[THE INVESTOR] The hotly debated hike plan for consumption taxes on heat-not-burn tobacco products is likely to be discussed in the finance committee of the National Assembly on Sept. 20, as industry watchers speculate on whether the bill will be able to pass within the month.

If the finance committee sends an amendment to the floor, it could be passed by the full legislature on Sept. 28.

 

IQOS from Philip Morris International. PMI.

“It has not been put on the official agenda yet, but people in the industry are saying it will come up in discussions because there is so much public interest surrounding the issue,” said an industry insider.

Similar discussions on an amendment to raise the consumption tax on these new types of cigarettes had taken place last month, but failed to reach the floor for a full vote due to disagreements about the size of the hike.

In the taxation subcommittee of the legislature‘s finance committee, lawmakers had reached an agreement to pursue an amendment that would raise consumption taxes on HNB products from 126 won ($0.11) per pack to 594 won per pack -- the amount levied on combustible cigarettes. The bill, however, faced a road block at the upper finance committee. 

On Sept. 19, the Ministry of Strategy and Finance submitted a compromise plan to the legislature proposing a tax hike to 461 won per pack for HNB tobacco, about 80 percent of the amount levied on combustible cigarettes. The plan also proposed to eventually raise the taxes to levels equal to combustible cigarettes in phases. 

The plan was based on the tax levels on Philip Morris International’s HNB HEETS sticks, where HNB products were launched in other countries ahead of the Korean market. Japan‘s tax system levies taxes based on the weight of the tobacco sticks, meaning that different products such as Neostiks produced by British American Tobacco pay a different tax rate.

In Korea, the taxes may be applied by pack rather than by weight of the sticks. 

When Philip Morris International launched IQOS in Korea in June, there was no legislation in place to deal specifically with these new types of tobacco products, which led the heated tobacco sticks to be subject to the same lower taxes as pipe tobacco.

British American Tobacco released its HNB system Glo in August under the same conditions.

The two tobacco companies maintain that taxes should be lower on HNB products than on traditional cigarettes because of their potentially reduced health risks. Although the exact health effects of HNB cigarettes have not been officially proven by any government authority, the two companies’ internal research indicates that heating rather than burning the tobacco sticks produces up to 90 percent less toxins.

The Health Ministry has stated that without definitive studies, HNB tobacco sticks should be subject to the same regulations as combustible cigarettes.

Consumers are concerned a tax hike may also mean rising prices on tobacco sticks. Officials from both PMI and BAT have stated that they will consider raising consumer prices from the current 4,300 won per pack should taxes rise.

However for the government, leaving the tax rates at their current levels can mean significantly less tax revenue. According to information released by PMI to its investors, IQOS made up about 5 percent of Seoul‘s tobacco market as of the end of August. 

The rising numbers of IQOS smokers seem to have contributed to a spike in imported cigarettes as well. According to numbers from the Korea Customs Service, imports of filter tip cigarettes reached $8.44 million in August, up from $1.59 million in August 2016. The amount of imported cigarettes spiked from 275.8 tons in June to 490.6 tons in July, once IQOS was released in Korea. PMI Korea imports all of its HEETS sticks from overseas.

Taxation is not the only issue for HNB makers. Tobacco sticks used in HNB systems are not subject to the same regulations as regular cigarettes because they have not yet been officially designated as products harmful to minors. The Ministry of Gender Equality and Family has announced that it will move to change this designation to put the same advertising and marketing restrictions on HNB products as on combustible cigarettes. 

By Won Ho-jung/The Korea Herald (hjwon@heraldcorp.com)