International Tax and Investment Center – A History of Tobacco Industry Facilitation

In addition to being funding by all of the leading transnational tobacco companies (TTCs), internal tobacco industry documents, now publicly released as a result of litigation, reveal that ITIC has a longstanding history of facilitating the tobacco industry’s access to government officials. The industry’s aim was, and still is, to influence tax and other regulatory policies that might threaten its business in markets where it operates or where it sought to penetrate- particularly throughout the former Soviet Union, but also in other countries.

• See International Tax and Investment Center for an overview of ITICs links to the tobacco industry as well as contemporary evidence of how ITIC has represented tobacco industry interests and lobbied governments on the industry’s behalf.

Significant Changes to Tax Code in Russia

In 1995, ITIC’s 1995 Annual report noted the following activities in Russia:

* Invited by the Russian Ministry of Finance to be the only private sector representative to the new Tax Code drafting team. ITIC’s comments, provided by company representatives, have resulted in significant changes being made in the draft Tax Code.

* At the request of the Russian Deputy Minister of Finance, formed a three-person team which assisted the Ministry in rewriting the draft Tax Code to conform with the Russian Civil Code.

* Along with other international advisors, successfully worked with the Ministry of Finance and State Tax Service to repeal the excess wage tax and reduce the VAT rate.¹

The Threat of Specific Excise has been “Diverted”

BAT’s monthly report for Russia for November 1996 noted:

“The threat of specific excise appears to have been diverted for the time being. ITIC and their sponsors (PMI, RJR, Rothmans), although foiled on this occasion, will not give up. We will not be sure of the minimum, however, until the Duma actually votes. We are developing our follow-up strategy with the Center”.

The document also stated:

“This month in official bodies, including the State Duma, BAT was lobbying jointly with Tabakprom on ad valorem excise system. The lobbying was against the specific excise system, proposed by Philip Morris and other international manufacturers and promoted through the International Tax and Investment Center (ITIC)”.²

A “Quiet Lobbying Opportunity” with ITIC

A 1996 RJ Reynolds (RJR) Monthly Report highlighted the role of ITIC regarding the progress on harmonisation of excise tax rates for tobacco products in Russia:

“The debate between specific excise versus ad valorem excise tax calculation has left parliamentary committee and will now be taken to the State Duma floor this week, as discussions over the 1997 budget continue. Since our last report, the Ministry of Finance has come around to the arguments in favour sic of a specific taxation system, a position defended by RJRI, PMI and Rothmans.”

“An influential Position Paper funded by Philip Morris and prepared by the Russian Scientific and Research Institute of Market Research (VNIKI by its Russian acronym) was submitted to the Taxation Committee of the Duma. According to PMI in Moscow, this document weighed heavily in favour of the specific taxation system, along with the International Tax and Investment Center’s (ITIC) earlier submissions.”

“A further quiet lobbying opportunity will be provided in late January 1997, when Duke University and ITIC host an RJRI-sponsored taxation conference on Russia, which will take place at Duke University in Durham (NC). Key Russian decision-makers in the legislative and executive branches, including Deputy Finance Minister Sergei Shatalov, are expected to take part. One day of the conference program will take place in Winston-Salem and will be devoted to excise taxation. We hope to include a tour of Tobaccoville and provide entertainment opportunities to Russian visitors.”³

Meeting “Under the Aegis of ITIC”

A 1997 RJR memo describes ITIC’s role in assisting RJR and PMI in favourable tax reform in Russia:

“The new Russian excise tax structure that came into effect this year differentiates between different types of tobacco products based on Russian State Standards (GOST) specifications. Anything that was not a traditionally-made Russian cigarette was taxed at a higher rate (including imports and American blend products made in Russia, like North Star and Peter 13`). Russia is now moving to fully reform the cigarette classification and standardization system, and thus get rid of the GOST cigarette class system.”

The memo continued:

“BAT has gone to the highest level at the Duma (the Speaker), a Communist, and has appealed to his nationalistic leanings to save the local industry from the foreign hordes. Under the aegis of the International Tax and Investment Center (ITIC) in Moscow, we are meeting with PMI this week to map out a response strategy, which may include a new campaign to protect the gains of the current system, while at the same time capitalizing on the opportunity of GOST reforms to further simplify the existing system.”⁴

An “Injustice” to Raise Cigarette Taxes

A 1997 RJR memo suggested that ITIC was used to promote the tobacco industry’s position that increases in tax result in increases in illicit trade:

ITIC along with the IMF were urged “to address the contraband problem – perhaps to form a study group, or ask for a report to be prepared for IMF consideration. Objective: the IMF is doing a grave injustice to emerging Democracies and third-world countries when it advises them to raise cigarette taxes — as this will only encourage organized criminal groups to get into trafficking contraband. These countries need to build a tax base — not encourage an underground economy.”⁵

Philip Morris and Argentina

In 1998, a Philip Morris document noted that PM hired ITIC to:

“conduct an economic impact study and to sponsor a project supporting the conversion from an ad valorem tax system to a specific tax system for cigarettes and other products. ITIC will use data from other countries to create a financial model for Argentina and will work to develop a proposal by mid-year in conjunction with the UK-based Oxford economic forecasting group and FIEL, an Argentine think-tank.”⁶

TobaccoTactics Resources

• Third Party Techniques
• Lobby Groups
• International Tax and Investment Center