Laos losing millions in tobacco taxes

The tax currently levied on tobacco products is far below that stated in the amended Law on Excise Tax passed in 2011, causing Laos to lose US$6 million annually until 2026.

The law states that a tax of 55-60 percent should be levied on the capital price of all tobacco products. But in fact only 15 percent is charged under an agreement made between the Lao government and Lao Tobacco Limited, to run from 2001 to 2026. Imperial Tobacco of the UK has a 53 percent shareholding in Lao Tobacco Limited.    

The 25-year agreement also applies to five other tobacco companies in Laos, covering all tobacco products manufactured in the country.

Under the agreement with the Lao government, the Imperial-led consortium pays excise tax on its products of between 15 percent and 30 percent, much less than Laos’ standard rate of 55-60 percent.

The agreement has already been in force for 13 years, during which time Laos has lost more than US$79 million. If the situation remains unchanged, Laos stands to lose more than US$72 million over the next 12 years, bringing the total to more than US$151 million.

Deputy Director General of the Tax Department under the Ministry of Finance, Mr Lamngeun Tanlamany, pointed out that this figure applied only to Lao Tobacco Limited. If all six tobacco companies in Laos were taken into account, tax losses could amount to millions of dollars more over the 25 year-agreement.

Tax staff estimate that the US$79 million lost over the last 13 years could build 29 hospitals or 592 schools, or 12, 640 km of asphalted road or 3,160 km of concrete road.

Secretariat of the National Commission of Tobacco Control, Dr Phath Keungsaneth, said the government was obliged to respect the agreements, laws and regulations it signed.

But he urged tobacco companies to reduce the harmful effects of tobacco by increasing the tax paid year by year if they could not immediately increase it to the amount stated in the Law on Excise Tax.

Deputy Director General of Legislation Department at the Ministry of Justice, Mr Inthapanya Khieovongphachanh, said the Lao government has the right to negotiate with the tobacco company to change the agreement in line with Lao laws and global trends. Changes should also reflect the dictates of international treaties that Laos is a party to.

According to the World Health Organisation, tobacco claims the lives of nearly six million people worldwide each year. More than 600,000 are non-smokers who die from breathing second-hand smoke. In Laos, about 4,807 people die from tobacco-related illness each year.

Smoking and any form of tobacco use causes 90 percent of lung cancers and is also a cause of cardiovascular disease.

According to a report in the UK’s The Guardian this month, health campaigners claim the British tobacco giants are desperate to deflect attention from the situation, 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. Under the terms of the deal, the consortium can negotiate with the Lao government “from time to time, Imperial taxes and duties from the importation of cigarettes and other finished tobacco products.”

Imperial insists it operates legally and 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 Director of the Southeast Asia Tobacco Control Alliance, Ms Bungon Ritthiphakdee.    

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 US$1 per pack.

“Tobacco needs to be taxed high to discourage consumption, the same as in the UK,” said Ms Bungon.

“Between 2002 and 2013, the Lao government has suffered revenue losses of US$79.42 million due to this unfair contract – money that could save 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 Chief Executive of Health Charity Ash, Mr Deborah Arnott, 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 Lao 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 Lao government on ways to increase tobacco excise revenue, not to minimise it. 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.”