DRAFT
1994 KEY AREA PAPERS
14 th March 1994 Ui
r"
ON
r,;
-0
CO
01 \
BATCo document for Province of British Columbia 23
April 1999


~Z~ 7 Ila
i:W
77
4
..3fN-
CD
c=
ILA;
,-:1 -3 a
BATCo document for Province of British Columbia 23
April 1999


EMMLAZ4 RRSOURCES NUMON
BATCOS HVMAH RESOMM FUNCrION WUL ADD VALULTO THF-
B.
BY CREATING THEENVIRONMENI-TO'. ENSURE THAT TEM
B~EgTr'
AVAILABLE IT -DEVELOPED TO MAMM-MML-r'
CONTRMIMON TO THEACHIEVEMENT OF COWANY OBJECTIVW.'
Through the adoption of the 0owing key principles,
BATCo's Hun= Resources Function wiU
achieve its mission:-
SUCCESSION PLAINNIING
We wil.1 have the right number of employees with
the appropriate skills in the right place at the
risk
time.
RECRUITINMNT & SELECTION
At every level of the organisatioa, we will
recruit and select those people with the highest
potential to
advance our business.
REWARD
Our reward philosophy wiH enAle us to recruit and
retain the best avail~lc Went, and will engender
the highest level of perfortrance =xmgst our
employees.
TRAINING AND DEVELOPMENT
Managerial and technical excelleoce will be
developed intc=Uy using training methods that wiU
support the business and encourage personal growth
in order to develop woridclass talent fiam within.
STRUC`rURE
Organisational structures will have the
appropriate number of levels with clear individual
and tearn
accmintabilitics in order to provide the
opportunity for cross-Ruxtional and individual
development.
EMPLOYEE RELATIONS
To cre= the cultural enviroanza which will ensure
cmplmees at all levels are conumued to thew
objectives, to the means of achieving those
objectives, and to the Company.
PRODUL-nVITY
To optimise work output compatible with the
cornpany's objectives.
L11
C:)
t"i
C711
co
00
BATCo document for Province of BritiSh Columbia 23
April 1999


SUCCEMON PLANMNG
~ BATCo will iniplancat a worldwide grad= traince
scheme with consistent training
and career paths in order to enstire that in the
fi=m apart ftorn selec:vve recruitznect~ we grim
our
senior mamigeri%ent popul=on from wW=
~ All Operating companies will use the 14- Pxsmr=
Phnning (KR-P.) syst= iaili6n the
standard definitions; of:
* Key Positions: positions critical to the
achievement of Company objectives
# Deyelopment Positions : pcsi&w providing ideal
development opporainicies for Fligh
Potential staff
* High Potential Staff: employees wiEh pc=tial to
rLw to at least Depa=e=.Maca&= level
# Potential Staff: employees with potectial to
progress but who do tax mect High Potential
criteria
* Obstacles : employees without further poteritial
to progress who am blocLing Key or
Development positions
~ Where there am changes to the HRP dambase these:
will be advised to the C== ca a monthly
basis.
~ T'he HRP system will be used to mcnitor
compliance with BATCo's Key Pn=plm cf Succession
ftnrling.
~ An Operating units win systemancally W=mfy kugh
potential stLff throggb the use of dw- PACE
appraisal pro=ss, Career Driclopmcas Conzinitzees
and, where possible, the Use of Develop-
Ccz= techniques.
RECRUITMENT
Bcfbre d=ding whetim to r== to a position the HR
function will -- with Ii=
the need and appropriat of internal candidates.
All HR departzrients must have at least am
professionally trained in--
Mie ultimate, selectinn rests with I= management
therefore they must be provided with the
appropriate skills of intervicwin& In all cam of
nunaglInellt rwruimi= die ML"Yant
Functional Director should finally approve the
appointmenL
All jobs will have a role profilm
For the recruitzrient of nunagers into key
positions HR dqwm=tx either frurn ~Ic C=nc, or
from within the Region must obtain the = of obje~
selection techniques-
U-I
C:)
r\J
ON
c0
1 ~0
BATCo document for Province of BritiSh Columbia 23
April 1999


REWARD
The Centre will have a conststent internwaonal
staffaad reward Mectlanism.
ALI Operating units will adopt BATCo!s vcrs= of
the Wt=auooal management grade
structurt trough the consisteztt applicancm of the
Hay method ofjob evaluaboa.
All Operating units will have in place a Board
Compensation Committee to:
# Ensure that remuneration policy at all times
c==wtcz a competuve advantage in temu of
a-acting and retaining top quaLity managern-
* Promote a good woricing imowledge of local
market practice.
# Cnamily challenge and analyse the reward padcage
mm
# Easure that padmges am performance orimted.
TRAIMING AND DEVELOPMENT
~ Every manager will have a development plaa.
~ Tbe prime vehicle for ideaffying training needs
will be the ?ACE' appraisal system.
~ A key feature of & line manager's performance
review wiU be to assess the effectiveness of
subordinate re"ics.
~ Comprehensive trammg records will be kept for
each manager.
~ Development will be principally on the job and
is a am management responsibility which wrill
include-
# Self Education & L=ming
# TeamWorking
# Task Forces
* Projects
# Secoadmects/Assignmew
# External Representmion
# Internal/External Courscs
An Operating Companies will adopt BATCo's
consistent three level ftmework for Training and
Development in order to grow woridelass talent
fiorn withim
Development will mlso fbcus on the acquisition
Oftechnical ==Be= within the fiInctic"L
rQ
(71
BATCo document for Province of British Columbia 23
April 1999


STRUCTURE
~ At least a=ually Operating ututs will critically
review dmr orgatusation, to achieve:
* Flatter Structures
# The appropriate level ofdocision making
* CbaLkn&gjobco-fbrst&ff
~ Opportunities must be created to utilisc
rnultifiLrictional task fbrces and project,
groups.
will enable key individuals to gain exposure to
other fitactions and discipUnes.
EN2LOYEE RELATrONS & PRODUMVITY
Operamig units will develop effkarve intemal
moo-way conmtnunicanon and Lnvolvcnv=
mechanisrns (distinct from Trades Unions or Staff
Association channels) wi~ich eacourage
=nployees to identify timnselves with the Company.
Under the di~vcticn of the BCC, Operating units
will agree payAx=fit reviews for all ernployce
groups, including dw principle of productivity
growth shared with shaM%oWe:%, customers and
fimher business development
Operating units will have well dtfined policies on
such rnatters as redundancy. equal opportunity,
eariy/voluotary rcdrcmem dismissal and grievance
procedures.
Operating units %&-ill constantly review
organEsation structures, amning and out-sourcmg
oppomuuties in order to achieve gre= people
productivity (i.e. low= cost provider sum and
rnir~ overheads).
Operating =ts will operate the high BAT Co fkalth
and Safety standuds, including etoployea
invOIVW=L
C--
rl:
C7 \
BATCo document for Province of British Columbia 23
April 1999


BATCo document for Province of British Columbia 23
April 1999


UTTLISATION OF PRODUC'110N RPqOURCFZ
1. C-Macirv Plan
Manufacturing capacity will be planned to exceed
Marketing fbL by 10%
except where markets are volatile~ when a higher
provision may be required.
Where possible, contract manufacture, which
absorbs surplus capacity in other
BAT companies, must be considered as an
alternative to investment in new capacity or
where there are overall cost benefits.
For hygiene reasons, Primary manufacture should
not be planned forfull three shift
operation.
Contingency plans should be made to respond to a
disaster at a producdon site or
warehouse or at a key supplier. Plans should be
consistent with the form, being
developed at Southampton plant and should include
procedures to--
Assess then minimise risk
Manage the disaster and minimise its affect on
personnel and propeny
Establish alternative production sources in the
event the disaster could produce
interruptions to market supply
Restore production capability.
2. Machinerv
Investment in new machinery must always maintain
or improve product quality.
New technology will be adopted where product and
commercial betiefit can be
shown.
Machinery purchases should be consistent with
BATCo and regional machinery
standardisadoo.
Machinery utilisasion should be maximised,
including the use of multi shift
working where this is cost effective.
Production Costs
Companies should aim to be the lowest mu producer
where competitive markets
exist and to aefiieve, cost reductions of at least
5% per year in real per millemsts
(excluding depreciation) on average over the plan
period.
Competitor production performance mid capability
should be specifically reviewed
on a regular basis with particular reference to
their production strategy and production cost
structUte.
V1
CD
CD
13 ATCO document for Province of Brifth Columbia
23 April 1999


Production plans to reduce costs should identify:-
3.1 Targets fbr improving productivity in the
direct and indirect areas.
Strategies should include.
Flexible Working practices
Team Working and *Mini Factories*
Reduced Product handling
Contracting out services, if financially viable,
and with a view to
improving the quality of service
Use of aftetive information systems
.Machinery investment where justified
Reduced layers of management
3.2 Targets :br process and material cost
reductions.
Strategies should include:-
The principles of MRPII
Raduc::iocs in stock levels, including Finished
GoodsWMS and R&RS
Rxionalisation of specifications
Reductions in energy usage ratios and energy costs
Ratonal Cooperation on stock items
Use of Procurement Dept. to ensure Competitive
Purchasing
3.3 Targets fbr improved use of existing
resources.
Sa=e_-'es should include:-
Machine Efficiency improvement programmes
traprovemems to material and cut tobacco quality
Comprebensive maintenance and machine cleaning
programmes
On floor m-n- ement and supervision
Improvements in skills, through local or regional
training
Reduced machine change over times
Disposal of surplus assets.
4. Product O-iirv
Companies should plan that product quality meets
the expectations of the consumer.
is superior to that of competition where this
exists and that~ as a minimum, products meet
standards set under relevant legislations.
VI
C:)
Ili
C711
r,.)
rIJ
CZ)
CD
NJ
BATCo document for Province of BritiSh Columbia 23
April 1999


Production plans to improve product quality should
show targets for improvements
in Product Quality Ratings, performance against
competition (where appropriate) and
reductions in consumer complaints. Strategies
should include:-
Moving responsibility for quality to machine
operator level
Quality training at all levels
Quality Performance Audits and Reviews at shop
floor level
Compliance with QC Protocols and Q Methods
Investment in on line quality measurement
Off line quality measurement at the point of
manufacture
Quality data and complaints analysis
Quality systems and procedures which are
consistent with the principles of
IS09000
.Machinery investment where specifically justified
Effective Machine programmes
Working with material suppliers to enhance the
quality of their produ= aad
services.
5. Health ;,,id Safetv
Companies should aim to eliminate all accidents
and risks to health w personnel on
BAT premises.
Production plans to improve Health and Safety
should show strategies ibr reducing
the number of accidents and the time lost through
accidents and for improvemems in
hy iene. Strategies should include:-
Compliance with BAT safety requirements as
expressed in BAT Safety Manuals
and Guidelines
Ensuring that contractors are carefully selected
and supervised and are obliged to
adhere to BAT standards of saferv
Compliance by visitors with BAT safety standards
General and job specific safety training fbr all
employees
An effective safety organisa on and regular safety
meetings and audits at Company
and Departmental level
Promotion of the safety message through specific
campaigns and pmgr=mes such
as "Safety Week*
Provision of We systems of work
Detailed investig2don of all accidents and
incidents which could have led to an
a=ide6t
Machinery which is fully guarded and interlocked
Safe storage and use of hazardous substances
Effective system for fim prevention and fire
fighting at all locations. including
remote warehouses and depots
Elimination of electrical b-zards
Meeting all relevant legislation
Maintaining the highest standards of hygiene in
the factory, lav=ries. kitchens
etc.. including regular Hygiene Audits
rQ
0
CD
ILA
BATCo document for Province of British Columbia 23
April 1999


666~ I!jdV, f:Z L-.iqtunlO:) 4SRIJF3 jo ODUIAOJd
JOI lumunoop oo.LVS
al
C:)
C\J
CIA
ID
Ln
Nc Z~.
UA


1993 KrY ARrA : FNMO'.%NfFWAF ISSUFq
Each company should review the potential impact of
its activities on the environment. As a
minimum it will comply with all applicable laws
but the company should aM be
pro-active. meeting best standards of practices to
safeguard the environment.
Aspect of the euviro-c-1 plan should include: -
Improving the impact of factories on the
environment including
Effluent, Air and Odour Emission, Noise, Dust, CG2
releases etc.
Plans to meet the BATCo Guidelines on
Environmental Issues, including
maximum residual limits (MRL) of permitted
agricultural chemicals on
tobacm products.
In companies where leaf is caused to be grown, the
plan should include: -
Meedng self sufficiency targets in wood fuel
usage.
StratMv for meeting BATCo Guidelines for the use
of agriculuiral
chemicals.
Any changes in the use of fenilisers that will
impact on the
environment and include any other major at= of
concern e.g.
Irrigation. Soil erosion. etc.
Proposals to reduce packa&g material usage and for
mi-ir-king. re-using or
recyc!4 of solid waste.
Identific3rion of emerging issues. Public Affairs
department should include
strategies for responding to and communication
about all issues.
Ln
rQ
CD
Lr",
BATCo document for Province of British Columbia 23
April 1999


BATCo document for Province of British Columbia 23
April 1999
Ln
CD
(31%
rl%.)
rIj
C)
CD
a,
3 ~
,n


666~ jjjdV CZ eiqtunloC) 4SIIIJ8 10 63UIAO-'d JOJ
JUOLun3op oo.LV8
x
771~
. . ........
zo 3:1
C
V-z
A.- L.-
N


1993 KEY AREA PAPER: PURCHAS WG I PROCURrNMENT
The result of close co-operation between BATCo and
the other Industries companies
during 1993 his been to neptiate global supply
agreements with key supliers for
FUter Tow, Cigarette Paper, Plugwrap and printer's
SBS Board. The details of the
impact on individual BATCo companies should now
have been communicated,
together with an irriplementation programme to
achieve the service and cost benefits
identified. This has effectively rationafised our
supplier base for these key materials to
those who can meet and sustain the quality,
service and cost requirements ofBAT as a
whole.
It is therefore the continuing deve!opmenE of our
material strategies that rpresents [he
thrust of BATCo Procurement's activities for the
plan period. This will specifically
focus on Duplex Board, Paper, Tipping
. I _- Film and Inner Bundling.
In order to ensure that we m1tieve the benefits
identified, it Is vital that Operating
Companies do not deviate from the sourcing and
pricing agreements made on behalf of
the Group for Filter Tow, Cigarette Puer, Plugwrap
and printer's SBS Board without
reference to BATCo P-ocurement. Furthermore. as
sourcing strategies r-or the other
materials identified are developed, any planned
changes in sourcing or pricing policy
for such additional materials will need to be
likewise advised.
The following have been identified as
Purchasinw?rocurement Primary Objectives:
1. To ensure that, within the bounds of commercial
viability the hi0est available
levels of quality and consistency of materials are
used an our key brands,
particularly Intemadonal Brands.
2. To reduce BATCo's materials spend in real terms
throughout the pian period by
taking advantage of BATCo's and BAT Industries'
annual material purchasing
volumes.
3. To ensure that materials used minimise total
cost - taking into acccunt all costs
incurred ie purchase price. overhead costs.
delivery, packing, storage. finance,
machine performance and x-tual material wastage.
4. To review purchasing of items other than
wrapping materials that may offer
Group-wide benefit ifvolumes or nestotiations are
co-ordinated.
5. To ensure that materials used meet all
established criteria and gruidefines laid
down by the Additives and Materials Guidance panel
regarding Health and Safety
of our workforce, our neighbours and our customers
and that theis manufacture,
packing, use or disposal is in line with BATs
Emironmental policies and
guidelines.
Specific strategies to achieve the above include:
a) In conjunction with the IBG. to develop,
implement and monitor comprehensive Lr'
Packaging Material Standards fbr each brand. C--
NJ
(71,
N;
r"i
C)
BATCo document for Province of British Columbia 23
April 1999


b) To rationalise material specifications used
throughout the Group without
detriment to product quality or design flexibility
and to document agreed
specifications My.
c) To rationalise BATs suppliers for key materials
worldwide in order to focus our
purchasing power with quality suppliers who are
able to support our long-term
growth and development.
d) To use selected suppliers where practicable to
be the sole source of particular
materials to individual manufacturing locations
e.g. single sourcing of tow to any
one company to Improve logistics and stockholding.
e) To verify. where appropriate, with the Additive
and Materials Guidance Panel
(AMG? - based at BATCo Technology Centre.
Southampton) and Group
Environmental management~ all materials that are
used.
To agree and implement a Group-wide supplier
rating system.
To support the ongoing development of the
strategies noted above, BATCo has now
F
completed detailea
materiai surveys for all Operating Companies, and
is identifying the
issues, suppliers and strategies for each region
which are an integral part of the global
strategies being developed with the other BAT
Industries tobacco companies. In
parallel with &s, the rarionalisation projects in
1994 are being extended to include
plugwrap, tipping, film and inner bundling. It is
intended to continue with the
prograrrune of Regional Purchasing Conferences to
develop and communicate the
issues of sourcing, quality, service, cost and
ralionalisation with each of the regions.
together with the ongoing exchange and update of
purchase data.
-kcr
zordinaly, It IS recommended that:
P2 ckaging Quality standards for International
Brands should be verified to
ensure conformance to international brand
standards. Areas of doubt should be
raised with [BUS or this department. Standards for
local brands should be
developed to mirror those of Interriational Brand
manuals. Rationalisation
opportunities between brands should be sought to
minimise stock items and cost
eg Tear tapes, Tippings etc.
All locally sourced materials in contact with our
product should be confirmed
as approved by AMGP and other materials m= conform
to local food and
health legislation or, if not available or
suitable, to US Food and Drug legislation.
I
N
o new specifications or supplier3 should be
introduced for key materials
sourced from international manufacturers without
first discussing the proposal
with this department.
Current local suppliers of materials should be
assessed by Operating
Companies in terms of quality, service and cost.
Local rankings should be Lrl
developed to identify orders of preference.
Alternative suppliers should be C__
identified and investigated to determine
suitability. Local material supplies rll.~
should be reviewed to identify differences in
quality, service or cost with current
international standards.
NJ
Ln
BATCo document for Province of BritiSh Columbia 23
April 1999


Supplier reiadonships - BATCo must aim for the
highest possible business
ethics and professionalism in all our dealings
with suppliers. We should not
allow suppliers to influetwe us through
inappropriate gifts or entertainment. We
should insist on absolute integrity and honesty
from ourselves and the suppfier
regarding infbrmaxion about each other. We should
never divulge their pricing to
their competimrs.
Where possible we should aim to establish
long-term relationships with our
supply base that allow continuity and awareness of
each others needs and iature
requirements.
Historically. suppliers have taken the approach to
organisations like ourselves of
'dNide and conquer'. We must ensure that
communciation within our Group is
suf5ciently 3ood to prevent this occurring and
suppliers must be made aware of
this and your adherence to defined corporate
sourcing strategies.
Local suppliers must not be allowed to hide behind
barriers and tarrifs which
preclude competitive imports. They must be
encouraged at eve.-y opporturuty to
compare Lhemseives with current international
standards.
Conversely, local suppfiers who are competitive in
quality, service and price may
be of significant Lnterest to other Group members
and should be encouraged to
contact this office after discussion.
March 1994
C:)
BATCo document for Province of BritiSh Columbia 23
April 1999


666~ IIAV VZ eiqLunlo3 4S.141,113 10 OOUIAOid -joj
JuaLunoop oo.LVE3
CC)
C:>
I cli
"o
C-4
C)
LO
vW,
59
M
.
-
--7-7
m
A-17
",;:~ -,AA3-
. . . . . . . . . .
-2,
W'F;
"'C


SECRET
~B A T)
INDIRECT TAXATION OF
TOBACCO PRODUCTS
KEY ARF--k PAPER
CD
r1 j
(71
NJ
r')
C:)
BATCo document for Province of British Columbia 23
April 1999


CONTENTS
KEY AREA: INDIRECT TAXATION OF TOBACCO PRODUCTS
A. THE ISSUE
B. POLICY
C. STRATEGIES
D. EXPLANATIONS OF STRATEGIES
Levelof taxation
Frequency of Tax increases
Structure of Taxation
Excise collection
Repional Taxes
Retail Prices
Retail Price Index
Company Responsibility
Government Relations
International Trade issues
Industry Relations
CompetitorMonitoring
Value Added Tax
Appendix I Structure of Taxation
Appendix II Excise Administration
C--
r,;
C7,
BATCo document for Province of British Columbia 23
April 1999


S'FCRVr
KFY ARFA : INDTRFCT TAXATION OF TOBACCO PRODUCTS
A. THE ISSUE
Tobacco indirect taxation (excise tax, Wes tax,
VAT and import tariffs) is
the most significant element of the retail selling
price of tobacco products and
hence plays a major role in determining the
commercial environmen'E in
which we operate. In particular, indirect taxation
determines the level of
retail prices. the price structure and Lherefore
the overall pattern of smoker
deniand for our products. It is also closely
linked to. and significantly
influences the level of profitability and cash
flow perfor7nance or an
operating company.
E--,cise taxation and VAT has always been a key
issue but is becoming even
more so because of Gove-nment inc== in the level
either for revenue or
health reasons, with resultant higher real prices.
Also, competition,
particularly P.M. increasingly seek to influence
the structure of the taxation
system in order to optimise their competitor
position in the market place.
The critical product cam-gory is cigarettes, which
accounts for well over 90%
of global tobacco consumption, this paper
therefore focuses upon cigarettes,
although there is some rere-rence. to other
tobacco products.
International co-operation and cross
frertilisation between Governments is
increasing with regard to indirect taxation, as a
result of which both taxation
levels and structures are being shaped by external
influences.
Tobacco indirect taxation is therefore an issue
for General Management
although its most direct impact is in the
functions of Marketing and Finance.
General Managers should advise Nlillbank of all
changes in tax structures and
levels, and discuss any proposals for change with
tMillbank prior to their
submission to Government.
B. POLICY
To manage the cigarette indirect taxation issue in
order to establish the most
appropriate retail price structure whilsE
optimising profitability and cash flow
over the long term.
In most instances. long rem profit optimisation
will normally result from a
totally or predominantly specific excise taxation
structure, in preference to an
ad valorem one. The optimum balance between
specific and ad valorem will
depend upon the brand mix of each company. Cr.
C--
r1 _'
CT%
NJ
C-~
r1 J
U4
BATCo document for Province of British Columbia 23
April 1999


C. STRATEGEES
This policy will be achieved by focusing upon the
following main strategies
Seek to reduce the r= and/or incidence of excise
taxation, or to
ensure that its level does not increase at a rate
greater than inflation.
2. To secure smaller and more frequent increases
in prefierence Lo Larger
and only occasional increases in excise taxation.
3. To establish a structure or system of excise
taxation which results in a
range of retail prices most appropriate to the BAT
brand mix whilst
also optimising profitability over the longer
term.
4. To establish a method of colleczing the excise
which
maximises any excise credit terms but at least
ensures revenue
neutrality between when payment is received from
customers and
when pavment is made to the Government.
maximises the involvement of the manufacturer in
the collection of
excise and minimises the involvement of the
distributive and retail
trades. The reason for this is to retain
manufacturer control over the
determination of the retail price which is
essential for long term pront
optimisation.
establishes 2L single retail price for a brand
either by means of a fixed
retail price or a retail price agreed with the
Government as the basis
for calculating any ad valorem excise.
makes it difficult for Govemments to impose
'health' surcharges in
the future or to impose differential taxation
linked to tar : nic delivery
levels-,
minimises the ability of competitors to underpay
their excise tax and
so derive a competitor advantage.
5. To manage the possible conflicts and to gain
advantage from situations
where indirect taxes are levied on a national and
regional basis.
6. To secure maximum freedom to determine selling
prices without
Government intervention or approval. whilst also
minimising the
ability of the retail trade to vary prices from
those recommended by,
or fixed by the manufacturer.
2
CTN
NJ
NJ
CD
N
Zb
BATCo document for Province of BritiSh Columbia 23
April 1999


7. To oppose the removal of tobacco products from
the retail price
index, which has become an objective for the
and-tobacco lobby in
order to enable Governments to increase taxes and
thenfore prices
without considering the inflationary impact of
their actions.
a. To define the management responsibility for
tobacco indirect taxation
within your company both from the public affairs
and commercial
Viewpoints.
9. To maintain a dialogue and close working
relationship with key
Government officials and Ministers in order to
influence their indirect
taxation policy and to establish links with other
businesses such as
-alcohol, oil etc who may assist in this process.
10. To maintain working relationships with local
representatives of
INIF:'World Bank/GATT agencies to be aware of and
influence policy.
11. To lead. but ac-, with the rest of the tobacco
industry and to maximise
the berefits from including other interested
parties such as farmers,
proc--ssors, suppliers and the trade.
121. To monitor competitor excise payment
disciplines to ensure that we
are not disadvantaged from either slower payment
or non-payment by
our competitors.
13. To seek to ensure that the application of
Value Added Tax to tobacco
products does not increase the total tax burden.
These samegies are explained in greater detail in
the subsequent sections.
D. F_XPLANATION OF STRATEGTES
1. Level of Taxation
7 he combined forces of Government revenue needs
and the anti-
.smoking lobby have resulted in increased real
levels of taxation in
many countries. a situation which is likely to
intensify further in the
foresetabic future.
Every opportunity to reduce the level of taxation
should be pursued
even though the achievement of reductions may
never be easy. If the
taxable base can be expanded e.g. by including
smoking products not
presently taxed, then Governments may be persuaded
to effect rate
reductions on cigarettes. Reductions have been
achieved in the
Netherlands and other countries in recent years.
CD
N~
CII
3 C:)
r'J
U11
BATCo document for Province of British Columbia 23
April 1999


Should reductions prove to be unachievable
companies should contain
the increase in taxation to a level below the rate
of inflation or at
worst in line with it. Arpments supporting this
include :
the inflationary and regressive impact of tax
increases ahead of
inflation, particularly upon lower income groups
who frequently
account for a disproportionately large amount of
tobacco sales;
the normal economic arguments that tax increases
result in
failing demand, employmcnt~ profitability and
invesur=4 both
directly upon the compan and indirectly upon
suppliers;
. y
increzises in taxation and hence retail price can
result in the
emergence or growth of transit or border trade
business and
hence a fall in revenue vield- This has verb
dramatically been
illustrated recently in Canada. The high taxation
policy
followed by the Canadian Government, in an effort
to reduce
smoking incidence. has failed and the high levels
of taxation
have been reduced.
high = increases may result in smokers dropping
out of the
manufactured cigarette market and switching to RYO
which is
often taxed at a lower level or not at all. It is
conceivable that
overall Governmeit receipts could fall in such
circumstanc:s;
increases in =ation may result in a decline in
consumption
sufficient to bring about a M in revenue yield to
the
Government. Because of the inelasticity of demand
for
ciga.rettes, over the longer term. this result
mrely occurs.
However, it is not uncommon to see a shon term
decline in
revenue yield which can be pointed out to
Government when
opposing increases:
increases in taxation which reduce consumption may
mean the
destruction of the vitality of the tobacco
industry and thus the
erosion of the tax base which Government may wish
to protect
over the long te-m. Tlis applies even more in
countries with a
significant lW- export trade which depends to some
extent upon
the continued existence of the local industry.
increases in taxation are either out of line with
international or
re-ional norms or would result in the incidence of
taxation
b;~omingr out of line with such norms.
Although it can sometimes hap . . nlikely that an
U-1
. pen, it is most u C--
Operating Company will be in a position, where it
elects, to absorb a rs;
part or all of an increase in excise taxation.
C711
N)
r-j
C:)
PQ
BATCo document for Province of British Columbia 23
April 1999


2. Frequency of Tax Increases
The psychology of smoker demand is such that they
are more likely to
a.bsorb smaller and more frequent price increases
than larger and less
frequent price increasets. During negotiations
with Government
therefore it is preferable to seek die former
excise environmenE.
However, this has also to be interpreted in the
context of the general
level of inflation in the country plus the
significance of stick sales and
coinage availability which may act as a constraint
to the
implementation of this strategy.
In markets of high inflation, it is always
preferable to take
manufacturers prices increases ahead of inflation
instead of behind it,
with the exact timing sometimes determining the
difference between
operating profitability or a loss. The timing of
manufacturer price
increases however, sometimes has co be
int.--grated with excise
inc=ses. and it is desirable that this should be
so under certain
-amstarices. although flexibility not to do so
should also exist.
,
circ
3. Structure of Excise Taxation
The structure of any excise system determines the
pricing scenano of
the market place and has a significant impact upon
the level of
profitability. Both Marketing and Finance should
fully understand the
implications of the current excise structure and
establish whether a
competitor advantage might accrue from a change to
a different
structure. In many instances. change may be either
inappropriate or
impossible while in other instances change may be
appropriate and
possible. The structure is also highly relevant to
the key issue of
product quality with specific eacise normally
resulting in higher
product quality then ad valorem because the latter
encourages price
competition and hence cost and quality reduction.
There is no single excise structure appropriate to
BAT on a global
basis because the competitor and brand mix
situations vary widely.
Companies should evaluate their own position in
the market place in
order to determine the structure most appropriate
for them. A specific
excise structure is more likely to result in
higher long term
profitability than in an ad valorem structure,
however it might not be
appropriate in particular situations given the
current brand portfolio
and competitive position.
Essentially there are two broad methods of excise
taxation in
operation around the world which are applied by
national
Governments as a means of raising revenue upon
tobacco products:
NJI
ON
r1 j
NJ
C:)
BATCo document for Province of British Columbia 23
April 1999


A smeiric system levied upon the cigarette itself
by number or weight
of cigarettes produced or an ad valorem system,
where the = is
calculated as a percentage of the retail selling
or ex factory price.
A oure sDecific svstern bv number of ciLnrettes
levies a fixed amount
of tax immpective of size, specification, cost of
manufacture or retail
selling price. Given that tax incidences are
generally high the retail
price range in the market place will therefore be
limited ~ecausc any
reductions of price have to be absorbed fully by
manufacturers, their
ability to lower prices is restricted to the
vahation on costs of
manufacture.
In addition to having a purr specific excise
applicable to ail cigarettes
a 'stab or tiered' system can be applied whereby
the amount of
specific tax varies according to the retail price.
(with lower priced
ci- . a lower tax than high priced cigarettes), or
other
garertes attracting. -te. ( *jer c--arettes
physical characterikc e.-. length of cigare Ion
attracting higher tax).
Some countries have a structure of cigarette
taxation which is based
upon a Soccific amount of wK oer k2 either of
tobacco only or
inclusive of the paper and filter. With such a
structure the amount of
taxation varies according to the cigarette
specification with the result
that lighter cigarettes have a significantly lower
price than heavier
cigarettes. The resul=t range of retail prices is
therefore similar to
an ad valorem structure although the tax. is a
specific one. The
principle effect of such a structure is that the
market may switch down
to either shorter cigarettes or cigarettes with
lower circumferences or
densities.
An ad ,:;Iorem excise is a proportional tax
calculated as a percentage
of the retail selling price or a price agreed
between the manufacturer
and the Government. On occasions, it is calculated
as &percentage of
the ex factory selling price. With an ad valorem
structure. the retail
price range in the market place will tend to be
quite wide because any
price increase or reduction by the manufacturer
will be multiplied by
the ad valorem tax resWting in a retail selling
price changed by an
amount much greater than the original increase or
reducdon by the
manufacturer.
ON
r1 j
rll~
C:)
r11j
Ga
BATCo document for Province of British Columbia 23
April 1999


Although not strictly an excise tax, a sales tax
or VAT is being
introduced by many Governments as an indirect =
applicable to an
consumer goods including cigarettes. This is
always expressed in
percentage terms and is therefore an ad valorem =
in addition to any
end product ad valorem tax which is applied to
cigarettes. If such an
additional tax is applied, it is important to get
Government to . t
that it forms part of the overall incidence of
tobacc taxitionandtat
it is part of the total ad valorem element of that
=.
A mixed end product system is simply a combination
of a sp6cific and
ad valorem structure. Such a system applies in the
European Union
and is increasingly being adopted in other
countries in order to
achieve a result which is related to the needs and
purchasing habits of
consumers, the competitor situation and varying
price segments.
whilst providing a more stable tax yield for the
Government-
The structure of taxation for products other than
cigarettes genemily
,ollows one of the above options. In the main,
cigars and cigarettes
do nOE directly compete against each other with
the possible exception
of miniarure cigars. Similarly, Pipe tobaccos.
Chewing Tobac=s and
Snuff do not compete directly against cigarettes.
However Roll Your
Own smoking tobacco is in direct competition with
manufactured
cigarettes. Companies must understand the relative
excise incidence
of these two product categories and their impact
upon relative pricz
levels and switching between the two categories.
Although
circumstances vary, the BAT policy is to minimise
the price advantage
of RYO and so maximise the market opportunities
for manuftc-.ured
cigarettes.
Further aspects of the structures of excise =ation
are developed in
.-kppendix One.
4. Excise Collection
The administration of tobacco excise =ation can
frequently be
complex but within this complexity, opportunities
may exist to derive
benefit for the Company.
In all countries, the timing of excise payment is
crucial bemuse of its
cash flow and profit implications. The minimum
objective should be
to ensure revenue neutrality whereby tax is not
paid until payment has
be--n received from the distributive trade
However, one should
always press for a period of tax credit which is
positive, which covers LF1.
one's costs of administering and collecting the =
on behalf of the
Government, which covers any bad debts (if any)
and which is
consistent with the concept of all indirect
taxation viz : that a
consumption tax should be paid when the product is
consumed. not
C)
7 r,)
1 Z
BATCo document for Province of British Columbia 23
April 1999


when it is manufactured or still in the
distribution pipeline. 717here
have be= occasions where Governments have
increased the pexiod of
tax credit instead of permitting & price increase
(the latter being
inflationary) as a means of improving
profitability. With regard to
bad debts. Governments should be lobbied to carry
this risk
thmnsielves, thereby limiting the risk of the
manufacturers to the net
cost, of Elie goods only.
Experience of indirect tax systems demonscratm
clearly that it is
pre'L-able to minimise the involvement of the
trade in the system so
that the manufacturers essentially remin the
optimum influence over
the --utal retail selling price. In Europe in
particular, the power and
inruenc: of the trade has and still continues to
gro re tan
., w with sul t
prmsure upon manufacturers to give hi-her margins,
bonuses or other
inc=tive payments to the trade. One or the means
whereby the
influenc.- of the trade has been contained is the
existence of an excise
coilec::ion system whereby only the manviimr-ers
are involved, and
whe= the trade margin is fixed either by law or
practice on the basis
of --;,e price determined by the manufacturerin
agreement with the
Gov"..-nent.
W-e-re the excise is linked to the retail price of
a brand, (normally via
an :d valorem element) it is necessary to have
either a fixed remit
pr.c.- for that brand a recommended remit selling
price or an agreed
price for the purposes of calculating the excise.
This is advisable also
bemuse it minimises the ability of the trade to
reduce the remit price
and so pass on to the consumer the multiplied
effect of any price
saving. To be able to vary the price upon which
the excise is based
and so vary the excise itself, would result in the
trade effectively
det-e-mining the retail price instead of the
manufacturer doing so.
In some countries BAT is at competitor
disadvantage against local or
national, companies who either under declare or
underpay their excise
liability. Although banderoles of fiscal stamps
are not desirable
bemuse of their negative impact Upon manufacturing
efficiencies. they
may offer some scope for resolving this problem.
However,
companies should also consider the possibility of
presenting a case to
Government. provided that they are sure of the
evidence of
underpayment.
N.;
all
r1 _1
rQ
C--
BATCo document for Province of British Columbia 23
April 1999


S. Regional Taxes
In some countries, e.g. USA, Ausualia, Brazil,
Canada, tobacco
taxation is a =rure of Federal and Regional- This
may offer
opportunities to trade off one authority against
another, either to
achieve lower overall taxation or better tax
credit payment terms.
However, the mlationships between the Federal and
Regional
authorities recui= careful management since
disharmony between the
two authorities can equally lead to higher levels
of taxation and worse
credit terms.
Retail Prices
Retail prices. :a- levels and increases in
taxation are often closely
linked in marr; countries. Government influence
varies from
completely ccn:rolling retail prices to allowing
full freedom to
manuficrurers. Retail prices vary from being fixed
by law or practice
to being free. wich the manufacturers and the
trade being able to
change prices'I-v whatever amount they wish,
whenever they wish.
Because circunstance:s vary widely, it is
difficult to have a global
strategy. Ho%ever, the interests of the Group are
best served by a
situation where the company is free to determine
the retail price for its
brands which Should then be fixed, with the trade
margin being linked
to this either as a fixed amount or a percentage
(a fixed amount is
prererable). 'dthough it is normally difficult to
dictate the degree of
involvement of Government in the excise : price
process, one should
seek to eiiminam or minimise the involvement of
the trade so that the
balance of powe: stays with the manufacturers.
In markets wh.---. stick sales predominate,
clearly the trade plays a key
role, but com=anies should examine every
opportunity to maximise
the prices acc.--uig to the manufacturer when
excise increases are
passed on to the consumer. although balancing this
with the need to
give the trade I satisfactory level of return
based upon the actual stick
price.
When permitted. it is nonnally preferable for the
industry to apply for
and implement price increases collectively and
simultaneously and to
negotiate with Government. where necessary, on an
industry basis.
CD
L14
BATCo document for Province of British Columbia 23
April 1999


7. Retag Price Index
It is frequently argued by the and-smoldng lobby
that the price of
tobacco products should be removed from the index
of retail prices of
the cost of living index. This would then enable
Government to
impose higher levels of exc-*se for 'health'
reasons, without impacting
negatively upon the level of inflation.
The effect of excise increases will be felt in any
economy, whether or
not they are included in an index of retail
prices. To pre=d
otherwise is naive while to exclude a bona fide
product from such an
index would (,ive rise -o doubts about the
validity of Govmment
statistics generally. Such an action would limit
the use of the index in
economic policy formulation and economic planning
generally
because the use of an :ncor:---: statistic will
always have a distorting
effect.
Companies should oppose any such attempt, and seek
to emlist the
support of trade unions who urilise the index for
wage negotiations,
together with economists and statisticians
sympathetic to the position
of the industry. Although this is the general
global strategy, there
may be circumstances when the level of inflation
combined with pric:
controls may necessimm its removal if to do so is
the only means of
purting the industry an a basis of profitability,
for example where a
Government is r Mising a necessary price increase
because of its effect
on the index of inflation. However, this should
not be underaken
unless the positive results wUl accrue over the
longer term.
S. Company Responsibility
Indirect tobacco taxation and pricing are general
management issues
and will always involve different business
functions within operating
companies. However. it is essential to have clear
responsibilities for
the management of the-n.
The key elements are :
strategic planning of exc;se am systems and
pricing
accounting and computation of options
management of payment and administration
lobbying
Millbank (Tobacco Taxation Department) is building
expertise and
contacts and a central database of information in
order to assist Ul
operating companies. Based on experience from
around the Group,
C:)
lobbying arguments art being developed in
Millbank. rl.;
cr,
r1 i
r1 i
10 C~
1-4
r%j
BATCo document for Province of British Columbia 23
April 1999


9. Govermment Relations
The issue of Government relations is closely
linked to that of Smoking
& Health which is more fully covered in the Public
Affairs key area
paper, whocas this paper covers relations in the
context of the
technical aspects of indirect tobacco taxation.
Government officials responsible for toba excise
and VAT
planning and control, from a relatively low to the
highest level,
should be identified and sufficient regular
contact maintained. while
Ministerial (Government & Opposition) contacts
should also be
maintained to ensure that the Company is well
placed to have its
views taken into consideration when policy is
being determined. Such
contact should be the responsibility of senior
management and the
Board to ensure an adequate level and quality of
communication.
An amicable and effective partnership berwmn
company and
Government is the objective. Rather than reacting
to a problem, a
positive and pro-active approach to this subject
must be implemented.
Such reiations should establish BAT as the Company
to which
Government will turn when they need advice and
assistance upon any
aspect of excise taxation. which of course
requires the existence of the
knowledge and experience of excise in the Company.
This is
becoming more significant as our competitors seek
to influence and
change Government policy on excise structures from
that which is
appropriate to BAT to that which is more
appropriate to their own
brand mix. Conversely, we should examine the
opportunities to
change excise systems too, if indeed such a change
would be
beneficial. In either instance, Sood and regular
Government relations
are essential.
In this same context, it is also relevant to
maintain close contact with
manufacturers of products also subject to excise
taxation, particularly
alcohol. where there are many excise similarities.
10. Intemational Trade Issues
Inc:zzlsingly the influence of IMF and World Bank
is being felt in the
arm of excise tax and VAT issues. Operating
company management
must be aware of their role and seek to influence
decisions from these
bodies e.g. most often ad valorem systems are
proposed by
DAF/Warld Bank. because of their belief. often
misguided, that such
systems are the most simple and maximise
Government revenues. If
this is not in our favour we must lobby against
the proposals.
INIF/World Bank policies are mostly directed from
Washington DC Lrl
and Nfillbank will be establishing contacts there.
in order to assist
ope.mm- companies. The proposals of the GATT, in
particular since
rQ
r"i
I C)
L-4
L-4
BATCo document for Province of British Columbia 23
April 1999


the conclusion of the Uruguay Round, and the
implications for world
trade wiU have an increasing impact on the tobacco
business. Import
tariffs are still an important element in indirect
taxation, but the trend
post Uruguay is rapidly moving towards a reduction
of Mriffs and
other barriers to free trade. To rely on such tax
barriers to 'protect'
an uncompetitive business would not be viable in
the longer term.
In the expanding global scenario whereby exports
currently account
for over 20% of BATCo cigarette sales, tariffs are
an important
indirect tax and comme-mial issue. Since most of
our exports are of
higher quality, higher price international brands,
our policy in export
markets is as follows:
eliminate tariffs
replace ad valorem tariffs with specific tariffs
persuade Government to raise revenue through
excise and other
indirect taxation not rariffs
lobby for specific or predominantly specific
excise taxation,
because ad valorem excise multiplies the amount of
the tariff (a
tax on a tax).
It should also be pointed our that our policy on
tariffs in domestic
markets is generally the opposite of the above. In
markets where
BAT has a'~ominant share. or where competition is
limited because
restricted access to the market keeps out imports.
out policy is to
persuade Government to minimise imports through
the application of
high tariffs and other obstacles such as pre
payment or early payment
of excise taxes. (However, as noted above this is
becoming more
difficult.)
11. Industry Relations
In a competitive context, tobacco excise taxation
is a key subject for
discussion and agreement in the National
Manufacturers Association.
Collective action and influence by the industry is
likely to be more
effective and productive than by individual
companies, although the
lamer may also be appropriate from time to time.
Although the lead
company on excise issues tends to select itself on
the basis of market
share, it can also be on the basis of knowledge,
cotperience, contacts
with Government- Where market share means that it
is not BAT
companies should seek to ensure a lead position
through these other
means. Excise contains many complex aspects which
hive to be
mastered if LIAI 1A leadership is to be
established.
cr,
NJ
r1 J
CD
13 ATCO document for Province of British Columbia
23 April 1999


Although the main thrust on excise should and will
always come from
the manufacturers, some benefit may be deiived
from incorporating
natural allies such as tobacco farmers,
processors, suppliers to the
industry, distributors and retailers in the
lobbying activities of the
NMA on excise levels.
Every opportunity for the industry to agree policy
and act collectively
shouid be taken. However, if agreement proves
impossible, it will be
necessary to devote the appropriate company
resources to Government
relations to ensure that the Group position and
influence exceeds that
of the competition.
U. Competitor Monitoring
BATCo policy is to comply with local excise
legislation whmver we
operate. In a number of countries. our competitors
do not always
have the same policy. In order that we are not at
a competitive
disadvantage evidence of avoidance or evasion
should be advised to
Government to ensure compliance. This is often an
issue requiring
delicate handling but the objective is clear.
13. Value Added Tax
Value Added Taxes (VAT) are always ad valorem.
Ideally they are
charged on the supply, including importation, of
goods and services at
every stage up to sale to a final consumer. They
are accounEs-based
taxes. This limits their coverage, for example to
manufacturers and
wholesalers in countries where retailers do not
keep accounts.
Businesses required to charge and account for VAT
are registered by
the tax, authorities and required to keep
specified accounts and make
periodic returns of the ta., due. The tax due is
the difference between
the tax charged on sales and the tax paid on
business purchases in the
period.
Excise duty periods and VAT periods need not
coincide e.g. in some
countries excise periods are monthly and VAT
quarterly.
13
Ln
C:)
cr,
CD
L4
U1
BATCo document for Province of British Columbia 23
April 1999


In many countries, where Governments are not
confident of wHecting
all the VAT due from the wholesale or retail
staged, manuftcturers
are required to charge the = on wholesale or
retail pri=. This can
be advantageous; it depends on the length of
credit; them can be cash
flow benefitr, it gives manu&cmrcn a degree of
control over retail
prices.
It is important, when VAT is applied to tobacco
products, to seek to
ensure :
a) that excise rates are reduced in compensation
b) dw the tax regime aHows the deduction of VAT on
;al business
purchases
c) that the length of credit adequately
compensates for the costs of
accounting for and coUccting the tax for the
Government.
d) that the collection of VAT does not extend
beyond the
manufacturing stage, uniess controlled by the
manufacturer. as
noted above.
DJ Bishop
,Njarch 1994
L4
Lr-
CD
Nj
cr,
NJI
r1 j
CD
LN
C7 \
BATCo document for Province of British Columbia 23
April 1999


APPENDEXT
STRUCTURF OF FXCIqV TAXATION
'rhe principle features, advantages and
disadvantages of the main types of excise
systems are:
SPECIFIC A specific excise structure is most
suited to a company
whose brands hive high levels of added value ot
image
and are positioned in the high and premium price
segments. Bemuse a specific structure results in
only a
narrow price range betwem the cheapest and the
most
expensive, there is little opportunity to compete
an the
basis of price. A specific structure is the global
policy
of Philip Morris whose brands art normally
positioned
&E the cop end of the market. Indeed, they lobby
hard
to change structures to specific and in some
instances
have succeeded, eg. Hong Kong.
A specific excise structure is closely associated
with
hi-h levels of profitability and product quality.
Z~ough many factors determine profitability', a
key
one is the nature and extent of price competition,
the
opportunities for which are limited with a
specific
structure. For example :
A 8 C
Retail price 100 89 111
Specific Excise 70 70 70
Trade Margin - 10% 10 9 11
Net Manufacturer Price 20 10 30
Th, is example demonstrates two features of &
speciric
structure based upon base case A:
B A reduction of 50% in the manufacturer's net
price from 20 to 10 results in an 11 % fill in the
retail price thereby demonstrating the limited
opportunity for price competition.
C An incre= of 50 % in the manufacturer's net
price from 20 to 30 results in only an I I%
increase in the retail price thereby demonstrating
how simple it is for a manufacturer to increm C)
r11j
CN
r1 i
r1 j
C)
L-4
13 ATCO document for Province of BritiSh Columbia
23 April 1999


profitability provided freedom to raise prices
exists.
For the same reasons as it discourages price
competition. a specific structure tends to
encourage
high qualiEy products.
A specific structure requires a positive act by
Government to raise the level of taxation which
may be
difficult to achieve in a political coalition
situation or
where the opposition is strong.
It may be difficult to achieve a wholly specific
structure
in some developing markets because of the resul=t
limited price range which Governments may consider
necessary to meet the divergent needs of smokers.
In
such instances, a predominantly specific structure
should be the target-
There are excise structures whose fearures am
essentially specific but whose impact is the same
as an
ad valorem structure. This occurs when Government
has different Specific taxes according to a
particular
'siab'. The various slabs being determined by:
length
of cigarette or price of cigarette. A specific
slab
structure is to be preferred to an ad valorem slab
structure.
SPECIRC BY WEIGHT
This method of taxing cigarettes originated in the
United Kingdom whi:~ discontinued it when it
joined
the European Community. However, some countries
still apply such a structure. Its features are
different
from the specific by number and the market impact
can
be different. although it remins the normal
characteristics of a specific system.
The tax might be assessed on the weight of tobacco
used to manufacture the cigarettes e.g. Sri Lanka,
or it
can be on the weight of the finished product e.g.
Australia. Singapore and Malaysia. One of the
problems of this system is that it is
administz-atively
cumbersome. In addition, unless some form of
credit
is agreed for factory waste the front end weight
system
can be very costly. In Australia the system has
encouraged fierce competition between the
cigarette
N;
011
NJ
16
U4
Ca
13 ATCo document for Province of British Columbia
23 April 1999


manufhcturers to reduce product weights and
densities
and hence prices.
AD VALORDI The impact of ad valorem excise sm=re
will vary
according to the local circumsmnccs of a
particular
company. In a highly competitive market it may
result
in a significant degree of price competition and a
resultant low level of profitability. However, in
a
monopoly or near monopoly market, it may not have
the same results unless a new small competitor
starts a
price war. It will also depend upon many factors
such
as the recognition by Competitors and Gove-nment
of
the need for a profitable price structure to
ensure the
financial health of the manufacturers and the
Ministry
of Finance.
An ad valorem excise structure creates or is best
suited
to a company whose brands are mainly located in
the
lower price segments, or a company whose costs of
manufacture are significantly lower than the
competition by virtue of a dominant market share.
Such a structure enables low added value and low
image brands to survive with a significant price
advantage over the higher image brands. It also
enables the advantage of lower costs to be passed
on to
the consumer with a 'multiplier' effect on the
retail
price.
An ad valorem excise structure is frequently
linked
with lower levels of profitability because it
creates the
circumstances where price competition can
flourish.
However, there are many exceptions to this which
demonstrates that many other factors need to be
taken
into account before such a general statement can
be
made.
An ad valorem structure has a multiplier effect
upon ex
factory price differences which enables
manufacutrers
to reduce prices at the 'expense' of the
Government
instead of by reducing their own profit margins
for
e-xmple!
A R C
Retail Price 100 50 150 Q11
Ad Valorem Excise C)
(70% of retail price) 0 35 105 r%.)
Trade Margin cr,
Nj
NJ
C:~
17
BATCo document for Province of British Columbia 23
April 1999


(10% of retail price) 10 5 15
Net Manufacturers Price 20 10 30
nis example demonstrates two features of an ad
valorem structure based upon a base caz A :
B.A reduction in the manufacturer's net price by
10
units from 20 to 10 results in a decre= in the
retail
price of 50 units thereby showing the multiplier
effect
of an ad valorem excise structure.
C.Similariy an incre;tse in the manufacturer's net
price
by 10 units from 20 to 30 results in an increase
in the
retail price of 50 units, thereby showing the
multiplier
effect in the context of an increase.
T'he NIULTIPLIM concept occurs directly from an ad
valorem structure. In the above me the multiplier
has
a value of 5 which means a net price change of 10
results in a remil prce change of 50. It is
calculated as
follows :
100 - X
where x = the sum of the proportional elements
expressed as pe-cenmgcs of the retail price.
"A = SO = M = lm = BQ
100-(ad 100-(70+10) 100-80 ZO
valorem.
trade
mar--ins)
For the same rmson as it encourages price
competition,
an ad valorem structure can often lead to lower
quality
products whose lower costs can be passed on to
Elie
consumer in the form of lower prices where the
reduction is multiplied through the tax structure.
Is
Ur
C)
N;
CTI
M.)
Nj
CD
BATCo document for Province of BritiSh Columbia 23
April 1999


An ad valorern structure automatically increases
the
amount of excise when a manufacm= increases its
prices. It therefore has an appeal to Government
who
may not therefore need to Wm any action to
increase
their revenues. On the other hand, because revenue
yield depends on retail prices, them is a greater
danger
of Government interference in retail price
detemination than there is when the excise is
specific.
In some markets ad valorem excise is expressed- as
a
percentage of the ex factory price and not the
retail
price. In such situations, it may be appropriate
to
consider transferring some of the elements
nornully
included in the ex factory price to beyond the
point
where the ad valorem 4 applied and so saving the
multiplier effect impacting upon them. One means
of
achieving this is to transfer some of the
marketing
expenses. However, one should appreciate that this
might be a short lived tactic which may give rise
to
problems with Government over the longer term and
may enhance the power of the trade, particularly
if
thev margin were increased to absorb the transfer
of
marketing expenses.
,NMIED A mixed excise structure contains elements
of both
specific and ad valorem. Its effect clearly
depends
upon the relative size of the two elements. Such a
system applies throughout the European Community
although different countries have different
relativities
between the two.
A mixed structure can be particularly beneficial
to a
company whose brand mix includes both higher
priced
brands and mid priced brands which am normally
local
or national. The exact balance or relativity
between the
two will depend very much upon the cost structure
of a
market and the retail price structure required.
t9
C)
r1 i
CF\
rQ
NJ
C)
-Ch-
BATCo document for Province of BritiSh Columbia 23
April 1999


APPENDIX 11
rXCTr,E ADMMSTRATION
There are many aspects of excise administration
which have an impact upon the
company. Although not all of them can be addressed
in a key area paper, some are
worthy of inclusion.
TLNMNG OF PAYMENT
It is important to establish exactly when excise
taxation falls due, and when the clock
starts for any excise credit granted by
Governments.
With banderoles or fiscal stamps, the timing of
payment is normally based upon the
actual purchase of the stamps, the time it takes
to manufacturt: and deliver and the
. porting
stock durations of the manufacturers and the
trade. Arguments and sup '
evidence are essential to persuade Governments to
accept payment cnly when the
cigare= have been sold to smokers or as a minimum
when payment has been
received by the manufacturen.
With other systems of collecting. excise the same
principles of the timing of payment
apply although the issue of when delivery to the
trade takes place oftem becomes
more important (is it when goods move from a
central to a regional depot or from
the latter to the trade). This &[so his
impLicajions for stock valuations.
With regards to the date and day of payment, it is
helpful to establish wheLher
payment has to be with the Government in the form
of a cheque, whether it has to be
in their account or whether it has to be with them
in the morning or at any time on
that date. The time taken to clear a cheque =
often be significant in cash flow
terms.
REFUNDS
It is important to establish a procedure for
refunds or non-payment either to deal
with re=m from the trade, damaged goods or bad
debts. The exact demils will
relate to the method of payment but should take
into consideration the following
an entitlement to a credit or refund for all goods
returned by the trade, at the
rate of excise appropriate to them. it is perhaps
unrealistic to expect any
refund to be at a level higher than the excise
actually paid although it might
be administratively simpler to provide for refunds
to be at the current excise
rate.
An entitlement to a credit for all goods damaged
during the manufacturing
process. up to the point at which they are
distributed to the trade. U71
C:)
r1 j
C7 \
r1 j
r\j
20
BATCo document for Province of British Columbia 23
April 1999


An entitlement to a credit for all bad debts with
trade non-payment being
shared on dz basis that the manufActurer bears the
cost of the goods but the
Governme= bears the excise mxation element. The
transfer of ownership is
often a crucW element in this area.
Provisions for excise taxation and refunds are not
always identical to those
for value add-I tax (if applicable). Governments
should be persuaded to
apply the same provisions using the mom beneficial
of the two.
21
Nj
C:)
Z:~..
LI4
13 ATCo document for Province of British Columbia
23 April 1999


BATCo document for Province of British Columbia 23
April 1999


666~ I!jdV CZ eiqLunloo LISII!JJ3 10 OOUIAOidiol
luouunoop oojLvj3
Lr)
z
-7 08,
C%l
C"i
Fx
Ln


BATCo document for Province of British Columbia 23
April 1999
f. A
Ift
Un
C~
rIj
CII M
r,.~
rIj
CD
0% 3~1


666~ IIAV CZ eiquunloo 4SIM.18 10 ODUIAOJd .101
lueLunoop oojLVB
LO
Ln
L.-pen
t. 7-~'j
31
;-%;:- SO
r._.n
:E .7.f
F~--
r7 l 4., -1-
M
Fla,
Nit W-


3 ;
2"
-:14- 4
;te
..4~
7 V
rIj
CD
BATCo document for Province of British Columbia 23
April 1999


Ln
C:)
rIj
(IN
r*j
rIj
C)
CO
BATCo document for Province of British Columbia 23
April 1999