Notes to the Unaudited Interim Financial Statements
Continued
Contingent liabilities and financial commitments
The Group has contingent liabilities in respect of litigation, taxes and guarantees in various countries. These are described below, are
further described in Note 31 to the 2023 Annual Report and Accounts and Form 20-F and will be included in the 2024 Annual Report and
Accounts and Form 20-F. The Group is subject to contingencies pursuant to requirements that it complies with relevant laws,
regulations and standards. Failure to comply could result in restrictions in operations, damages, fines, increased tax, increased cost of
compliance, interest charges, reputational damage or other sanctions. These matters are inherently difficult to quantify.
In cases where the Group has an obligation as a result of a past event existing at the balance sheet date, it is probable that an outflow of
economic resources will be required to settle the obligation and the amount of the obligation can be reliably estimated, a provision will be
recognised based on best estimates and management judgement. There are, however, contingent liabilities in respect of litigation, taxes
in some countries and guarantees for which no provisions have been made. While the amounts that may be payable or receivable could
be material to the results or cash flows of the Group in the period in which they are recognised, the Board does not expect these
amounts to have a material effect on the Group’s financial condition.
Taxes
The Group has exposures in respect of the payment or recovery of a number of taxes. The Group is and has been subject to a number of
tax audits covering, among others, excise tax, value-added taxes, sales taxes, corporate taxes, overseas withholding taxes and payroll
taxes. The estimated costs of known tax obligations have been provided in these accounts in accordance with the Group’s accounting
policies. In some countries, tax law requires that full or part payment of disputed tax assessments be made pending resolution of the
dispute. To the extent that such payments exceed the estimated obligation, they would not be recognised as an expense.
There are disputes that are in or may proceed to litigation in a number of countries, including Brazil and the Netherlands. In relation to
Souza Cruz, the Group’s Brazilian subsidiary, the Brazilian Federal Tax authority has challenged the treatment of Rio de Janeiro VAT
incentives. In October 2021, in respect of the 2016-2023 calendar years, the authorities’ position was upheld at the lower Judicial Court.
Souza Cruz has appealed in full against the judgment. In June 2024, the Brazilian tax authorities initiated a tax audit specifically focused
on the exclusion of the VAT incentives from corporate income tax. Consideration of the defence strategy has led Management to file a
petition to withdraw its judicial claims in order to be able to defend the company’s position in the administrative courts. The Brazilian
Federal Tax authority has filed an appeal challenging the withdrawal of the judicial claim. This has resulted in a reversal of the benefit
recognised for the company’s claim for the period 2016-2019 of BRL327 million (£47 million) and a provision for potential exposure to tax,
interest and penalties of BRL969 million (£138 million) for the 2020-2023 period.
The Group is also appealing the ruling in respect of sales taxes and penalties in South Korea.
Group litigation
Group companies, as well as other leading cigarette manufacturers, are defendants in a number of product liability cases. In a number of
the cases, the amounts of compensatory and punitive damages sought are significant. While it is impossible to be certain of the
outcome of any particular case or of the amount of any possible adverse verdict, the Group believes that the defences of the Group’s
companies to all these various claims are meritorious on both the law and the facts, and a vigorous defence is being made everywhere. If
an adverse judgment is entered against any of the Group’s companies in any case, avenues of appeal will be pursued as necessary. Such
appeals could require the appellants to post appeal bonds or substitute security in amounts that could in some cases equal or exceed the
amount of the judgment. At least in the aggregate, and despite the quality of defences available to the Group, it is not impossible that the
Group’s results of operations or cash flows in a particular period could be materially affected by this and by the final outcome of any
particular litigation.
Canada
In Canada, following the implementation of legislation enabling provincial governments to recover healthcare costs directly from tobacco
manufacturers, ten actions for recovery of healthcare costs arising from the treatment of smoking and health-related diseases were
commenced in ten provinces. Damages sought have not yet been quantified by all ten provinces; however, in respect of five provinces,
the damages quantified in each of the provinces range between CAD$10 billion (approximately £5.8 billion) and CAD$118 billion
(approximately £68.2 billion), and the province of Ontario delivered an expert report quantifying its damages in the range of CAD$280
billion (approximately £161.9 billion) and CAD$630 billion (approximately £364.2 billion) in 2016/2017 dollars. Ontario has amended its
Statement of Claim to claim damages of CAD$330 billion (approximately £190.8 billion). On 31 January 2019, the Province delivered a
further expert report claiming an additional CAD$9.4 billion (approximately £5.4 billion) and CAD$10.9 billion in damages (approximately
£6.3 billion) in respect of environmental tobacco smoke. No trial date has been set. In respect of New Brunswick, on 7 March 2019, the
New Brunswick Court of Queen’s Bench released a decision requiring the Province to produce a substantial amount of additional
documentation and data to the defendants. As a result, the original trial date of 4 November 2019 has been delayed. No new trial date
has been set.
In addition to the actions commenced by the provincial governments, there are numerous class actions outstanding against Group
companies. As set out below, all of these actions are currently subject to stays of proceedings. On 1 March 2019, the Quebec Court of
Appeal handed down a judgment which largely upheld and endorsed the lower court’s previous decision in the Quebec class actions.
ITCAN’s share of the judgment is approximately CAD$9.2 billion (approximately £5.3 billion). As a result of this judgment, the attempts by
the Quebec plaintiffs to obtain payment out of the CAD$758 million (approximately £438 million) on deposit with the court, the fact that
JTI-MacDonald Corp (a co-defendant in the cases) filed for protection under the CCAA on 8 March 2019 and obtained a court ordered
stay of all tobacco litigation in Canada as against all defendants (including the RJR Group Companies) until 4 April 2019, and the need for
a process to resolve all of the outstanding litigation across the country, on 12 March 2019, ITCAN filed for protection under the CCAA. In
its application, ITCAN asked the Ontario Superior Court to stay all pending or contemplated litigation against ITCAN, certain of its
subsidiaries and all other Group companies that were defendants in the Canadian tobacco litigation (the “stays”). The stays are currently
in place until 30 September 2024. While the stays are in place, no steps are to be taken in connection with the Canadian tobacco
litigation with respect to ITCAN, certain of its subsidiaries or any other Group company. The parties continue to work towards a plan of
arrangement or compromise in a confidential mediation (by order of the Court) as part of the CCAA process. The length and ultimate
outcome of the CCAA process, including the resolution of the underlying legal proceedings, remains uncertain.
