South Korea’s solid nicotine vapes have sparked controversy over tax evasion due to their low tax rate. However, industry insiders point out that this product has long been regulated under the Tobacco law and has a very small market share. The criticism is not substantive.
The industry generally believes that the real regulatory loophole lies in synthetic nicotine products. Currently, there is a lack of legal constraints and the legislative progress is slow.
Key points:
- The focus of tax system disputes has shifted to solid nicotine vapes: South Korea’s regulatory discussions on synthetic nicotine have sparked controversy over the tax system for “solid” nicotine vapes, with public opinion worrying that it might become a means to evade taxes.
- Industry refutes tax avoidance accusations: Industry insiders point out that such products have been included in the regulatory scope of the Tobacco Industry Law since 2017 and are not considered defective products. Currently, they are only sold in small quantities by small and medium-sized enterprises, and the tax issue is not a new phenomenon.
- Historical and international comparison reference: South Korea has adopted a tobacco tax system similar to Japan’s, where taxes are levied by weight. Japan has had a similar policy for 12 years without controversy. The industry questions why it is only regarded as a problem at this stage.
- The regulatory gap of synthetic nicotine has drawn more attention: Compared with solid nicotine vapes, the industry believes that what needs more attention at present is the situation where synthetic nicotine is not subject to the Tobacco Business Act, is not taxed and is widely circulated.
- Policy delays lead to regulatory vacuum: Despite the legislative promotion plan, the relevant committee of the South Korean National Assembly failed to push the bill through in February 2024, thus the regulatory outlook for synthetic nicotine remains unclear.
- Solid nicotine vapes are accused of enjoying the “ultra-low tax rate” dividend due to their low tax burden: Currently, vape products in South Korea have significant differences in tax burden depending on their internal structure. Experts point out that this structural difference may undermine the credibility of the tax system and provide some enterprises with room for evasion
South Korea’s solid nicotine vape tax system stirs controversy
According to News1 on May 13th, recently, the regulatory controversy over synthetic nicotine products in South Korea has extended to the tax system design of solid nicotine vapes, triggering further discussions at the policy level regarding tax fairness and regulatory loopholes.
Industry insiders point out that the so-called “solid” nicotine vapes currently available in the market are classified as “tobacco solid vapes” under the Tobacco Business Law. Their structure is centered around a tobacco solid and generates vapor through electronic devices for users to inhale.
This type of product entered the market as early as 2017 by JTI Korea and in 2019 by BAT Rossmann. Although there were tax burden differences compared with similar heat-not-burn products at that time, it did not cause major disputes. With sluggish sales, mainstream tobacco enterprises have gradually withdrawn. Currently, the market is mainly maintained by small and medium-sized enterprises, whose current sales volume is even less than 10% of the sales volume when large enterprises first launched.
Tobacco industry points to synthetic nicotine regulation as top priority
Solid nicotine products are taxed by weight, referring to the relevant system design in Japan. Even in Japan, the tax burden of such products is about 70% lower than that of heated cigarettes. However, they have been on sale for 12 consecutive years and have never raised serious policy concerns about tax evasion. The South Korean industry has expressed doubts about the current phenomenon that “sales by small and medium-sized enterprises trigger tax system disputes”, believing that this is a manifestation of “double standards”.
Meanwhile, the industry generally believes that a more urgent problem than solid nicotine products lies in the regulatory gap for synthetic nicotine. Synthetic nicotine, as it is not directly derived from tobacco leaves, is currently not within the scope of the Tobacco Business Act. Therefore, it evades the burden of tobacco consumption tax and is not subject to regulations on online sales, self-service vending, and contact with teenagers.
Historical and international comparison reference
Although the Economic Group of the Congressional Committee on Business and Finance had once pushed for the review of a bill to include synthetic nicotine under regulation in February 2024, it ultimately failed to pass due to the need for further research. As the electoral political agenda progresses, it may be difficult for relevant legislation to make substantive progress in the short term.
Some insiders have pointed out that currently, small and medium-sized enterprises operating solid nicotine vapes legally are depicted as “new types of evasive products”, which is unfair to law-abiding entities. He further stated that if the authorities truly intend to guide the optimization of the industrial structure through tax policies, they should draw on the current weight-based tax model for solid tobacco and use it as a policy tool to regulate new tobacco products rather than as a problem focus to suppress.
Previously, the Center for Tobacco Regulation and Education of South Korea pointed out on May 13th that the solid nicotine vape products currently in circulation are in a blind spot of the tax system, and the current tax calculation method needs to be adjusted as soon as possible.
Policy delays lead to regulatory vacuum
At present, the vape products in the South Korean market are mainly divided into two categories: One is the liquid type products with nicotine e-liquid impregnated cotton cores; the other category is solid products that combine nicotine in solid form with non-nicotine liquids. This structural difference directly affects the tax measurement basis and the final tax burden.
Vapes containing liquid nicotine are subject to a tobacco consumption tax based on the volume of the nicotine liquid they contain, with a tax rate of 628 Korean won per milliliter. For comparison, a pack of traditional cigarettes is taxed at approximately 1,007 Korean won (0.7 US dollars), while heated non-combustible cartridges with the same nicotine content cost about 641 Korean won (0.5 US dollars). However, electronic cigarettes containing solid nicotine are taxed only based on the weight of the nicotine itself, and the liquid part used in combination with it is not included in the tax base.
Solid nicotine vapes are accused of enjoying the “ultra-low tax rate”
For example, for a product of 2 milliliters of liquid combined with 0.8 grams of solid nicotine, only about 70 Korean won (0.05 US dollars) needs to be paid. When 10 milliliters of liquid is combined with 2 grams of solid nicotine, the tax amount is approximately 176 Korean won (0.1 US dollars), which is significantly lower than that of other products with the same nicotine content.
This tax system arrangement leads to unequal tax treatment for different products in the market, creating a “structural tax burden loophole”. Some experts point out that this not only weakens the fairness of the tax system and policy consistency, but may also pose an impact on government tax revenue and provide some enterprises with space to avoid taxes through product design, thereby gaining an unfair advantage in market competition.
