Campaigners say company uses ‘financial manoeuvring’ to shift profits to tax havens

This article is more than 1 year old

This article is more than 1 year old

British American Tobacco has been accused of depriving developing countries of hundreds of millions of dollars in tax by using “financial manoeuvring” to shift profits to a UK subsidiary.

The Tax Justice Network estimated that London-based BAT, the world’s largest tobacco company, would avoid paying $700m (£540m) between now and 2030 in Bangladesh, Indonesia, Kenya, Guyana, Brazil, and Trinidad and Tobago.

It said that in 2016 alone BAT managed to shift $941m, roughly 12% of its group pre-tax profit that year, from overseas companies into its British subsidiary, BAT Holdings.

This, it said, reduced the company’s tax bill, partly because UK corporation tax is charged at 19% – lower than many of the countries in which BAT sells cigarettes.

There is no suggestion that any of the methods allegedly used are illegal and BAT said it complied in full with tax legislation in the countries where it operates.

But in a detailed report entitled Ashes to Ashes, the Tax Justice Network said BAT’s practices “fly in the face of tobacco companies’ claims to be essential tax providers to low and middle income countries where 80% of the 1.1bn smokers worldwide live”.

The campaign group’s chief executive, Alex Cobham, said: “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 siphoned off to.”

The organisation said BAT had managed to shift profits from developing countries to its UK subsidiary, which pays relatively little corporation tax using a variety of methods.

They include arrangements where an overseas company pays royalties to the UK business, and charging foreign subsidiaries interest fees on loans, some routed through low-tax areas such as the Netherlands.

The Tax Justice Network said the picture was incomplete because BAT had more than 100 offshore subsidiaries in 19 tax havens where financial data is opaque, while the company’s accounts also revealed hundreds of millions of dollars paid in unexplained “other operating charges”.

Its 62-page report broke down its method of calculating BAT’s alleged “financial manoeuvring” in several countries.

In Bangladesh, for instance, it said BAT’s outpost there declared $21m in obligations owed to British subsidiaries between 2014 and 2016, in royalties, technical and advisory fees and IT charges.

The payments meant that, rather than paying tax on those profits at local rates, the company paid a much lower “withholding tax rate” set by a bilateral treaty between the UK and Bangladesh.

It said this cost Bangladesh $5.8m in lost tax in 2016, enough to cover the country’s health expenditure for more than 200,000 people for a year.

The annual economic cost of tobacco consumption in Bangladesh, where 40% of men over 15 smoke daily, is $1.8bn and smoking causes more than 25% of deaths among men, according to tobaccoatlas.org.

A spokesman for BAT said it “does not accept that there is any avoidance or loss of tax to the countries concerned in the manner contended by the report.

“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 [at market rates] 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 $58.2m [per year until 2030] identified by the report simply does not arise.”

It said the tax losses claimed by Tax Justice Network did not arise because services provided by UK companies to overseas subsidiaries incurred genuine costs.

BAT also told the Tax Justice Network that transactions between group companies were subject to frequent external scrutiny.