016, the Board of Audit and Inspection detected the false reporting by Korea Philip Morris and notified relevant agencies, including the Ministry of the Interior and Safety. A joint task force was formed by 166 local governments nationwide to conduct a tax investigation. As a result, a total of 118.2 billion won in evaded taxes was collected, with the amount recovered from 31 cities and counties in Gyeonggi Province totaling 27.4 billion won (22.7 billion won in tobacco consumption tax and 4.7 billion won in local education tax).
Korea Philip Morris filed a lawsuit to recover the difference in tobacco consumption tax, arguing that the cigarettes had been shipped from the factory before the tax increase and that the pre-increase tax rate should therefore apply.
However, the Supreme Court ruled that "the tax obligation for cigarettes shipped without tax payment arises at the time they are transferred from the temporary warehouse to the logistics center," siding with the tax authorities.
An official from Gyeonggi Province stated, "This ruling is a representative legal achievement resulting from the cooperation between local governments and the Korea Local Tax Institute, and it serves as a meaningful precedent that clarifies the point at which the tobacco consumption tax obligation arises. We will continue to closely monitor unfair tax evasion and work with the Korea Local Tax Institute and local governments to protect local finances."
Meanwhile, since 2017, the Korea Local Tax Institute has been developing legal arguments for major local tax disputes, including high-value litigation cases, and providing opinions to local governments.
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