Follow the money: How the billions of dollars that flow from smokers in poor nations to companies in rich nations greatly exceed funding for global tobacco control and what might be done about it

Introduction

Tobacco use is a global health problem, and the business activities which fuel tobacco use have garnered strength from the economic, cultural and trade dimensions of globalisation.1

Indicative of the increased globalisation of the tobacco market is the extent to which domestic tobacco producers have been replaced by multinational corporations. While it may be difficult to visualise the number of smokers worldwide (1.3 billion) or the number of cigarettes smoked in recent years (5.6 trillion in 2008),2 the number of tobacco companies that make most of these cigarettes can be can be counted on the fingers of one hand. They are British American Tobacco, the China National Tobacco Company, Imperial Tobacco, Japan Tobacco and Philip Morris International. Among the companies that have in recent years been acquired by or merged with these companies are Gallaher, Lakson, Reemstma, Rothmans, Sampoerna, SEITA, Tabacalera and Tekel.3 In only a few nations (such as China, the USA, Japan, Thailand, Egypt) is the tobacco market operated by companies headquartered in that country,3 and the global market share of multinational tobacco companies has grown significantly over the past two decades (table 1).

The world's largest tobacco company is owned and controlled by the Chinese government and operates almost exclusively in China; in 2008 it accounted for 38% of the world's cigarette sales.5 While estimates differ of the market share of the largest companies operating outside China,8–10 Euromonitor2 reports a further 50% of the world market is supplied by: British American Tobacco and its associates, (16.4% global market share when sales by associated companies like Reynolds American are included); Philip Morris International (15.5%); Japan Tobacco (10.9%); and Imperial Tobacco (5.9%). The remaining market is served by companies which operate predominantly in domestic or regional markets, such as US-based Altria/Philip Morris USA (3%) and Lorillard (<1%); Egypt's Eastern Tobacco (1.2%); Korea's KT&G (1.8%); the Thai Tobacco Monopoly; the Taiwan Tobacco & Liquor Corporation; the Vietnam National Tobacco Corporation; and Bulgaria's Bulgartabac (all under 1%).211–13

One consequence of global concentration is the relative ease of measuring the tobacco economy by using information provided to shareholders and financial analysts in compliance with stock exchange and other regulations. Comparative data on tobacco control are less robust or routine but, nonetheless, allows comparison between the financial benefits to tobacco company owners that result from tobacco use and the financial resources provided by governments and others to reduce tobacco use.

Methods

Sales data, revenue and income of the largest publicly traded tobacco companies for the 2008 fiscal year were collected from corporate annual reports of the companies reviewed,14–17 investor presentations8–1018 and from other trade sources.231920 Information on expenditures on tobacco control and selected health issues during this same general time period were gathered from publicly available sources.1516 These data were compiled to provide a snapshot of the global economies of tobacco sales and tobacco control in 2007 and 2008.

Some adjustments to the data were required to allow for comparability. The companies reviewed defined key financial terms differently, reported on different time periods, presented data in different currencies and used different regional groupings for their markets. To allow for better comparison of data:

• The terms (a) revenues, (b) earnings and (c) profits were used to mean (a) gross value of tobacco sales including excise taxes, (b) value of tobacco sales after costs of production and excise taxes have been subtracted and (c) net corporate proceeds after income taxes, extraordinary items and other expenses have been subtracted.
• The business activities reviewed were those in the fiscal year with the most months in 2008: that is the fiscal years ending 30 September 2008 (Imperial Tobacco), 31 December 2008 (British American Tobacco, Altria and Philip Morris International) and 31 March 2009 (Japan Tobacco).

• No adjustment was made to regional or geographical categories or terms, which are presented as provided by the companies. Information on the groupings used by the companies, although often vague can be found in their annual reports.14–17

• For companies that did not report results in US dollars, local currencies were converted to US dollars at the average annual rate in 2008, as stated in table 2.

• This study is limited to the sale of manufactured cigarettes and fine-cut tobacco intended for use in cigarette form (ie, RYO/roll-your-own). These two product categories were combined by calculating 0.7 g of fine-cut tobacco as equivalent to a manufactured cigarette. Oral tobacco, shisha tobacco, pipe tobacco, bidis, etc, were not included in this study.

Results

In 2008, British American Tobacco, Philip Morris International, Japan Tobacco International and the Imperial Tobacco Group shared about $220 billion in revenues from tobacco sales. After these companies paid their production costs and remitted tobacco taxes to governments, their earnings were $25 billion, approximately $0.18 for each package of 20 cigarettes they sold. After paying corporate income taxes and other such expenses, they retained almost $14 billion in profits (about $0.10 per package). Almost nine-tenths of the sales on which these earnings were based were in foreign markets—that is, from sales in countries other than the country in which the company is officially and operationally headquartered. On average, each carton of 200 cigarettes sold by Philip Morris International resulted in a return of $2.30, while Imperial Tobacco's earnings on foreign sales were $1.78 per carton, BAT's were $1.60 and Japan Tobacco's were $1.10 per carton. These results are presented in table 2.14–17

Discussion

The globalisation of the tobacco market has resulted in significant transnational transfers of revenues from tobacco sales. The globalisation of tobacco control, in the form of the FCTC, has not yet resulted in significant transnational transfers of revenues to support tobacco control efforts.

Global concentration of the tobacco industry could allow for increased funds to be made available for global efforts to reduce tobacco use through the use of transaction taxes on the flow of profits from countries where multinational tobacco companies sell cigarettes to countries where they distribute the profits or other fiscal instruments. This could reverse the current pattern, which sees money flow from smokers in developing countries to corporations in the developed world. It would also be consistent with the ‘polluter pay’ principle and with proposals like the Tobin Tax to levy fines on international financial transactions. A precedent for surtaxes on tobacco companies can be found in Canada, where the government levied a ‘health promotion surtax’46 on tobacco manufacturers' earnings in 1994, now set at 150% of the tax rate for all other corporations.47

The imbalance between the money that flows from (often poor) smokers to (often not poor) shareholders and the money that flows from wealthy to poor countries to reduce tobacco use can be illustrated by comparing the earnings received by just one tobacco company from smokers in one sub-continent with the amount provide to help all poor nations combat tobacco use. In 2005, BAT reported to investors that it sold 40 billion cigarettes in two of the world's poorest regions, Equatorial and West Africa, and that a similar number of cigarettes were sold in the region by all other companies combined.48 Assuming the profits on BAT's sales in that region were consistent with its average earnings that region ($0.17 per package of 20 cigarettes, shown in table 1), then smokers in the poorest countries of sub-Saharan Africa provided about $340 million to BAT's bottom line, about 140% the global DAH for tobacco control. Equivalent figures for earnings from tobacco sales by other companies in that region are not disclosed, but would further increase the gap between the amount provided by Africans and the amount available to them.

The same governments and international agencies that have adopted innovative mechanisms and partnerships to raise funds for other global health challenges have so far failed to do so for tobacco, although they have developed in domestic tobacco control several models for how this could be done. Canada's health promotion surtax on tobacco manufacturers' income, mentioned above, is one available tax instrument. California, Switzerland and other jurisdictions have imposed special consumption taxes on tobacco, or levies, to provide funding for tobacco control and other health programming.4950

Governments could draw on the same innovative spirit they used to develop novel instruments to fund efforts against HIV/AIDS, tuberculosis and malaria in order to find a suitable mechanism to increase funding available to development assistance for tobacco control. The experience with these other diseases suggests that when there is a political will, a way to raise money can be found.

The FCTC provides a forum appropriate for intergovernmental negotiation of ways to reduce the transboundary flow of earnings from tobacco use and to increase transboundary support for tobacco control. Actions the Conference of Parties and the FCTC Secretariat could take include:

• Monitoring the application of the Article 5.3 guidelines on tobacco industry influence which recommend against investments by governments in tobacco companies, and reporting on the dividends paid to governments that refuse to abide by these guidelines.
• Requesting parties to gather and report information on earnings of the tobacco industry in their country, and also to report on the destination of those earnings.
• Requesting WHO/TFI to include in its study of ways to implement FCTC Article 6 (tax and price) methods, currently under way, the use of profit taxes to raise funds for national and international tobacco control efforts.

Diverting a portion of the earnings on tobacco sales that cross international boundaries away from shareholders and towards the victims and potential victims of this commercial activity might be one way to resolve the funding crisis that hinders full implementation of the FCTC.