Tobacco firms sidestep tax rises

Opposition MPs say tobacco companies are "gaming" tax rules to reap profits from annual excise increases, profiting from measures designed to curb smoking.

Tobacco companies are avoiding millions of dollars worth of tax increases each year by triggering huge excise payments just before the end of December, then keeping the annual increase on New Year sales.

A timing loophole creates an entirely legal way to make a windfall from tax increases.

Last year the Government announced there would be 10 per cent increases in tobacco excise, on top of inflation adjustments, each year for four years, on January 1.

That followed a 40 per cent increase in the tax since April 2010.

The tobacco companies are responding by importing huge volumes of tobacco in the final months of each year, with imports plunging at the start of the following year.

When prices increase on January 1, whoever owns any tobacco at the time keeps whatever increases are passed on to customers. None of the three major tobacco companies which operate in New Zealand denies using the tactic.

Green Party health spokesman Kevin Hague said the companies seemed to be "gaming" the system to delay the impact of increases, using a loophole he did not know had existed.

He said he thought the money was being gathered in tax, not that was creating a windfall "for the very industry that's causing all of the harm."

Hague said the tobacco companies would know precisely what they held in stock at any time, meaning there was "no administrative hurdle" preventing the added excise being collected as tax.

NZ First revenue spokesman Andrew Williams said the loophole would be creating millions in profits.

"Of course it's a rort, absolutely," Williams said, adding that the fact cigarettes were being flown into the country demonstrated how lucrative the loophole must be.

"These international companies know all of the tricks of the game."

Retailers are not compelled to pass on the increases on January 1, but are encouraged to do so by the Ministry of Health.

Both the Treasury and Customs have confirmed excise is triggered once and the opportunity exists to legally add profit from subsequent price increases.

A similar situation exists for fuel companies, but the smaller excise increases and storage requirements makes their potential windfall much smaller.

For tobacco, the loophole allows companies to delay the impact of excise increases, depending on how much excise-paid product they have in stock by December 31.

Figures from the New Zealand Customs Service shows a massive weighting in imports towards the end of each year, with more cigarettes typically imported in the final two months of each year than the following six months.

Treasury figures show a major bias in the tax take from tobacco companies in December.

Last December, Treasury collected $423 million, while during the next seven months the combined take was $390m. The figures include both imported tobacco and excise from Imperial Tobacco's factory in Petone.

In December 2011 the amount of tax collected on tobacco, at $370m, was more than the following six months combined.

Customs Minister Maurice Williamson was not concerned by the tactics.

"As long as tobacco companies are abiding by the law then it's up to them how they behave," he said.

Smokers interviewed on the subject were baffled to learn that increases in January did not necessarily go to the Government.

For Imperial Tobacco, which runs New Zealand's only cigarette factory, excise is triggered when product crosses a "bond line" in its warehouse, timed at the company's discretion.

Brendan Walker, Imperial Tobacco's New Zealand manager, said the company's aim was to ensure it had product when customers wanted it, but he did not dispute there was a windfall opportunity each year.

"We, like any other business, will look at maximising any efficiency we can," he said.

A spokeswoman for British American Tobacco, which has close to 75 per cent of the New Zealand market, all with imported products, said the company was focused on paying taxes which were due "in as efficient a way as possible".

US tobacco giant Philip Morris has not replied to written questions.

A tobacco industry source said some smokers did buy up large in December, as did retailers, with reports of dairy owners borrowing money from family members to maximise the potential windfall.

But the source conceded the companies used a similar tactic.

"Everyone in the chain is speculating," the source said.

Wellington taxi driver William Dunn, who after about 40 years of smoking is struggling to kick his 10-cigarette-a-day habit, said he assumed that when the cost of a pack of cigarettes went up each January, the increase immediately flowed to the Government.

"I'll bet 98 per cent of people think that money is going to the government," Dunn said.

"You would have thought the tobacco companies are making enough money without having to do that."

Fairfax Media