I b F E B 1981
SEEN CY It" I.77 9
ME
Sp 0:1 Imperial Tobacco Limited
%-UU1 I Io
-77'
con 10
April 16, 1980
Dr. L. C. F. Blackman
Westminster House
7 Mi I lbank
London SW1P WE
England
Dear Lionel:
Your letter of March 24 to L.E. Ricard has been referred to me
for further clarification directly with you. You will recall the
discussion about taxation we bad at Torquay when it was acknowledged
that formulas for definition of and joint payment for group research
would have to pass the scrutiny of tax auditors in the countries
involved. The concerns voiced then have now proven to be well founded.
- e rapid escalation of our GR & DC bill is currently under question
Ah
by government tax auditors and we are not at all certain that the 1978
bill will bw-, allowed as a legitimate businesi expense. If disallowed
the effect will be a loss of 42t of the bill from our profit. The tax
auditors are giving us a hard time with respect to 1978. so when we
look at the change from $160,000 before 1978 to about $830,000 for the
current fiscal year we are apprehensive indeed.
The concept of cost sharing group research rather than
commissioning and paying for specific projects has been agreed and we
believe can pass tax auditor scrutiny provided certain conditions are
met:
(1) We have a research agreement that defines and commissions
the work and shows the basis for payment.
(2) we have sufficient information to demonstrate that we pay
only for our share of the costs of GR G DC activity that
conforms to the definitions of 'group research" as written
into the agreement. This means we must be able to demon-
strate that the GR S DC bill does not represent a bidden
transfer of funds to SAT for work that does not represent
an allowable business expense by our company.
(3) The group research arrangement can be defended as being
beneficial to Canada.
__J
Lill
BATCo document for Province of British Columbia 12 April 1999

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These conditions add up to the need to have very good
documentation as exhibits. To meet the first requirement, Bob Begin
has been corresponding with K. Ethcrington to arrive at a suitably
worded research agreement. Concerning the second need, I realize
that the introductory pages and cost breakdowns contained in '1980
Programm and Resource Allocation" were prepared to communicate the
programme in terms noted on p. 3 of 'Notes on R & D Conference,'
London 1979, but it seems clear that we shall need a different break-
down that ties in directly with the terms and wording of the agreement.
It appears to me (and to government tax auditors) that GR & DC serves
several masters. Both the agreement and the kind of cost analysis
we need must demonstrate that the "participants.' and only the
participants (of which BAT is one) control group R L D, and thai the
cost to be shared covers only direct costs of group R a D plus a
reasonable proportion of overheads like technical and supporting
services.
Although I don't waht to interfere with the drafting of the
agreement, I have taken the latest draft and modified it so as to
prompt your clarification of the elements of GR & DC to be within the
scope of the agreement. If this can be done and the words used are
equally well understood on both sides, drafting the final version of
the a a re emen should be straightforward and I hope it would then be
possible for you to furnish cost breakdowns that fit the agreement and
its terminology.
(Sue attached amended version of page I of draft agreement)
Although perhaps I ought not to try to relate the costs given
with the 1980 programme to an agreement that does not yet exist, the
following appear in whole or in part to be beyond its scope.
Millbank
Sponsored
a portion of "applied"
Mi I lbank Product Dev. Advisors
BAT Bridon Joint Development Project
Patents Uncl. BAT Head Office Legal Fees)
A proportionate amount of Supporting Services
and Technical Functions as related to non-
Participant activity.
Concerning terminology, we have difficulty here with 'Millbank' as
opposed to 'B.A.T.," and 'operating companies' as compared to
affiliates.'
--4
4:11.
BATCo document for Province of British Columbia 12 April 1999

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Apart from the problem of dealing with the tax people I do
have some difficulty in fielding the question 'Do you agree that the
value of group research is worth the cost?" I am regularly warned
that not only the tax people and our own management, but also the
Imasco Audit Committee and Imasco's external auditors might take notice
of the escalation in the GR & DC bill, and ask the same question. I
feel committed to that part of GR & DC activity that has been agreed
in the give and take of group research conferences but am really in a
weak position to defend the figure established for cost sharing
purposes.
A letter of this type is certainly a departure from the past,
but there seems to be no doubt that an inevitable conseque-ce of the
decision to draw substantial support for GR & DC from participants is
the need to document the intended arrangement, and how it is practised,
in ways that will pass external scrutiny. As a matter of fact.
Bob B@gin. in atterpting to get tax authority approval for the 1978
bill, has had to promise better documentation for subsequent years.
With kind regards,
Yours sincerely,
R. M. Gibb
enclosure
Postscript:
The foregoing letter to you was reviewed at Imesco and I attach
the corrments from that source. They refer to the text of the agreement
rather than my letter. Ai I mentioned in my letter, I think the actual
drafting of the agreement is best handled by those who now have the job,
viz. Bigin and Etherington, but I suppose you have a role to play in this,
even as I do here.
Can you arrange to have these points considered for the guidance
of the two who are drafting the agreement? Bob Bfigin is on the point of
writing, Etherington and he will copy my letter and these comments to him
so we'll all know what's going on. 9.5.80
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LJ-4
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BATCo document for Province of British Columbia 12 April 1999