DRAFT
CENTRAL GROUP RESEARCH EXPENSES
In 1976, at Hot Springs, the companies present
agreed that their
contributions to central. group research expenses
would be an the basis of a
percentage of net turnover. This percentage would
ensure, as near as
possible. full allocation of relevant expenses
when applied world wide.
For 1977/78, the percentage calculated was 0.15%,
equating to a 99%
allocation of the relevant expenses. For 1978/79,
it was apparent that
expenses had risen faster than net turnover and to
achieve a comparable
percentage recovery the rate would have to be
0.20%. In an attempt to avoid
a!inual revisions a three year projection was made
which indicated that if
0.21% were used in 1978/79 it could be maintained
until 1980/8t.
The expectation at the time of the projection was
that inflation would be no
higher than 15% p.a. and that the exchange rate
would remain at about El
U.S.$ 1.977. The alternative was that if inflation
reached as high as 20Z
the exchange rate would fall to 11 - U.S.$ 1.800,
the basic assumption being
that sterling would depreciate as inflation
increased. In either situation
it appeared that 0.21% was a valid rate of
contribution.
In the event, the position in 1978/79 was that a
projected over recoverl of
sone Z165,000 finally became-an under recovery of
Z81,000. The turn round in
this instance was due to the unexpected
strengthening of sterling tc El
%-0
U.S.$ 2.25. c0
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BATCo document for Province of BritiSh Columbia 10
November 1999


The position in 1986 shows a marked difference
from the 1978 projection.
Recoverable research expenses have Increased 22Z
(against a U.K. Inflation
rate of 20Z) In- comparison with 1979 while a
higher exchange rate reduces
the sterling equivalent of group net turnover.
A39uming an exchange rate of
Z1 = U.S.$ 2.25, the result would be an under
recovery of 9943,000 against
the E30,000 projected.
If recoverable research expenses increase In 1981
by a further 20% (in line
with U.K inflation) and the exchange rate Is ZI
-.U.S.$ 2.22, our current
forecast is that contributions at 0.21% would
leave the centre with a
substantial under recovery of E1,634,000.
Comparable under recoveries for
1982 and 1983 would be E1,945,000 and E2,395,000.
As the above Indicates it Is now very difficult
for us to maintaia the 0.21%
basis through 1981, although BAT stood by Its
earlier a-greement to ablorb tile
shortfall of E943,000 in 1980.- In order to
reinstate the position where
recoveries approximately equate to forecast
expenditure, the contribution
rate would require to be increased to 1981 0.272,
1982 0.28Z, 1983 0_9%.
It is apparent that a percentage rate of
contribution for R & D recoveries
cannot at present accommodate satisfactorily the
unknown vaciable factors
although the principle of relating a company's
contribution to research
CZ>
110
expenses in the proportion that their net turnover
bears to the group as a CO
whole is-not In question. !f
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BATCo document for Province of British Columbia 10
November 1999


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A further problem is that for some.companias,
where exchange controls and
taxation datters are increasingly more difficult
the us& of a percentage
creates a situation which requires renegotiation
whenever a change occurs.
This situation often requires -that supportin;
documents be provided, which
causes additional problems where forecast, and noi
actual, figures have been
used. In addition, we are always vulnerable to
attacks by the U.K. Revenue
authorities if we are clearly not recovering
expenditure incurred.
At this time, therefore, companies are being asked
to agree to a formula.
which, while retaining the existing principles,
will be based initially on
provisional figures but with a final adjustment to
actual over ati the year
end. This will be supported be an open-ended legal
agreement that will state
the formula, but not figures, thus hopefully
obviating the need for-annual
approval by the Authorities.
The operation of the proposed procedure is that at
the end of each year
company and group net turnover values are taken
from the consolidated
accounts for subsidiaries and the advices by
letter for associates and
related to actual recoverable research expenses by
the following formula:-
Company's Net Turnover
Research Expenses x Contribution
Group Net Turnover
A copy of the type of agreement we have in mind is
attached. We will, where
CO
required, give supporting details of the values
used. cc
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BATCo document for Province of British Columbia 10
November 1999


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To try to contain the increase In central gro4p
research expenses in the U.K.
the Board is investigating whether some research
at an agreed cost could be
carried out in overseas companies, who would notif
y their relevant expenses
to us. These expenses would be then added to those
of the centre before the
calculation of company contributions in accordance
with the formula. Any
company who had participated in central research
would then receive a credit
for the value of work done.
In conclusion, I would add that all the above
proposals have one object in
view, namely that of ensuring that research vital
to our industry's future
progress is not placed in jeopardy by a
contribution procedure which 1,Ust
inevitably lead to unacceptable shortfalls at the
centre. Equally'important
is that we move to a procedure that is ultimately
tied to current actual
expenses and net turnover so that existing timing
differences and forecasting
errors are not unfairly borne by either the centre
or companies.
ACC/JAH
9/7/80 Oz~
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BATCo document for Province of BritiSh Columbia 10
November 1999


AppRoxmqATE NET TURNOVa-M L Kff-1 IONS
A. 1980 1981 1982 1983
other. Subs.& Assoc. 1,008 1,201 1,386 1,552
Brazil 249 275 305 341
B. & W. 570 588 638 687
-2 13Z '138 145 153
GerAany 296 313 332 345
AMATIL 9,5 100 105 110
2,350 2,615 2,911 3,188
RECOVERY AT 0.21% L100093
B. Other Subs. & Assoc. 2,116 2,522 2t9O% 3,258
Brazil 523 578 641 716
B. & W. 1,197 1,235 1,340 1,443
- IMSM 277 290 305 321
Ger-.y 622 657 697 725
AHATM 200 210 221 231
4,935 5,492 6,113 6,694
rOPMECAST R. D- REMVERABLE Z100003
C. 5,878 7,126 8,058 9,089
RECOVERY AT FORMULA
D. Other Subs. & Assoc. itS21 3,273 3,837 4,424
Brazil 623 749 844 972
B. & W. 1,426 2,602 1,766 1,959
L74ASCO 330 376 401 436
G---ny 740 853 919 984
AMATM 238 273 291 314
5,878 7,126 a ,058 9,089
INCIMA57-11 Z1000's
E. Brazil 100 171 203 256
B. & W. 229 367 426 516
IMASCO, 53 86 96 115
C----Y Ila 196 222 259
AMATIL 38 63 70 83
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BATCo document for Province of British Columbia 10
November 1999