Korean e-cigarette companies found to be evading taxes via falsified reports

E-cigarette liquid. [Photo by Kim Ho-young]

South Korean electronic-cigarette (e-cigarette) companies have been declaring false nicotine content when importing liquid nicotine base and evading taxes on cigarettes, data showed Tuesday. The scale of the accumulated tax evasion is estimated to be several trillions of won, raising concerns about lax tax management.

According to documents obtained by Representative Lim Lee-ja of the ruling People Power Party from the Korea Electronic-Liquid Association, a total of 20,197 kilograms of liquid nicotine base was imported between January 2020 and July 2023. Around 3,300 bottles of e-cigarette liquid can be produced with 1 kilogram of liquid nicotine base and each bottle is levied 53,970 won ($40.6) in taxes.

But it is commonplace for e-cigarette companies to falsify their liquid nicotine base import declarations.

According to the association, many e-cigarette companies have been declaring tobacco leaf nicotine as tobacco stem and root nicotine since 2016 to evade taxes. Nicotine extracted from tobacco stems and roots is not classified as tobacco under tobacco laws.

E-cigarette companies were also found to have changed their declarations from tobacco leaf nicotine to synthetic nicotine when the country’s Individual Consumption Tax Act was amended in January 2021 to impose taxes on all nicotine derived from tobacco. Synthetic nicotine, which is manufactured as a chemical substance, is classified as a simple commodity and is not subject to taxes.

The annual distribution volume of Korean e-cigarette liquid is about 30 million 30-milliliter bottles and the estimated annual tax evasion amount is about 1.6 trillion won, according to the association.

The amount accrued since 2016 is therefore expected to be trillions of won.

The Board of Audit and Inspection audited the Korea Customs Service, the Ministry of Environment, and the Ministry of Health and Welfare in 2019, which revealed that all the imported nicotine that was inspected was tobacco leaf nicotine.

But the association claims that the practice of falsified declarations by e-cigarette companies has continued since then.

An analysis by the Ministry of Food and Drug Safety showed that a significant portion of e-cigarette liquids currently in circulation and declared as synthetic nicotine in Korea contains tobacco leaf nicotine.

Lim of the People Power Party called for the government to actively crack down on false declaration companies. Liquid nicotine base is classified as a hazardous substance under the Chemical Substance Control Act and is subject to regulation by the Ministry of Environment.

Companies must also report imports to the Minister of Environment and obtain an import declaration certificate for hazardous substances.

Under the Chemical Substance Control Act, those who fail to report or falsely report the import of hazardous substances are subject to up to one year imprisonment of up to 30 million won in fines. However, none of the companies that were revealed to have falsely declared nicotine content during past audits have been punished so far.