Italy Claims Philip Morris Avoided Taxes

Italian officials on Friday seized Philip Morris Cos. records and prohibited some of its top executives from leaving the country, claiming the company has avoided paying taxes on $6 billion in cigarette sales since 1987.

A magistrate in Naples also froze royalties owed to New York-based Philip Morris by Italy’s government-run monopoly, which produces and distributes all cigarettes made in the country.

Documents from the judge’s office say Philip Morris has been taxed at a lower rate reserved for companies without subsidiaries in that nation even though it owns an Italian cigarette filter maker. Philip Morris said it has openly owned the company, called Intertaba, for 20 years and that the judge is incorrectly interpreting international tax laws.

“Inasmuch as we are confident that the company has done no wrong, we are absolutely confident that our people have done no wrong and we stand behind them 100%,� said David Davies, chief counsel for Philip Morris in Europe.

Shares in Philip Morris fell $2.75 to $101.875 on Friday on the New York Stock Exchange.

The company pays taxes on the royalties it gets from the state-run monopoly at a rate determined by a long-standing tax treaty between Italy and the U.S., Davies said.

“We have consistently complied with the fiscal laws in Italy,� Davies said. “We have paid all of the taxes due.�

Officials seized the passports of Walter Thoma, Philip Morris European Union regional president and the company’s highest-ranking executive in the area; and of Paolo Degola, vice president of Italian operations.

Two company employees who are Intertaba executives--Giovanni Pozzali, managing director, and Maurizio Zaccheo, director of distribution logistics--and Intertaba Chairman Paolo Ferrari, who is not a Philip Morris employee, also had their passports seized.

All cigarettes made in Italy are produced by a government-owned monopoly. The monopoly, referred to as Monital, then pays royalties to the companies whose cigarettes it makes under license.

The Finance Ministry controls the monopoly. The ministry is also in charge of collecting tax revenue.

PM pays applicable taxes on its cigarettes to the monopoly, Davies said. The monopoly then is responsible for forwarding the money to the government, he said.

The remainder of Philip Morris cigarettes sold in Italy are produced by company plants in other countries and then sold to the monopoly. In those cases, the company is taxed on that income by the country in which the cigarettes are produced, he said.

Philip Morris is the only major international company that has its cigarettes made under license.

Other major international tobacco companies--such as RJR Nabisco Holdings Corp. and BAT Industries--only sell cigarettes that are made outside of Italy and then imported into the country.

The Italian legal system requires that investigations focus on officers of a company. Legal action of this sort in Italy does not imply guilt. Italian investigative magistrates have wide powers to arrest people, freeze funds and seize documents while carrying out investigations.

The Finance Ministry said Judge Agostino Cordova had provided details of the investigation to Finance Minister Vincenzo Visco, who came into office three months ago.

An official at the ministry said Philip Morris appears to have used tax breaks designed for overseas companies even though it has operations in Italy.

The ministry must have been aware of the situation, said the official, who asked not to be named, and that previous ministers decided not to launch tax audits.

The official called it an “awkward set-up� because Philip Morris is a commercial partner of the ministry at the same time the ministry is in charge of checking its taxes.