BAT SSF AUDITBAT SSF AUDIT

BRITISH AMERICAN TOBACCO

• BAT is the world’s second largest quoted tobacco group by global market share, with brands sold in more than 180 markets.

• With over 300 brands in our portfolio, BAT makes the cigarette chosen by one in eight of the world’s one billion adult smokers.

• In 2008, the company’s subsidiaries enabled governments worldwide to gather almost £22 billion a year in taxes, including excise duty on its products, more than eight times the Group’s profit after tax.

Corporate Social Responsibility

BRITISH AMERICAN TOBACCO AZERBAIJAN

British American Tobacco Azerbaijan is a Representative Office of BAT (UK and Export) Limited being registered in London. It implements Marketing related activities such as Market research and Brand Support.

BAT Azerbaijan on it’s entrepreneurial activities as RepOffice has no turnover on finishing of goods, performance of work and rendering of services (except of disposal of Fixed Assets)"

• BAT Azerbaijan has more than 40 permanent employees, 20 percent of which are expats.

• The main source of Social contributions are the following:

– Salaries

– Bonuses

– Other Expats’ benefits

– House rentals of Expats’ staff

• During 2008 BAT Azerbaijan made more that $1mln of social contributions

BRITISH AMERICAN TOBACCO AZERBAIJAN

SOCIAL SECURITY INSPECTION

• Period of Inspection

– Inspection from Social Security Fund took place in 2008 and covered 2 year period (June 2006- June 2008)

• Notification on inspection

– A company has a right to get a written notification 2 weeks prior starting date of inspection. This time can be used for the necessary preparation.

• The main object of audit

– The documents were requested by inspectors were Petty cash book and Payroll sheets.

– They were not interested in Bank transfers and Corporate Cardspends.

SOCIAL SECURITY INSPECTION

After 2 days of inspection following types of expenditure were challenged by the inspectors.

- Car Wash

- Travel expenses exceeding daily allowance stipulated in the legislation

- Business lunches

- Office supplies (milk, cola, cooks, tea etc)

- Mobile phone running cost.

SOCIAL SECURITY INSPECTION

• Car Wash– Although it was clearly stated in the expense statement that the cost is

related to wash of Companies’ cars, the inspectors insisted that this cost has to be added to the drivers salaries and relevant taxes applied

• Travel expenses exceeding daily allowance– From the inspectors perspective for any exceeding cost on travel

expenses, social contributions of 25% must be applied. In the legislation it as a grey area whether it is correct or not

• Office supplies– As per the inspectors view amount of all office supplies have to be

proportionally applied to the employees salaries and relevant social contributions calculated.

SOCIAL SECURITY INSPECTION

• Business lunch – Due to specifics of activities in BAT Azerbaijan, business lunches or other

entertainment cost are very common expenditures. From the inspectors point of view such expenditures have to be applied to the employees’ salaries to whom cash advance was provided.

• Mobile phone running cost– Running cost on mobile phones has to be applied to respective

employees salaries and social taxes to be calculated. Existing of company mobile phone policy and statements of call didn’t influent on inspectors opinion

INSPECTION OUTCOME

• Overall inspectors came to very unreasonable report that about 200k USD is to be paid by the company (including penalties).

• It was possible to abate the results of the report only after meeting with the senior management of SSF.

OUR RECOMMENDATION

• We believe that existing legislation needs to be reviewed in order to meet today’s business requirements, especially for Rep offices and marketing activities.

• The grey areas which can not give a clarity upon certain treatment of tax implications needs to be addressed, because they create a potential risk of overpayment of taxes.

• The way forward: to bring the issue using common platform, e.g. AmCham, to the attention of the Government

Thank You