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. Last Updated: 07/27/2016

Japan Tobacco Hit With $85M Back Tax Bill

bloombergJTI, whose brands include Camel and Winston, is the world's No. 3 cigarette maker.
Japan Tobacco International, one of the largest foreign investors in Russia, said Friday it had been served an $85 million bill for back taxes and fines, the latest in a string of similar claims against major companies.

"The assessment follows a routine tax audit for 2000 and represents a tax claim against JTI of 2.4 billion Russian rubles," the Moscow office of the world's No. 3 cigarette maker said in a statement.

The Tokyo-based company said the claim, which would be the largest ever for a tobacco company in Russia, was received in July and "based on an erroneous interpretation of well-accepted business practices."

JTI, No. 4 in cigarette sales in Russia last year with about $1 billion, declined to go into details about the claim because it is currently before the courts, with the first hearing scheduled for Wednesday. A company spokeswoman in Tokyo, however, told Reuters it related to value-added taxes.

Kommersant on Friday cited anonymous police sources as saying a criminal case had been opened against the company for allegedly using a transfer-pricing scheme to avoid paying VAT. One source told the paper that JTI could face similar bills for subsequent years.

The Interior Ministry declined to comment. A spokesman said: "There are many companies. We can't keep thorough track of them all."

The case against JTI comes at a time of heightened fear in the business community as a result of aggressive probing of the recent tax history of several companies, most notably oil major Yukos, which is being dismantled by the government to cover more than $20 billion in back taxes and penalties for 2000-2003.

Oil majors TNK-BP and Sibneft, mobile phone operators VimpelCom and MegaFon, and shipping giant Volgotanker are some of the companies that have been served with back tax bills in recent months.

JTI, formerly known as Japan Tobacco, paid nearly $8 billion in 1999 for R.J. Reynolds International, the international tobacco unit of RJR Nabisco. The company, whose products include Camel, Winston and Salem, now operates in 70 countries, including Belarus and Ukraine.

With 16.2 percent of the Russian market, JTI is running neck and neck with British American Tobacco (16.7 percent) and Gallaher (17.1 percent) for the No. 2 spot, according to Business Analytica, a research firm. The maker of Marlboro, Altria, formerly Philip Morris, holds the top spot with 26.3 percent.

JTI is two-thirds owned by the Japanese Finance Ministry and is publicly traded.

The Japanese Embassy in Moscow said it was aware of the case, but declined to comment, citing the ongoing legal challenge.

The Japan External Trade Organization, which represents Japanese businesses abroad, declined to comment officially. But the head of the lobby group, Iwao Ohashi, said his personal opinion was that the JTI case may become "one of the factors" Japanese companies consider when deciding whether to invest in Russia.

As long as the economy continues to grow, however, there will be interest in Russia, Ohashi said.

Japan was No. 6 in foreign direct investment into Russia in 2003, having invested $1.353 billion, nearly all of which went into the manufacturing sector, according to the State Statistics Service.