BAT shifts nearly $1bn out of developing countries into one UK office

PRESS OFFICE
ashtray full of cigarette buds

BAT shifts nearly $1bn out of developing countries into one UK office

For every dollar British American Tobacco (BAT) paid in tax in the countries it operates in, the giant multinational shifted more than half a dollar that would have been taxed locally to a UK subsidiary where BAT paid almost no tax.1 New analysis by the Tax Justice Network estimates Bangladesh, Indonesia, Kenya, Guyana, Brazil and Trinidad and Tobago together stand to lose a total of nearly $700 million in tax revenue by 2030 from the financial manoeuvring of just one tobacco company if business continues as usual.2

In a report published on the heels of BAT’s annual shareholder meeting in London, the Tax Justice Network has revealed a range of mechanisms used by the tobacco company in 2016 to shift income equivalent to over 12 per cent ($941 million) of its pre-tax profits to BAT Holdings Ltd, a UK-based subsidiary where BAT paid almost no corporate income tax.3 By charging itself royalties, rerouting loans through tax havens and paying interests fees on loans made between regional offices, BAT shrunk its tax contributions in low and middle income countries where public funding is high in need and short in availability.

However, this picture remains incomplete: BAT has over one hundred offshore subsidiaries spread across 19 tax havens and books hundreds of millions of dollars each year to ‘other operating charges’ without further explanation.

The profit shifting practices fly in the face of tobacco companies’ claims to be essential tax providers to low and middle income countries where 80 per cent of the 1.1 billion smokers worldwide live.4 For every dollar Bangladesh raised in income tax from BAT in 2016, BAT shifted 22 cents out of the local economy into the UK while smoking cost Bangladesh 24 dollars in economic damage.5

Alex Cobham, chief executive at the Tax Justice Network, said:

“Tobacco companies make a lot of noise about paying tax, but the nearly $1 billion that British American Tobacco shifted out of developing countries in a single year into one UK office – and the life-changing tax it avoided on that profit – tells a very different story.

“Cigarettes not only impose massive human costs, those who profit from them are actively depriving lower-income countries of the public funding they need to provide people with health services. At a minimum, governments must require tobacco companies to publish country by country reporting to make sure profits are taxed in the communities where they were raised, not in the tax havens they were syphoned off to.”

Tax losses in Bangladesh: BAT pays itself royalties and IT charges in Bangladesh

From 2014 to 2016, BAT Bangladesh Company Limited declared $21 million a year in obligations owed to BAT’s UK subsidiaries in royalties, technical and advisory fees and IT charge – equivalent to 15 per cent of BAT Bangladesh’s pre-tax profits over the three years. The payments allowed BAT Bangladesh to avoid paying the corporate tax rate on the $21 million it shifted into the UK and instead pay much lower withholding tax rates, costing Bangladesh $5.8 million in lost tax in 2016 – enough to cover the Bangladesh government’s per capita health expenditures for over 170,000 citizens for a year.6

The annual economic cost of smoking in Bangladesh is $1.8 billion where 40 per cent of men over the age of 15 smoke daily and over one quarter of deaths among men is caused by tobacco.7

Tax losses in Brazil: BAT pays itself loan interest and books profits offshore

By utilising intracompany loan interest payments and shifting profits from Brazil to the Portuguese tax haven Madeira, BAT’s Brazilian operation Souza Cruz reduced its tax contributions in Brazil by a total of $128 million between 2007 and 2014 – enough to cover the Brazil’s government’s per capita health expenditures for over 98,000 citizens for a year.8

The annual economic cost of smoking in Brazil is $19.7 billion where 19 per cent of men over the age of 15 smoke daily and 12 per cent of deaths among men is caused by tobacco.9

Tax losses in Indonesia: BAT reduces tax contribution on future profits

Indonesia may lose nearly $14 million in tax each year from future profits made by BAT’s main subsidiary in Indonesia, PT Bentoel Internasional Investama, due to loan interest payments and royalty, fee and IT charge payments made by the subsidiary. Because Bentoel has been making a loss each year since 2012 – losses that were exacerbated by the $164 million shifted in interest loan payments between 2013 and 2016 and the $20 million shifted each year in royalties, fees and IT charges between 2010 and 2016 – the losses incurred by the subsidiary through profit shifting over the past years are likely to be offset against future profits.

The $14 million in tax Indonesia stands to lose each year would be enough to cover the countries yearly per capita health expenditures for 125,000 citizens.10

The annual economic cost of smoking in Indonesia is $42 billion where 76 per cent of men over the age of 15 smoke daily and 21 per cent of deaths among men is caused by tobacco.11

British American Tobacco responded to the Tax Justice Network’s report saying:

“The Group fully complies with all applicable tax legislation where it does business, operates the transactions that occur between Group companies on an arm’s length basis and is a significant tax contributor to Governments worldwide. Classifying countries such as the Netherlands and the UK as tax havens is simply not a credible claim… the tax loss of $58.9m identified by the report simply does not arise.”12

BAT is currently being investigated for tax avoidance in Brazil, South Korea, South Africa and the Netherlands.13 BAT is also being investigated for corruption in the UK14, Romania15 and Kenya16.

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Contact: [email protected], +44 (0)7562 403078

Notes to Editor

  1. A total of US$941 million – 12.3 per cent of BAT’s 2016 pre-tax profit of $7682 million – was shifted to BAT Holdings Ltd in the UK where BAT paid almost no corporate income tax. Globally, BAT declared it paid $1,532 million in tax under its cash flow statement in its 2016 Annual Report (page 24). Comparing the two figures, for every $1 BAT declared it paid in tax in 2016, $0.61 were shifted to BAT Holdings Ltd in 2016 in royalties, IT recharges and technical and advisory fees. https://www.bat.com/group/sites/uk__9d9kcy.nsf/vwPagesWebLive/DO9DCL3B/$FILE/medMDAKAJCS.pdf 
  2. Over the various periods examined by this report, Kenya, Bangladesh, Indonesia, Kenya, Guyana, Brazil and Trinidad and Tobago collectively lost an average of $58.2 million each year. In the case of Indonesia, tax losses will be incurred in future tax payments.
  3. The UK-based BAT Holdings Ltd was paid $400 million in royalties, $278 million in IT recharges and $263 million in technical and advisory fees by other BAT subsidiaries from across the world in 2016. At a total of US$941 million, 12.3 per cent of BAT’s 2016 pre-tax profit of $7682 million was shifted to a single subsidiary where BAT paid almost no corporate income tax.
  4. World Health Organisation, Tobacco, accessed 12 October 2018: https://www.who.int/en/news-room/fact-sheets/detail/tobacco
  5. In 2016, BAT Bangladesh paid 6.6bn BDT (US$78.3 million) in income tax (BAT Bangla Annual Report 2016, p145) which is far less than the estimated 158 billion BDT (US$1.9 billion) of economic damage caused by smoking, according to the Tobacco Atlas, accessed 20 October 2018: www.tobaccoatlas.org. Exchange rates using https://oanda.com/currency/converter/ on 20 October 2018
  6. According to the WHO Global Health Expenditure Database, Bangladesh’s health expenditure per capita in 2016 was US$34 https://apps.who.int/nha/database/Select/Indicators/en  
  7. The Tobacco Atlas, accessed 20 October 2018: www.tobaccoatlas.org. Exchange rates using https://oanda.com/currency/converter/ on 20 October 2018
  8. According to the WHO Global Health Expenditure Database, Brazil’s health expenditure per capita in 2014 was US$1301. https://apps.who.int/nha/database/Select/Indicators/en 
  9. The Tobacco Atlas, accessed 20 October 2018: www.tobaccoatlas.org. Exchange rates using https://oanda.com/currency/converter/ on 20 October 2018
  10. According to the WHO Global Health Expenditure Database, Indonesia’s health expenditure per capita in 2016 was US$112 https://apps.who.int/nha/database/Select/Indicators/en
  11. The Tobacco Atlas, accessed 20 October 2018: www.tobaccoatlas.org. Exchange rates using https://oanda.com/currency/converter/ on 20 October 2018
  12. The Tax Justice Network shared the report with British American Tobacco in advance. BAT’s detailed responses are included in the text.
  13. BAT 2016 Annual Report (page 101 and page 106) https://www.bat.com/group/sites/uk__9d9kcy.nsf/vwPagesWebLive/DO9DCL3B/$FILE/medMDAKAJCS.pdf 
  14. “Serious Fraud Office investigating British American Tobacco p.l.c”, Serious Fraud Office, https://www.sfo.gov.uk/2017/08/01/sfo-investigating-british-american-tobacco-plc/
  15. “Inspectors of the Control Corps verify Aurelia Cristea’s interrogation on governmental irregularities in tobacco matters”, Bursa.ro, http://www.bursa.ro/inspectorii-corpului-de-control-verifica-interpelarea-aureliei-cristea-privind-neregulile-guvernamentale-in-materie-de-tutun-64009823
  16. “Kenya: Njiraini Says They Are Working With EACC Over BAT Bribery Saga”, All Africa, https://allafrica.com/stories/201512240399.html
  17. Figures presented in this press release and in the below tables are explained in detail in the report’s Appendix. The report also features detailed mappings of the complex corporate chains utilised by BAT.

Payments leaving the lower income countries and the estimated tax losses that result

  Type of profit shift Profit shift amount per year (US$ million) Estimated tax loss per year (US$ million) Years Notes (where applicable)
Bangladesh Royalties, fees and IT charges 21 5.8 2014-2016 (tax loss for 2016) Some payments accrued in the accounts but not yet made
Indonesia Loan interest 54.7 11 2013-2015 Payments uneven between different years and some made later
Royalties, fees and IT charges 19.7 2.7 2010-2016 Potential loss – offset against future profits
Brazil Profits booked in Madeira 78.3 27 2009-2011  
Loan interest 31.9 6 2007-2014  
Guyana Royalties, fees and IT charges 3.4 1.1 2009-2012 Assumption that related party payments made to the UK
Trinidad and
Tobago
Royalties, fees and IT charges 12.6 1.9 2010-2017 Assumption that related party payments made to the UK
Kenya Dividends 26.5 2.7 2015-2016 Relevant treaty came into force in 2015 and arrangement pre-dates this, so not motivated by avoiding this tax. BAT says that according to its sources, the Kenya/Netherlands Double Tax Agreement treaty does not yet apply.
Total     US$58.2 million    

Estimated economic cost of smoking, Tobacco Atlas

  % men over 15 using tobacco daily % % women over 15 using tobacco daily % deaths caused by tobacco – men % deaths caused by tobacco – women Estimated economic cost of smoking – (direct health costs and lost productivity due to early mortality and morbidity)
Bangladesh 39.8 0.7 25.5 9.7 158578 million taka (US$1.8 billion)
Indonesia 76.2 3.5 21.4 7 639173131 million rupiah (US$42 billion)
Brazil 19.3 11.3 12.4 10.5 73031 million real (US$19.7 billion)
Guyana 17.4 2.3 11.4 4.7 3409 million dollar (US$15 million)
Trinidad and Tobago 26.1 5.8 12.4 4.5 1858 million dollar (US$0.3 billion)
Kenya 24.6 2.1 4.2 1.6 2978 million shilling (US$29 million)
Uganda 16.4 2.9 4.3 2.6 N/A
Zambia 26.5 4.6 6.6 3.6 N/A

 

Source: tobaccoatlas.org (accessed 20 October 2018). Exchange rates using https://oanda.com/currency/converter/ on 20 October 2018

About the Tax Justice Network

The Tax Justice Network is an independent international network, launched in 2003. It is dedicated to high-level research, analysis and advocacy in the area of international tax and financial regulation, including the role of tax havens. The Tax Justice Network maps, analyses and explains the harmful impacts of tax evasion, tax avoidance and tax competition; and supports the engagement of citizens, civil society organisations and policymakers with the aim of a more just tax system.

www.taxjustice.net

About British American Tobacco

British American Tobacco (BAT) is one of the world’s leading, multi-category consumer goods companies, providing tobacco and nicotine products to millions of consumers around the world. It employs over 55,000 people, with market leadership in over 50 countries and factories in 48. Its Strategic Portfolio is made up of its global cigarette brands and a growing range of potentially reduced-risk products. These include vapour, tobacco heating products, modern oral products including tobacco-free nicotine pouches, as well as traditional oral products such as snus and moist snuff. In 2018, the Group generated revenue of £24.5 billion and profit from operations of £9.3 billion.

https://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DO89KHEK