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. Last Updated: 07/27/2016

JTI Takes Tax Fight to a Second Front

While Japan Tobacco International fights off tax claims totaling some $90 million in high-profile court cases, the cigarette maker is waging another tax battle on a front far from the public eye.

The country's No. 3 tobacco company is leading a crusade to roll back changes in the excise tax, which it says contributed to its mounting back tax bills. The changes resulted in less revenue being delivered into the federal budget, JTI claims, giving authorities a motive "beyond standard audits" for a closer inspection of tobacco manufacturers.

As a result, JTI now faces a total of some $90 million in back taxes and late fees.

Petro, JTI's plant in St. Petersburg, has been hit with a $15 million back tax charge for 2001 and is set to appeal the bill in the St. Petersburg Arbitration Court on April 20.

That bill came on top of a 2000 back tax claim for $86 million. In September the Moscow Arbitration Court rejected JTI's appeal of the bill, even though it reduced the charge by some $10 million. The case has moved to the Cassation Court, which rescheduled a Thursday hearing to April 12.

"The centerpiece of the allegations against us stems from a misunderstanding by the tax authorities of our accounting system," Rick Caufield, JTI Russia's general manager for marketing and sales said in an interview.

"We firmly expect to be totally exonerated."

Caufield said changes in the excise tax were partially to blame for JTI's tax woes.

"It's been widely publicized that when the excise tax system was changed ... the tobacco industry delivered less in excise taxes than what was [projected] in the budget," he said.

Before 2003, excise tax was a flat tax levied on every 1,000 cigarettes produced. After the changes, excise tax also took into account a cigarette brand's wholesale price. Inevitably JTI bears higher costs for its locally-produced smokes like Winston or Camel than producers of lower-end brands bear.

JTI is actively lobbying for a return to the previous system with the belief that "the tax authorities would collect what they expect to collect and they wouldn't have to go looking for money elsewhere," as Caufield put it.

Not everybody in the industry agrees, however.

Tabakprom, the main tobacco producers' lobby, asserts that excise tax revenues are actually growing.

While the industry's total production dipped slightly to 381.3 billion cigarettes last year, state revenues from excise taxes increased by 5 billion rubles ($17 million), totaling 23.2 billion rubles ($83 million) in 2004, according to Tabakprom.

Last month the lobby appealed to Prime Minister Mikhail Fradkov to preserve the current system and level of excise tax. The Cabinet is set to discuss the tax later this month.

Many producers are against any changes in part because the previous system benefited the makers and consumers of expensive cigarettes, said Yelena Mamontova, head of corporate affairs at Liggett-Ducat, the country's No. 4 cigarette manufacturer under the control of Britain's Gallaher.

The current system provides a more equitable distribution of the tax burden across social groups, Mamontova said.

Liggett-Ducat, which according to Business Analytica controls 12.2 percent of the market after JTI's 17.9 percent, targets consumers of inexpensive brand such as Ducat, Level and Prima.

JTI's Caufield said that the previous system did not necessarily favor higher-end brands.

If an optimal rate is set, he said, cheaper brands won't lose out.