Campaigners say agreement between Imperial Tobacco and the Laos government boosted sales by keeping prices low, and deprived the poor country of million of pounds of tax revenue.
The Guardian (UK newspaper), October 5 2014
Big tobacco sees Asia as a growing market, and keeping prices, and taxes, down is a key strategy. Photograph: Frederic J Brown/AFP/Getty Images
A British tobacco giant has been accused of depriving taxpayers in Laos, one of Asia's poorest countries, of tens of millions of pounds, having struck a special tax deal with its government lasting a quarter of a century.
Health campaigners claim the agreement has kept cigarette prices in the country low, which encourages younger people to take up smoking.
But Imperial Tobacco, which accounts for around 90% of all cigarettes sold in Laos, has fiercely defended the deal between the government and the consortium in which it owns a majority stake.
The row comes ahead of a major international meeting at which 179 countries, including Laos, which have signed up to the World Health Organisation's Framework Convention on Tobacco Control, will seek to agree new rules on tobacco taxation.
Health campaigners claim the tobacco giants are desperate to derail the talks worried about their profits in developing countries. They say the Imperial deal – signed in 2001 and due to last until 2026 – highlights the need for reform.
According to the agreement with the Laos government, the Imperial-led consortium pays excise tax on its products of between 15% and 30%; the country's standard rate is 55%.
Under the terms of the deal, seen by the Observer, the consortium can negotiate with the Laotian government "from time to time, preferential taxes and duties for the importation of cigarettes and other finished tobacco products".
Imperial insists it operates legally and that the tax arrangements have been renegotiated several times since it signed the deal. Under the original terms, the consortium paid no corporate income tax for the first five years, and was granted other concessions.
But health groups say these arrangements are wrong. "With this contract, the tobacco industry is interfering with the sovereign right of states to determine their taxation policy," said Bungon Ritthiphakdee, director of the Southeast Asia Tobacco Control Alliance.
Big tobacco sees Asia as a growing market that will drive future profits as Europeans turn away from smoking. Keeping tobacco taxes down is crucial to its growth strategy. Cigarettes are relatively cheap in Laos, costing less than one US dollar a pack.
"Tobacco needs to be taxed high to discourage consumption, the same as in the UK," Ritthiphakdee said. "Between 2002 and 2013, the Laos government has suffered revenue losses of $79.42m due to this unfair contract – money that could have been used for health and social development for the nation."
A spokesman for Imperial said that, by negotiating the 2001 deal, it had made a long-term commitment to Laos and saved the state cigarette manufacturer, the country's third-largest revenue contributor, from bankruptcy. As a result it had helped generate thousands of jobs both directly and indirectly in Laos and curbed the flourishing market in counterfeit cigarettes that earned the country's exchequer no revenue.
But Deborah Arnott, chief executive of health charity Ash, said the Imperial tax deal encouraged smoking. "Lower taxes mean lower prices and as a result, young people are increasingly becoming addicted to a product that kills half its lifetime users in a variety of painful and unpleasant ways. The Laos government must live up to its obligations under the WHO tobacco treaty, obligations which are about to be strengthened with specific guidelines on taxation."
The Imperial spokesman said: "We work with the Laos government on ways to increase tobacco excise revenue, not to minimise it."
He added: "As part of the 2001 agreement, Imperial agreed to develop a sustainable leaf growing strategy to alleviate rural poverty. This highly successful project remains ongoing."