Tax Evasion Probe Uncovers Billions in Dodged Taxes by Food Giants and Funeral Homes
A sweeping tax investigation by South Korea’s National Tax Service (NTS) has exposed a disturbing pattern of tax evasion and profiteering among major companies, particularly within the processed food sector. The NTS audit, targeting businesses accused of manipulating prices and creating market instability, has unearthed approximately 3.898 trillion Korean won (roughly $2.9 billion USD) in evaded taxes from 53 companies. Of this amount, 1.785 trillion Korean won has already been collected.
The investigation, which commenced in September of last year, is a multi-phased operation aimed at identifying and penalizing companies that have abused their market positions to inflate prices and boost profits without fulfilling their tax obligations. The NTS is currently examining an additional 50 companies and has plans to audit 14 more, signaling a sustained effort to curb illicit financial practices.
Processed Food Manufacturers Under Fire for Excessive Profits
A significant portion of the uncovered tax evasion stems from three major processed food manufacturers. These companies, by leveraging their dominant market share, have been able to dictate prices, leading to substantial financial gains at the expense of consumers and the national treasury.
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Oriental Brewery (OB): A Case of Inflated Expenses
The most substantial evasion was discovered at Oriental Brewery. The company allegedly concealed rebates worth over 110 billion Korean won (approximately $85 million USD) by falsely classifying them as advertising expenses. These rebates were reportedly used to incentivize sales outlets, thereby boosting OB’s market share and overall sales.Furthermore, OB is accused of inflating procurement fees by approximately 45 billion Korean won (around $35 million USD) paid to a related entity involved in raw material sourcing. This practice served as a mechanism for profit splitting. The NTS analysis indicates that the combination of inflated rebates and procurement fees contributed to a staggering 22.7 percentage point increase in product prices. The tax collected from OB in this instance alone amounts to roughly 100 billion Korean won (approximately $77 million USD).
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Company B: Logistics Costs Masking Profit Funneling
Another processed food manufacturer, identified as Company B and known for its ice cream production, inflated its logistics costs by 25 billion Korean won (about $19 million USD). This was reportedly done to funnel profits to a related entity. The NTS determined that these artificially inflated logistics costs were a direct cause of a 25 percentage point price increase for snacks, placing a heavier financial burden on households. Over 20 billion Korean won (around $15 million USD) in taxes were recovered from Company B. -
Ramen Manufacturer: Substantial Tax Bill
A ramen manufacturer was also implicated, facing a demand for 30 billion Korean won (approximately $23 million USD) in back taxes.
Beyond Food: Funeral Services and Other Sectors Targeted
The NTS’s scrutiny extends beyond the food industry. A funeral services provider, designated as Company C, has come under intense investigation for siphoning off approximately 97% of its annual sales over a five-year period. This was allegedly achieved through the fraudulent reporting of labor costs and commissions.
Upcoming Audits: Targeting Price Collusion and Agricultural Giants
As the NTS progresses through its audit phases, a fourth phase is being prepared, specifically targeting tax evaders linked to price instability ahead of the upcoming Lunar New Year holiday. This phase will encompass 14 companies, including:
- Six monopolistic processed food manufacturers suspected of engaging in price collusion.
- Five distributors of agricultural and livestock products, alongside manufacturers of daily necessities.
- Three franchise headquarters.
The total suspected tax evasion in this upcoming phase is estimated to reach 5 trillion Korean won (approximately $3.8 billion USD).
Daehan Flour Mills: Price Fixing and Tax Evasion Allegations
Among the companies facing scrutiny in the fourth phase is Daehan Flour Mills. This company is already facing prosecution for an alleged 6 trillion Korean won (around $4.6 billion USD) price-fixing scheme. The NTS has levied 120 billion Korean won (approximately $92 million USD) in tax evasion charges against Daehan Flour Mills.
The company is accused of implementing product price hikes totaling 44.5 percentage points through various manipulative tactics, including a “ladder system” designed to coordinate price increases among industry players. Furthermore, Daehan Flour Mills is alleged to have manipulated raw material costs by exchanging fabricated invoices with colluding companies. The NTS also uncovered evidence of corporate funds being used to cover the funeral expenses of the honorary chairman and the repair and maintenance costs of luxury sports cars owned by company executives.
- Company D: Soy Sauce Producer Accused of Profit Hiding
Company D, a manufacturer of soy sauce, chili paste, and fermented seasonings, is another entity under the NTS’s microscope. Despite a decrease in production costs, the company raised product prices by 10.8 percentage points, leading to a threefold increase in its operating profit, reaching hundreds of billions of Korean won. However, reported profits were significantly reduced through the overpayment for packaging materials and the payment of high rental fees to entities owned by the owner’s children.
Agricultural Distributors and Daily Necessities Manufacturers Under Scrutiny
The fourth phase of audits will also focus on agricultural and livestock distributors and manufacturers of daily necessities.
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Company E: Fruit and Vegetable Distributor Exploiting Tariff Benefits
Company E, a fruit and vegetable distributor, is accused of exploiting tariff benefits. Despite purchasing goods at rates 8% lower due to reduced tariffs, the company increased its selling prices by 4.6 percentage points. The NTS revealed that Company E inflated distribution costs paid to related entities to evade taxes, using rising distribution costs as a justification for price hikes. This practice effectively allowed the company to pocket the tariff savings instead of passing them on to consumers. -
Company F: Wet Tissue Manufacturer and Trademark Diversion
Company F, a wet tissue manufacturer, inflated its distribution costs by channeling products through shell companies owned by related entities. Additionally, the company is alleged to have diverted corporate funds by registering trademarks under the owner’s name. -
Company G: Restaurant Franchise with Omitted Royalties
Company G, a restaurant franchise operating over 1,000 branches nationwide, is accused of reducing its reported profits by omitting royalties and advertising fees collected from its regional branches. The NTS found that the company siphoned off profits by paying salaries, amounting to tens of billions of Korean won, to non-working family members of the owner. -
Company H: Fried Chicken Franchise and “Shrinkflation”
Company H, a fried chicken franchise, raised prices by 11 percentage points, citing increased raw material costs. Concurrently, the company reduced product sizes, a practice commonly known as “shrinkflation.” This franchise is also under investigation for allegedly concealing new franchise fees.
Ahn Deok-su, Director of the NTS Investigation Bureau, emphasized the NTS’s commitment to swift action. “For companies confirmed to have engaged in collusion through investigations by the Korea Fair Trade Commission, prosecutors, or police, we will immediately analyze potential tax evasion and swiftly initiate audits,” he stated. This proactive approach underscores the NTS’s determination to ensure fair market practices and robust tax compliance.
