Philip Morris (PM) Discloses Formal Probe Related to PM Thailand in 10-Q Filing

October 25, 2016 6:38 AM EDT

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Philip Morris (NYSE: PM) disclosed the following in its 10-Q filing on Tuesday:

Governmental Investigations

From time to time, we are subject to governmental investigations on a range of matters.
The Department of Special Investigations (“DSI”) of the government of Thailand has been conducting an investigation into alleged underpayment by Philip Morris (Thailand) Limited (“PM Thailand”) of customs duties and excise taxes of approximately $1.8 billion, relating to imports from Indonesia covering the period 2000-2003. In September 2016, the DSI commenced formal investigations and alleged that PM Thailand, jointly with others, including Philip Morris International Inc., underpaid customs duties and excise taxes of approximately $250 million. PM Thailand disagrees with the DSI’s allegations and believes that its declared import prices are in compliance with the Customs Valuation Agreement of the WTO and Thai law. If at the end of its formal investigations, the DSI recommends prosecution, the DSI will refer the matter to the Public Prosecutor, who will decide whether to file formal charges against PM Thailand and/or the other alleged co-offenders.

Additionally, in November 2010, a WTO panel issued its decision in a dispute relating to facts that arose from August 2006 between the Philippines and Thailand concerning a series of Thai customs and tax measures affecting cigarettes imported by PM Thailand into Thailand from the Philippines (see Note 9. Contingencies for additional information). The WTO panel decision, which was upheld by the WTO Appellate Body, concluded that Thailand had no basis to find that PM Thailand's declared customs values and taxes paid were too low, as alleged by the DSI in 2009. The decision also created obligations for Thailand to revise its laws, regulations, or practices affecting the customs valuation and tax treatment of future cigarette imports. Thailand agreed in September 2011 to fully comply with the decision by October 2012. The Philippines contends that to date Thailand has not fully complied and commenced formal proceedings at the WTO to address the outstanding issues. The Philippines has repeatedly expressed concerns with ongoing investigations by Thailand of PM Thailand, including those that led to the criminal charges described in Note 9. Contingencies, noting that these investigations appear to be based on grounds not supported by WTO customs valuation rules and inconsistent with several decisions already taken by Thai Customs and other Thai governmental agencies.

The South Korean Board of Audit and Inspection (“BAI”) has been conducting an audit of certain Korean government agencies and the tobacco industry into whether inventory movements ahead of the January 1, 2015 increase of cigarette-related taxes by tobacco companies, including Philip Morris Korea Inc. ("PM Korea"), our South Korean affiliate, were in compliance with South Korean tax laws. In September 2016, the BAI alleged that PM Korea underpaid approximately $152 million in taxes in connection with its inventory movements. The BAI recommended the tax authorities to collect the alleged underpaid taxes together with a penalty of approximately $61 million. The tax authorities are currently considering this recommendation. If, in addition to the assessment of the foregoing amounts, at the end of the tax audit, the tax authorities recommend prosecution, they will refer the matter to the Public Prosecutor, who will further investigate and decide whether or not to file criminal charges against PM Korea and/or other alleged co-offenders. If the Public Prosecutor decides to prosecute, it may seek up to three times the underpaid tax for company criminal penalties and up to five times the underpaid tax for individual criminal penalties. PM Korea believes that it has paid cigarette-related taxes in compliance with the South Korean tax laws.

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