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August 17th, 2015:

Nothing dubious in Big Tobacco’s tax records

Michael West

It is the irony of ironies. Dollar for dollar, the tobacco companies appear to do more for Australian hospitals, roads and schools than any other group of foreign-controlled multinationals who operate in this country.

An analysis of the financial statements of the three major tobacco companies here, Philip Morris (Australia) Ltd, British American Tobacco (Australasia Holdings) Ltd and Imperial Tobacco Australia Ltd shows the despised cigarette manufacturers abide by the accounting standards and pay their fair share of tax – on top of the billions in excise they pay every year to state and federal governments.

Over four years, Fairfax Media has investigated the accounts of multinationals operating here: the new breed of global digital companies such as Google, Apple, Facebook, eBay and PayPal, resources giants such as Glencore, Rupert Murdoch’s media empire News Ltd, betting behemoth William Hill, services juggernauts Serco and G4S, oil giants Chevron and Shell, and major drug companies, including Pfizer.

They show an alarming failure to comply with accounting standards (and therefore the Corporations Act), and a failure to deliver financial accounts devoid of dubious tax schemes such as large and uncommercial payments to related companies overseas.

In contrast, the cigarette manufacturers are pulling their weight. The most often reviled of these is Philip Morris, which is suing Australia in a Hong Kong court over its successful plain packaging laws, at a legal cost to taxpayers here estimated at $50 million.

Profits revealed

Philip Morris’ accounts filed with the corporate regulator show the company made $3 billion in revenue last year and paid $2.1 billion in government levies. After its other costs of operating the business, it recorded a profit of $502 million and a tax expense of $152 million.

Actual tax paid was $247 million (on top of the $2.1 billion in duties – and on top of the $200 million and $2.1 billion in income tax and duties in the previous year).

The biggest cigarette manufacturer is British American Tobacco, which notched up $6 billion in sales last year. Of that, almost $4 billion went in government levies even before the company made a profit of $1.2 billion and recorded $455 million in income tax paid.

That’s an eye-watering $4.4 billion in tax and duties to governments on sales of $6 billion.

The smallest player in the sector, Imperial Tobacco, recorded sales of $656 million a profit of $31 million and tax paid of $11 million, although its accounts were not as clear and featured related party transactions, proportionately, at a much higher level than its peers.

Of note were “fees received for brand promotions” at $70 million (paid to its parent overseas). Because promoting cigarettes is prohibited in Australia, this may relate to other countries in the region.

Danger pay?

Another interesting facet of the financial accounts of Big Tobacco is the remuneration. British American Tobacco directors were paid $9.3 million last year and key executives $5 million, indicating the “danger money” – the prospect of litigation – in being a director with Big Tobacco.

It should also be said that, collectively, these appear to be the simplest and cleanest sets of financial statements by any group of multinationals operating in Australia.

They have provided “general purpose” accounts too, audited by PwC, rather than the “special purpose” accounts furtively favoured by most multinationals.

The distinction is important. The latter require a much lower standard of disclosure. It is hard to tax things that are hidden.

University of NSW accounting academic Jeff Knapp told Fairfax Media; “These companies, and the auditor PwC, seem to be taking their accounting and accountability seriously.

“If Philip Morris can put together general purpose financial statements, why can’t other multinationals? If they can pay the effective corporate tax rate of 30 per cent, why can’t the others?”

Whistle blown

The Seven Network’s Sunday Night program this weekend featured an interview with Antoine Deltour​, who walked out of his job with PwC in Luxembourg in 2010 and released 28,000 documents, which led to the LuxLeaks scandal, embroiling multinationals around the world for tax avoidance.

“Things … are not legitimate because everybody should pay their fair share of tax. It’s a matter of tax justice. I mean, we need schools, we need hospitals, we need roads, and I pay for that in my revenues and I don’t understand why internationals wouldn’t contribute to the common good,” he said.

Most people in the world will be barracking for the 29-year-old Frenchman as his trial looms in Luxembourg and he faces the spectre of hefty fines and a five-year jail sentence for his mighty act of public interest.

Cigarette plain packaging war heating up as new Australian study due for release

by Edith Hancock

The tobacco industry has hit back at the government’s plan to enforce plain packaging for cigarettes, warning that the ruling will cause a rise in counterfeits being smuggled into the UK.

As legal battles rage between the UK government and British American Tobacco, this latest challenge comes after it was revealed yesterday that an official Australian study, to be published next month, will be used by the UK government as ammunition in its battle to remove tobacco branding.

The report by Australia’s department for health will show that smoking rates have reduced since the introduction of plain packaging. Some opponents argue that a combination of factors have led to a decline in smoking rates over many years.

The UK government ruled in favour of removing branding from cigarette packets last March.

Tobacco industry sources have warned of a rise in the UK’s counterfeit trade and questioned the validity of the study in the UK.

Industry sources said that removing branding will put the accessibility of “non-shop” and illegal tobacco in the spotlight.

“The UK now has the most expensive tobacco in Europe, but the number of quitters has flatlined.

“People are not stopping smoking, they are using increasingly illicit means.”

The UK department for health could not be reached for comment.

Delay irks anti-tobacco advocates

Enhanced pictorial warning on cigarette packet

Shahid Rao

islamabad – The health ministry is facing a court challenge over its failure to increase the size of graphic warnings on cigarette packets.

Health Minister Saira Afzal Tarar announced the increase in February this year to raise awareness of cancers and other serious illnesses related to cigarette smoking.

Campaigners are alarmed almost six months later the government has failed to act and the deadline for introducing the new warning expired more than two weeks ago.

Two campaign groups, the Society for Alternative Media & Research (SAMAR) and The Network for Consumer Protection, have now moved the Islamabad High Court (IHC) over the delay and the case will be heard this week.

Philip Morris: Impact Of A Sudden Excise Hike In Asia


Philip Morris International (NYSE:PM) is a global tobacco manufacturer, selling in over 200 countries. Since 2009, the maker of Marlboro has managed to deliver modest increases in revenues in spite of difficult economic situations in some markets, increasing regulatory control over the sale of tobacco products, and currency headwinds. Of its operational regions, Asia happens to be among the most important division for Philip Morris, accounting for close to 35% of our valuation for the stock. Part of this is because Asia is the only region that has actually been seeing increasing market size, which has grown by almost 30% in value between 2009 and 2014. Given this, the region could go on to become a real winner for Philip Morris and go on to bring in almost 37% of the revenues for the company. However, with growing awareness regarding the ill effects of smoking, many Asian countries are resorting to various anti-tobacco measures, mostly in the form of higher excise taxes on cigarettes. Given this, we look at what these changes in tax regimes could mean for future prospects in Philip Morris’ biggest market.

Let’s start by looking at recent changes in tax regimes in key Asian markets such as Indonesia, Japan, Korea, and the Philippines, which collectively account for more than 78% of shipment volume of Philip Morris’ cigarettes.((PMI Fourth Quarter Earnings Results)) The start of 2015 has seen a number of developments on the tax front. For one, Indonesia recently saw a 9% increase in excise on tobacco products, in response to which, Philip Morris hiked cigarette prices by 10%. Korea is expected to see a whopping 120% increase in tobacco excise, in response to which, Philip Morris plans to increase the retail price of key brands, Marlboro and Parliament, by approximately 67%.((PMI Fourth Quarter Earnings Results)) The Philippines has witnessed differential hikes on low and high priced cigarettes, with the former undergoing a 24% increase and the latter a 4% increase. While this is bound to exert a negative impact on market size, by competing in the high price category, Phillip Morris may just enjoy higher market share since the 24% increase on low prices cigarettes might lead to consumers trading up to a high price alternative.((Excise Taxes To Raise Prices Of Cigarettes And Liquor)) Finally, while Japan has resisted tax hikes on cigarettes since 2012, they have been facing continued pressure by the World Health Organization (WHO) to hike excise taxes by close to 50%. In this case, it may only be a matter of time until hikes are put in place even in this market.((Japan Considers Tobacco Tax Increase))

Presently, our forecast for Asia assumes modest increases in excise taxes, which as a percentage of revenues, is expected to increase from about 55% presently to 59% by the end of the forecast period. Given this, revenues in the region are expected to increase at a rate of about 2.5-3.5% going forward. Now, suppose implementation of higher taxes simultaneously in different Asian countries results in a 40% increase, so that excise taxes increase from about $10 billion presently to $14 billion.

Now, what impact could such tax hikes have for Philip Morris’ business?

In the face of increasing taxes, tobacco manufacturers are bound to increase prices in order to maintain revenues and profits. Suppose Philip Morris institutes a one time increase of 20% in response to the higher taxes, and progressively builds on it going forward such that the price per cigarette reaches 10 cents by the end of the forecast period, which is an approximate 50% increase from its current levels. On the demand side of things, higher prices could all together dissuade or reduce usage among existing consumers, and prevent former consumers from using again. Some may choose to trade down to cheaper alternatives, such as brands in the low price segment, or even roll-your-own or make-your-own cigarette offerings, which could adversely impact profitability. Furthermore, consumers may also look at acquiring products through illicit means, which could potentially reduce both, the market size and market share for Philip Morris. Higher taxes could also dissuade consumption among new users, especially in the “adult smokers under 30 (ASU30),” who in general are more vulnerable to pricing.

According to a report by the World Health Organization, the price elasticity of cigarette demand stands at -0.4 for high income countries and between -0.2 and -0.8 for low income countries. Furthermore, this estimate is almost two to three times higher among the youth, in comparison to adults. We assume a -0.6 price elasticity for Asia, i.e. a 10% increase in cigarette prices should result in a 6% fall in demand. Hence, a 50% increase in price should result in an approximate 30% fall in demand, pulling down the cigarette market volume in the region to about 800 billion, from over a trillion presently. While price hikes may be one way of offsetting losses from a declining market, Philip Morris may be constrained beyond a point, since further increases in prices could lead to lower market shares and exacerbate the falling market size. Given this, in the long run the increase in excise taxes, along with falling volumes, may outweigh revenue gains from higher prices, to result in an 11% downside to our current price estimate.

See our complete analysis for Philip Morris in the scenario of the impact of excise hikes in Asia.

Tobacco farmers are a pawn in the TPP game

By Arendtm

But tobacco farmers are not part of the game

Mitch McConnell and other pro-tobacco politicians have become very vocal over the past two weeks in their opposition to a potential partial tobacco exemption in the Trans-Pacific Partnership (TPP) Agreement. And just as in so many other political debates, they are citing the plight of the farmer and rural America. In truth, tobacco leaf has been explicitly left out of any discussion on treating tobacco products uniquely in the TPP; Senator McConnell and his allies are using tobacco farmers as a distraction for their efforts to support the multinational tobacco industry.

The negotiating text of the TPP is secret, but through leaks and anonymous sources, we know of three proposals that would deal with tobacco in the Agreement:

1.) A full carve-out, or exemption, for tobacco measures, proposed by Malaysia in 2013. This would mean that nothing in the free trade agreement would apply to tobacco.

2.) A notation that tobacco measures fall under the general health exception, proposed by the United States in 2013. This pays only lip service to protecting governments’ sovereign right to regulate tobacco.

3.) A carve-out for tobacco measures in the Investor-State Dispute Settlement (ISDS) mechanism, which would prevent the tobacco industry from being able to directly sue governments. This has not been formally proposed, but is apparently supported by a number of countries. This is also the target of the ire of pro-tobacco Members of Congress.

These three proposals have one thing in common: they all refer to “manufactured tobacco products,” a term explicitly meant not to apply to tobacco leaf. Under any of the above measures, tobacco leaf would enjoy the same trade privileges as any other product, including zero tariffs. Regulations to reduce consumption of cigarettes and other tobacco products are at the core of the debate in the TPP.

So why is Senator McConnell using farmers as a shield for the tobacco industry?

As is too often the case in American politics, we need only follow the money.

Mitch McConnell was the second biggest recipient of tobacco industry campaign contributions in the last election cycle, to the tune of $120,475. Two of his most vocal colleagues, Thom Tillis and George Holding, were the 4th and 14th biggest recipients, respectively.

After more than half a century of battling tobacco consumption, and burying 100 million victims in the 20th century alone, it is staggering that there are still powerful people willing to use their clout to protect the tobacco industry.

Senator McConnell, I put it to you: what will your grandchildren think?

Retailer: Tobacco sales shrink 70 per cent following triple tax

Kam Leong

Last month, the Legislative Assembly passed a bill tripling tobacco tax in the city in an urgent procedure. The tax was officially increased on July 14. One month after, a tobacco retailer says the industry’s overall sales have slumped by as much as 70 per cent

Following the government tripling the tax on tobacco products last month, one of the city’s tobacco retailers – Hing Cheong Hong Tobacco Company Ltd. – has told Business Daily that sales of the local tobacco retail industry have dropped from 60 to 70 per cent.

Last month, the government increased the tax on each cigarette to MOP1.5 (19 US cents) whilst that for cigars or cigarillos per kilogram was raised to MOP4,236, meaning a pack of 20 cigarettes is around MOP20 more expensive compared to the original tax of MOP0.5 per cigarette.

“Our sales have plunged 60 per cent to 70 per cent following the implementation of the new tax… Other industry retailers, as I know, have also experienced such drops in their sales,” the general manager of Hing Cheong Hong, Sunny Iao, told us in a phone interview yesterday.

Regional competition

According to Mr. Iao, the increase in local tobacco tax has driven more residents to buy cigarettes in Zhuhai.

“Many prefer buying cigarettes in Zhuhai now. Before the rise, the price gap between the two cities was only some few dollars so people didn’t care. But now, [for those] in Macau it’s like a few tens more expensive. Even though people don’t go to Zhuhai only for the cigarettes, they will buy when they pass by those duty-free shops when they cross the border,” he said. “In addition, we have many Chinese workers crossing the border every day. It’s easy for them to buy for their colleagues in Macau”.

On the other hand, many local shops as well as individual smokers bought more cigarettes than usual when the government announced its proposed tax increase, according to Mr. Iao, indicating that this is another reason sales are down.

“Upon knowing the government’s intention of increasing tobacco tax many shops ordered a lot more cigarettes than usual. Individual smokers also tried to buy more cigarettes. Hence, they may still be consuming the cigarettes that they bought before the new tax,” the general manager said.

Nearly 100,000 duty-not-paid cigarettes seized

In addition to the tax hike, the city’s new tobacco law also reduces the duty-free allowance for travellers entering Macau to 19 cigarettes from the original 100.

According to local Chinese-language newspaper Macao Daily, the Macau Customs have confiscated some 97,530 duty-not-paid cigarettes, or some 3,200 cigarettes per day, since the implementation of the new law on July 14 as at August 13, involving 293 cases.

Some 56 per cent of total violations were caught at the Border Gate, with more than 40,000 cigarettes seized. The city’s Customs also confiscated some 21,500 and 15,600 duty-not-paid cigarettes at the Outer Harbour Ferry Terminal and Pac On Ferry Terminal, respectively.

Some 65 per cent of travellers carrying duty-not-paid cigarettes were from Mainland China, followed by local residents and people from Hong Kong.

Two-thirds of street tobacco vendors to close

The newspaper also quoted the Macau’s Trade Chamber of Tobacco Companies’ Andrew Chan Hou Lam as predicting that two-thirds of the city’s street vendors selling cigarettes may face closure if the downturn in tobacco sales continues.

The association vice head said street vendors were the group most affected by the new tax as their income is lower and they cannot rely on selling snacks or beverages like convenient stores.

Mr. Chan also perceives that the drop in the city’s tobacco sales is due to many residents, especially long-term smokers and those on a lower salary, starting to buy cigarettes in Zhuhai.

For the sales to rebound, Mr. Iao reckons that it will depend upon the enforcement of the Customs in catching violators bringing duty-not-paid cigarettes into the city.

“If the Customs strengthens its enforcement, for sure the local consumption in cigarettes will be boosted and sales will improve. But if the enforcement is rather loose the impact will continue to be big for local retailers. Frankly speaking, it’s hard for the Customs to catch everyone that brings in duty-not-paid cigarettes,” the Hing Cheong Hong general manager said.