British American Tobocco (BAT) has been accused of having evaded paying taxes in 2016 in six different middle income countries it operates in, including Kenya. The other countries are: Indonesia, Brazil, Guyana, Trinidad and Tobago and Zambia.
A recent report dubbed ‘Ashes to Ashes-how British American Tobacco avoid taxes in low and middle-income countries’ released by Tax Justice Network (TJN), revealed that the firm sent home income comparable to over 12 per cent of its pre-tax profits to its mother firm in the UK where it paid no corporate income tax in 2016.
“At a total of $941 million (Sh94.1 billion), 12.3 per cent of BAT’s 2016 pre-tax profit of $7682 million (Sh768.2 billion) was shifted to a single subsidiary to avoid paying corporate income tax,’’ the report reads.
The report similarly revealed that BAT achieved this by paying itself royalties, fees and IT charges, lending money to its other subsidiaries and by sending profits back home to investors.
In Kenya for example, the cigarette maker sent US$26.5 million (Ksh. 2.65 billion) in dividends from the country to the Netherlands in 2015 and 2016 rather than directly to the UK. “Relevant domestic rate of Kenyan withholding tax is assumed to be 10 per cent, and the Netherlands-Kenya treaty, has since 2015 reduced the withholding tax on dividends to zero. This therefore represents a tax loss to Kenya of US$2.7 million (Ksh. 270 million) a year,” the report explains.
In Brazil, BAT’s subsidiary Souza Cruz financed its exports with loans from its own subsidiary company Yolanda Netherlands BV Between 2007 and 2016. In total over the period, Souza Cruz paid US$255 million in interest on these loans.
“The Brazilian corporate tax rate through the period was 34 per cent, while the withholding tax rate stipulated in the Netherlands-Brazil tax treaty on loan interest was only 15 per cent. The difference between the two rates could have allowed Souza Cruz to pay on average roughly US$6 million a year less in Brazilian taxes over those years,” the TJN report reads.
TJN also reiterated that should the tax evasion continue unchecked, middle income countries will lose billions of shillings in future.
“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,” TJN says in the report.
When contacted for comment by TJN, BAT dismissed the tax evasion allegations entirely. “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,’’ BAT told TJN.
According to a news report by the Star Newspaper following the release of the report, the Kenya Tobacco Control Alliance (KETCA) urged the government, in a letter to National Treasury CS Henry Rotich, to initiate an investigation into the alleged tax scam. Kenya’s BAT subsidiary has however similarly downplayed the allegations.
“BAT Kenya fully complies with all applicable tax legislation. Contrary to the allegations in the TJN report, all dividends paid to our parent company are subject to 10 per cent withholding tax. This is remitted in full, in compliance with Kenyan tax legislation,” the firm is quoted as saying by the Star.
In order to curb the illegal transfer of funds from their republics by tobacco companies such as BAT, TJN advises countries to: prioritise regulation and administration that enables the maximisation of corporate tax revenue from tobacco companies, ensure public accountability of tobacco companies by requiring publication of country by country reporting alongside company accounts and to closely scrutinize the tax affairs of tobacco companies, to reduce or eliminate profit shifting.
TSJ has similarly urged the international community to support tax treaty standards which are more beneficial to lower income countries while similarly multilaterally pushing for the publication of multinational companies’ country by country reporting to ensure accountability for mechanisms that shift taxable profits away from the location of real economic activity.