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.
One of the measures proposed by the World Health Organisation is “raising tobacco [excise] taxes to more than 75 per cent of the retail price [a high proportion of it] is among the most effective and cost effective tobacco control interventions” – but only 32 countries in the world have so far achieved this
Apart from the health damage, it has emerged that countries where tobacco companies operate are losing billions of money in taxes as a result of the smoky industry.
One of the companies implicated in tax evasion is British American Tobacco (BAT) through a heath report by Tax Justice Network published in April. The report reveals that by 2030, low income countries like Kenya will have lost $700 million (Ksh70 billion) in tax revenues from BAT if business continues as usual.
BAT is a publicly traded company based in the UK. It sells its products in over 200 markets around the world and has cigarette factories in 42 countries. Its structure includes more than 100 subsidiaries in tax havens. It has a strong presence in Africa and has had recent growth in sales volume and market share in Bangladesh and Indonesia. It controls an estimated 11.8 per cent of the global cigarette market.
BAT’s revenue in 2016 was US$18.2 billion (Ksh1.82 trillion). Its global pre-tax profits were 42 per cent of revenue.
In Kenya, the company has been on the spotlight for tax evasion and bribery of Kenya Revenue Authority (KRA) officials.
One of the methods used by BAT to evade taxes is paying itself royalties, fees and IT charges.
Royalties entail monies paid by subsidiaries (a kind of user fee) for the use of brands and trademarks, or for the products of research, to the related company owning these pieces of intellectual property, which may be in the multinational’s home country, or elsewhere.
On the other hand, the fees entails the money paid for the use of software and IT systems. They may also include a component for staff costs.
Global payments to BAT (Holdings) Ltd, one of the main holding companies and the principal group head office operating company, were, in 2016, £325 million (Ksh40 billion) in royalties, £214 million
(Ksh26.3 billion) in technical and advisory fees and IT recharges of £226 million (Ksh27.8 billion) – a total of £765 million (Ksh94.1 billion).
BAT’s global pre-tax profits in that year were £6245 million (Ksh768.2 billion). So income shifted from around the world to BAT Holdings alone, using just one method, constituted 12.3 per cent of pre-tax profits – nearly one in eight of every pound BAT makes.
This picture was similar in 2015, when the total of royalty, fee and IT recharge payments to BAT was £668 million (Ksh99 billion) and global pre-tax profits were £5855 million (Ksh867.9 billion): in this year, income equivalent to 11.4 per cent of pre-tax profits was shifted to BAT Holdings.
In the BAT case, the company is accused of paying royalties to other parts of itself for the ongoing use of its own assets, which amounts to dishonesty. Where the cases are genuine, the report indicates that there is a lot of manipulation.
“Does it make sense – economic sense, not legal sense – for a multinational company to make ongoing payments to other parts of itself for the ongoing use of its own assets? It may do, for example if there has been extensive recent investment in an asset and the payments are genuinely made at market prices. In practice, there is often no such market because the transactions may only occur within a group, and so the scope for manipulation may be high. It is also unclear what role international branding plays, compared to domestic advertising, in promoting domestic sales. The UK tax authority identifies offshore royalty payments among its risk indicators for profit shifting,” notes the report.
BAT is also accused of lending itself money through its subsidiaries in developed countries. The money accumulates interest and at the end of the saga a big chunk is transferred to developed countries, tax free. In real sense, it is thought that there are no such loans, as the company uses cooked figures to understate their profits, consequently reducing taxes.
BAT is also on the spot for exploiting developing countries by sending profits back home to investors, through dishonest means.
For instance, BAT sent US$26.5 million (Ksh2.6 billion) in dividends from Kenya to the
Netherlands in 2015 and 2016, rather than directly to the UK.
The 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 (Ksh270 million) a year. However, this arrangement was not set up with the purpose of avoiding the withholding tax on the dividends, since BAT Kenya’s dividends have been sent via the Netherlands for many years.
BAT has its procurement functions centralised. This may make business sense, but it also enables profits to be shifted around the world and booked in larger centres rather than investee countries. These centres may often have lower tax rates than the investee countries.
The report notes that while the multinational tobacco companies are highly profitable, the amounts of profit generated and the corporate income tax paid on them is relatively small in comparison with the scale of the economic damage caused by smoking.
For example, in 2016 BAT Bangladesh made a net profit of around 7.6 billion BDT61
(Ksh8.9 billion) – much less than the estimated 158 billion BDT (Ksh190 billion) of economic damage caused by smoking.
“Yet, even though the corporate income tax they pay is a relatively small potential recompense, the companies still avoid making the full corporate income tax contribution that would be expected. Rather, they should pay a higher distribution from profit towards mitigating the damage,” reads the report in part.
Globally, BAT has paid tax on its profits at an average cash tax rate of just under 26 per cent in the decade from 2007 to 2016, as compared to 37 per cent in the previous decade.
Tax is not mentioned in the pages of BAT’s Annual Report 2017 that deal with corporate social responsibility. It is mentioned as one of five or six risk factors for the company – in relation to excise
duty increases and to unfavorable tax rulings.
The report says that for every dollar BAT paid in taxes globally, it shifted half a dollar that it would have paid in taxes locally where it operates to its London office, where it paid almost no corporate tax.
BAT Kenya is 60 per cent owned by a Dutch subsidiary of the BAT group called Molensteegh Invest BV.
The report focused on regions where BAT had invested including Asia (Bangladesh and Indonesia), Africa (Kenya, Uganda and Zambia), and Latin American and the Caribbean (Brazil, Guyana and Trinidad & Tobago).