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Andres Knobel ■ Ashes to ashes: How British American Tobacco avoids taxes in low and middle income countries

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Tax justice reports
Tax justice reports

Ashes to ashes: How British American Tobacco avoids taxes in low and middle income countries

Are tobacco companies making a fair tax contribution to the societies where their activities cause the greatest human and economic costs? We have looked at British American Tobacco. The answer, based on the analysis we have carried out for Bangladesh, Indonesia, Brazil, Guyana, Trinidad and Tobago, Kenya, Uganda and Zambia, is a resounding ‘no’. We uncovered a range of mechanisms reducing tax, including cross- border payments made within the multinational group for royalties, research, intra-group lending and as dividends. If the implied foregone tax revenues that we find are taken to reflect ‘business as usual’ from now until 2030 the countries in question would suffer a total loss of nearly US$700 million.

The massive damage to human health caused by tobacco is now well- known. So too are the efforts of major tobacco companies to avoid disclosing the health consequences of smoking in order to continue marketing their deadly products. But as regulation tightened in the high income countries that used to generate most of the tobacco companies’ profits, their focus shifted. Marketing is especially targeted at younger age cohorts (the ‘economic future of the tobacco industry’), and at lower income countries. Today, as a direct result, around 80 per cent of the 1.1 billion smokers worldwide live in low and middle income countries – and it is estimated that tobacco is responsible for the deaths of up to half of all users.

The tobacco companies have long stressed the economic contribution made through tobacco duties, while at the same time lobbying intensely against meaningful increases in duty rates. At the same time, tobacco remains among the most profitable industries in the world. While much research has focused on the benefits of tobacco duties, which are borne by the consumer and so can change behaviour for the better, this report assesses the extent to which a major tobacco company pays tax in lower income countries – specifically, corporate income tax on profits.

Are tobacco companies making a fair tax contribution to the societies where their profitmaking activities cause the greatest human and economic costs? We have looked at British American Tobacco, the only tobacco company to feature in the top 100 of Forbes’ Global 2000 list of the world’s largest public companies. The answer, based on the analysis we have carried out for Bangladesh, Indonesia, Brazil, Guyana, Trinidad and Tobago, Kenya, Uganda and Zambia, is a resounding ‘no’. The operations we’ve looked at reveal the efforts that BAT goes to to minimise the tax contribution made to those countries.

We uncovered a range of mechanisms reducing tax, including cross- border payments made within the multinational group for royalties, research, intra-group lending and as dividends. If the implied foregone tax revenues that we find are taken to reflect ‘business as usual’ from now until 2030, the year in which the world aspires to reach the UN Sustainable Development Goals, the countries in question would suffer a total loss of nearly US$700 million – from the tax avoidance of a single tobacco company.

While the multinational tobacco companies are highly profitable, the scale of the profits and the corporate income tax paid by them is relatively small, in comparison with the scale of the economic damage caused by smoking.

Any claim that tobacco companies make an economic contribution to offset their massive health costs rings hollow, when they appear to go to such efforts to avoid paying taxes. Tobacco companies must be set higher standards of transparency to ensure greater public accountability for their tax behaviour. And tax authorities must approach tobacco companies with great scepticism and apply rigorous scrutiny to the claims they make.

Key findings

  • Based on the analysis of British American Tobacco’s activities in Bangladesh, Indonesia, Brazil, Guyana, Trinidad and Tobago, Kenya, Uganda and Zambia, the company is not making anything approaching a just contribution to tax revenues in those countries.
  • British American Tobacco deploys a range of mechanisms to reduce its tax contributions, including cross
  • border payments made within the multinational group for royalties, research, intra-group lending and as dividends.
  • The implied foregone tax revenues from the time of writing to 2030, if ‘business as usual’ continues, is nearly US$700 million.
  • While multinational tobacco companies are highly profitable, the scale of the profits and the corporate income tax paid by them is relatively small, in comparison with the scale of the economic damage caused by smoking. Any claim that tobacco companies make an economic contribution to offset their massive health costs rings hollow.

Key recommendations

  • Governments should prioritise regulation and administration that enables the maximisation of corporate tax revenue from tobacco companies (to be spent on essential public services). 
  • Governments should ensure public accountability of tobacco companies by requiring publication of country by country reporting alongside company accounts.
  • Governments should closely scrutinise the tax affairs of tobacco companies, to reduce or eliminate profit shifting, with particular attention to crossborder related party royalty fees and IT recharge payments, financing, routing of dividend payments, and procurement.
  • Governments should review and renegotiate tax treaties that are excessively disadvantageous to lower income countries.
  • The international community should support tax treaty standards more beneficial to lower income countries. It should also require the publication of multinational companies’ country by country reporting.

Additional resources